point to 1 percent on Oct. 29. Two-year yields fell 4 basis points to 1.52 percent. U.S. government securities returned 0.04 percent this month as of yesterday, according to Merrill Lynch's U.S. Treasury Master index. German government bonds handed investors 2.7 percent in October, and Japanese debt earned 0.4 percent. 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, another survey showed. The number of borrowers at risk of credit-rating downgrades rose to 786 in October, the highest since September 2005, as the credit crisis crimped lending, Standard & Poor's said in a report yesterday. The cost of protecting Asia-Pacific bonds from default increased by a record in October, helping spur demand for the safety offered by Treasuries. Default Swaps 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. Company bonds handed investors a loss of 9.2 percent this month, according to Merrill's U.S. Corporate & High Yield Master index, the most since the firm began compiling the figure in 1997. 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. `Huge Supply' ``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.'' The difference in yield, or spread, between two- and 10- year securities increased to 2.39 percentage points, near 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. Kokusai On Yields 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.'' Ten-year Treasuries yield 2.42 percentage points more than similar-maturity debt in Japan, widening from 1.86 percentage points in the middle of September. Japanese bonds 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 1 basis point to 1.48 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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