By Wes Goodman Oct. 28 (Bloomberg) -- Treasuries fell for a second day before the government sells $34 billion of two-year notes to help pay for its $700 billion bank rescue. The U.S. needs to borrow ``enormous'' amounts, according to economic advisory firm Wrightson ICAP LLC, as it tries to halt a financial crisis that has wiped out more than $10 trillion of stock-market value worldwide this month. The Treasury plans to follow today's two-year sale, which matches a record, with a $24 billion five-year auction on Oct. 30, the biggest since 2003. ``This will be a tough auction,'' said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan's second-largest brokerage. ``Supply is rising. There are few people who want to buy.'' The yield on the 10-year note increased 5 basis points to 3.72 percent as of 12:48 p.m. in Tokyo, according to BGCantor Market Data. The price of the 4 percent security maturing in August 2018 dropped 12/32, or $3.75 per $1,000 face amount, to 102 8/32. The yield will rise to 4.1 percent by year-end, Nagai said. Two-year rates increased 2 basis points to 1.55 percent. The budget deficit may rise to a record $1 trillion in 2009 from $455 billion in the fiscal year ended Sept. 30, Wrightson, which is based in Jersey City, New Jersey, said in a report yesterday. The Treasury Department is scheduled to announce how it plans to increase its debt sales on Nov. 5. Money Market Yields The last two-year auction on Sept. 24 drew a yield of 2.115 percent. Investors bid for 2.21 times the amount of debt on offer, versus the average of 2.31 for the past 10 sales. The government's bailout includes buying equity stakes in banks and purchasing soured financial assets. Credit-market losses and writedowns of securities tied to U.S. subprime mortgages have reached $677 billion since the start of 2007. ``You have to be careful not to be exposed to the long end'' of the Treasury market, said Mohamed El-Erian, the co-chief executive officer of Pacific Investment Management Co., speaking yesterday in a Bloomberg Television interview from Newport Beach, California. Pimco's $129.6 billion Total Return Fund, the world's largest bond fund, last held Treasuries in December, according to the firm's Web site. Futures on the Chicago Board of Trade show 100 percent odds the Fed will lower the target rate for overnight bank loans, now 1.5 percent, by at least a half-percentage point to help increase bank lending and spur economic growth. The chances of a 0.75 point cut rose to 34 percent from zero percent a week ago. Yields indicate banks are less willing to lend than they were two months ago. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 2.67 percentage points, more than doubling since Aug. 28. The figure increased to 4.64 percentage points on Oct 10, the most since Bloomberg began compiling the data in 1984. The difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate, the so- called Libor-OIS spread, was 2.63 percentage points. It widened from 0.78 percentage point two months ago. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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