By Bo Nielsen and Wes Goodman Oct. 29 (Bloomberg) -- Treasuries rose for the first time in three days on speculation the Federal Reserve will cut its key interest rate 50 basis points today. U.S. government securities headed for a fifth monthly gain after former Fed Governor Frederic Mishkin said the market shock is ``more pervasive'' than during the Great Depression. Two-year note yields were 8 basis points above the Fed's target rate for overnight loans, less than half of the 17-point average in the last three months, after the U.S. sold a record $34 billion of the notes yesterday at better-than-average demand. ``People are looking for a rate cut by the Fed and that's fueling Treasury buying,'' said David Keeble, head of fixed- income strategy in London at Calyon, the investment-banking arm of Credit Agricole SA. ``With a lot of the supply out of the way, it enabled us to start buying again.'' Two-year yields fell 7 basis points to 1.58 percent as of 6:30 a.m. in New York, according to BGCantor Market Data. The 1.5 percent security maturing in October 2010 increased 4/32, or $1.25 per $1,000 face amount, to 99 27/32. The two-year securities are among the most sensitive to interest-rate changes because of their short maturities. Ten- year yields slipped 3 basis points to 3.82 percent. A basis point is 0.01 percentage point. Futures on the Chicago Board of Trade show a 42 percent chance the central bank will trim its target rate for overnight bank loans to 0.75 percent from 1.5 percent. The odds increased from no chance a week ago. The rest of the bets are for a half- point reduction. Stock Futures U.S. stock-index futures fell 0.7 percent on concern a Fed rate reduction won't be enough to spur U.S. economic growth. The Standard & Poor's 500 Index rose 11 percent yesterday, paring this year's decline to 36 percent, its steepest annual drop since 1937. The index and two-year Treasuries moved in opposite directions 88 percent of the time in the past three months, Bloomberg data show. The Fed will lower its benchmark rate by half a percentage point today and by the same amount at its Dec. 16 meeting, Standard Chartered predicted yesterday. ``We continue to look for the U.S. two-year to head for the sub-1 percent area,'' Padhraic Garvey, the Amsterdam-based head of interest-rate strategy for ING Bank NV, wrote in a note today. The Fed cut its key interest rate by half a point on Oct. 8 in a coordinated effort with other major central banks to quell financial turmoil and avert a recession. It slashed the rate from 5.25 percent since September last year as the crisis in credit markets intensified. `No Hurry' ``In its statement the Fed will probably try to create the impression that it is in no hurry at all to take action in order to tighten the currently very accommodative monetary policy,'' Peter Mueller, a fixed-income strategist in Frankfurt at Commerzbank AG, Germany's second-largest bank by assets, wrote in a note today. ``The short ends of the curve should remain very well supported.'' A Commerce Department report today may show orders for U.S. durable goods fell in September for a second month. The figure dropped 1.1 percent, after slumping 4.8 percent in August, according to the median estimate in a Bloomberg survey of economists. The U.S. economy probably shrank last quarter for the second time this year, contracting at a 0.5 percent annual rate, the most since the 2001 recession, according to economists surveyed by Bloomberg. Commerce Department figures on gross domestic product are due Oct. 30. Inflation Expectations Traders have scaled back their estimates for inflation over the next decade as the economy stalled and oil prices fell 56 percent from a record in July. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, narrowed to 0.82 percentage point, from 1.62 percentage points a month ago. ``We have had a major deflationary shock,'' Mishkin said yesterday on Bloomberg Television. Yields indicate banks are less willing to lend than earlier in 2008. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.71 percentage points, from this year's low of 0.76 percentage point in May. The figure was 4.64 percentage points on Oct. 10, the most since Bloomberg data began in 1984. Treasury Supply The U.S. sold $34 billion of two-year notes yesterday, matching a record, drawing yields of 1.60 percent, the lowest since March 2004. It plans to sell $24 billion five-year securities tomorrow. It will announce on Nov. 5 how it plans to boost its debt sales later in the month. Ten-year securities fell the most in two weeks yesterday after Anthony Ryan, acting Treasury undersecretary for domestic finance, said the U.S. may sell more long-term debt to address ``unprecedented'' needs to finance a growing budget deficit. Treasuries returned 0.5 percent in October, according to Merrill Lynch & Co.'s U.S. Treasury Master index. Corporate bonds handed investors a 9.3 percent loss, the most since Merrill began compiling the figures in 1997. To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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