By Wes Goodman Oct. 31 (Bloomberg) -- Treasury 10-year notes rose for the first time this week on speculation the Federal Reserve will cut interest rates in December for a seventh time this year as it tries to revive the shrinking U.S. economy. Notes gained before government and private reports today that economists estimate will show consumer spending fell in September for the first time in two years and confidence declined by the most on record this month. The cost of protecting Asia- Pacific bonds from default increased by a record in October, helping spur demand for the safety offered by Treasuries. ``I'm still bullish,'' said Hiromasa Nakamura, senior fund investor in Tokyo at Mizuho Asset Management Co., who correctly predicted a rally in Treasuries this year and in 2007. ``The Fed may cut further because the U.S. economy is slowing down sharply, especially consumer spending.'' The yield on the 10-year note fell 3 basis points to 3.93 percent as of 2:27 p.m. in Tokyo, according to BGCantor Market Data. The price of the 4 percent security maturing in August 2018 rose 8/32, or $2.50 per $1,000 face amount, to 100 18/32. A basis point is 0.01 percentage point. Ten-year yields will drop to 3.4 percent by year-end, according to Mizuho Asset, which oversees the equivalent of $40.7 billion as part of Japan's second-largest bank. Fed policy makers brought the rate down by half a percentage point to 1 percent on Oct. 29. U.S. government securities returned 0.04 percent this month as of yesterday, according to Merrill Lynch & Co.'s U.S. Treasury Master index. It is the smallest gain since they declined in May. German government bonds returned 2.7 percent, and the rise was 0.4 percent in Japan. Consumer Spending Consumer spending slipped 0.2 percent in September, according to the median estimate in a Bloomberg News survey of economists before the Commerce Department issues the figure at 8:30 a.m. in Washington. A Reuters/University of Michigan report at 10 a.m. will show the index of consumer sentiment fell to 57.5 from 70.3 in September, according to the Bloomberg survey median. The number of borrowers at risk of credit-rating downgrades rose this month to the highest since September 2005 as the credit crisis crimped lending, Standard & Poor's said. Borrowers rated investment grade AAA to junk B- that are at risk of downgrades climbed to 786 in October, 28 more than September and up by 136 from a year earlier, S&P said in a report yesterday. The Markit iTraxx Australia index of credit-default swaps climbed 54 basis points this month to 2.54 percentage points, according to CMA Datavision. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements. `Huge' Supply Futures on the Chicago Board of Trade show a 55 percent chance the Fed will reduce its target rate to 0.5 percent at its next meeting on Dec. 16, as of late yesterday in New York. The odds increased from 32 percent the day before. The rest of the bets are for a quarter-point reduction. Treasuries trimmed gains from earlier in the month because of concern U.S. efforts to thaw credit markets and prop up the financial system will swell sales of long-term government debt. U.S. borrowing needs will almost double this fiscal year to $2 trillion, Goldman Sachs Group Inc. forecast. The U.S. reported gross domestic product shrank 0.3 percent in the third quarter. ``A huge amount of supply is coming,'' said Kei Katayama, who oversees $1.6 billion of non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., part of Japan's second-biggest investment bank. ``No one wants to go to the longer end of the market.'' Spread Widens The difference in yield, or spread, between two- and 10-year securities grew to 2.40 percentage points, the widest since 2004, from 2.17 points a week ago. The so-called yield curve has steepened as longer-term securities lagged behind in anticipation of increased government debt auctions. Yields indicate banks are more willing to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 2.82 percentage points from 3.15 percentage points at the end of September. Demand for the safest investments will favor the dollar, said Masataka Horii, one of four investors for the $47.9 billion Kokusai Global Sovereign Open fund in Tokyo, the biggest bond fund in Asia. ``That will continue until around the middle of November,'' Horii said. ``We're not that concerned about supply. The most important thing is yield. U.S. yields are still attractive versus Japanese yields.'' BOJ Rate Cut Ten-year Treasuries yield 2.44 percentage points more than similar-maturity debt in Japan, widening from 1.86 percentage points in the middle of September. Japanese bonds initially fell and then rose after the Bank of Japan lowered its benchmark interest rate to 0.30 percent from 0.50 percent. A Bloomberg survey showed 15 of 17 economists expected a quarter-point cut to 0.25 percent. The yield on the 1.5 percent bond maturing in September 2018 dropped 2 basis points to 1.47 percent. Global Sovereign Open increased its holdings of dollar- denominated bonds to 28 percent of assets from 27 percent in October, Horii said. It raised yen holdings to 15 percent from 9.5 percent. The fund trimmed euro bonds to 37 percent from 39 percent, he said. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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