By Dakin Campbell and Anchalee Worrachate Oct. 30 (Bloomberg) -- Treasuries declined, led by 10-year notes, amid concern the Federal Reserve's efforts to unfreeze credit markets and prop up the financial system will result in ``a huge amount'' of government debt being issued. Bonds also retreated after the U.S. reported gross domestic product shrank 0.3 percent in the third quarter, less than economists forecast. The declines sent five-year yields to the highest level in a week on speculation demand will weaken at a sale of $24 billion of the notes today. Treasuries have returned just 0.26 percent this month, the least since they fell 1.21 percent in May, according to Merrill Lynch & Co. indexes. ``You will have a huge amount of Treasury supply coming on stream,'' said Kevin Flanagan, a fixed-income strategist at Morgan Stanley Global Wealth Management Group in Purchase, New York. And ``the GDP number did come in a little better than expected, and there may have been some pre-Halloween ghouls out there who wanted something a bit more negative than what we got.'' The yield on the benchmark 10-year note rose 6 basis points, or 0.06 percentage point, to 3.91 percent at 12:23 p.m. in New York, according to BGCantor Market Data. The 4 percent security maturing in August 2018 dropped 14/32, or $4.38 per $1,000 face amount, to 100 22/32. The two-year note's yield gained 1 basis point to 1.55 percent. Five-year yields increased as much as 12 basis points to 2.84 percent, the highest level since Oct. 20. `Downside' Risks The Federal Reserve cut its benchmark interest rate by half a percentage point yesterday to 1 percent, the lowest level since June 2004, saying ``downside'' risks to growth remain. GDP posted its biggest decline since 2001 in the third quarter, ushering in what may be the worst recession in a quarter century. The economy contracted at a 0.3 percent annual pace, a Commerce Department report showed today in Washington. The median forecast in a Bloomberg News survey was for a decline of 0.5 percent. The government's sale today of $24 billion in five-year notes matches the largest auction of the maturity since 2003. At the last five-year sale, on Sept. 25, investors bid for 1.91 times the amount of debt offered. The average for the past 10 sales is 2.12. The Fed agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in so-called swap lines, expanding its effort to unfreeze money markets to emerging nations for the first time. Libor Falls Banks' cost of borrowing dollars overnight fell to a record low, according to the British Bankers' Association. The London interbank offered rate, or Libor, that banks charge each other for overnight loans in dollars tumbled 41 basis points to 0.73 percent, 27 basis points below the Fed's target rate. Three- month Libor dropped 23 basis points to 3.19 percent, its 14th straight decline. Yields indicate banks are more willing to lend than they were almost three weeks ago. The difference between what they and the Treasury pay to borrow money for three months, the so- called TED spread, narrowed to 2.75 percentage points from a high of 4.64 percent Oct. 10. Investors can earn extra yield by buying so-called agency bonds issued by Fannie Mae and Freddie Mac, the two largest providers of funds for mortgages, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. The U.S. government seized the pair last month. Gross said he also recommends the debt of banks that have sold stakes to the U.S. government. ``With Uncle Sam as your partner, default seems remote,'' Gross said in a monthly commentary on the Web site of Newport Beach, California-based Pimco. More Supply Fannie's five-year notes yielded 1.36 percentage points more than Treasuries, Bloomberg data show. The spread narrowed from 1.52 percentage points on Oct. 27, which was the most since Bloomberg began tracking the figure in 1997. Traders speculated the Fed's statement yesterday signaled another reduction in December. Futures contracts on the Chicago Board of Trade showed odds of 100 percent on a decrease of at least a quarter-percentage point in the target rate for overnight bank loans. Longer-term securities lagged behind this month in anticipation of increased government debt sales. The Treasury is scheduled to announce on Nov. 5 how it will increase the sales. The department may also be prompted by record failed government securities trades to quell a scarcity of U.S. debt by reopening past Treasury issues. The U.S. reopened four older 10- year note issues to sell $40 billion of the securities earlier this month to reduce shortages. To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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