By Wes Goodman Nov. 3 (Bloomberg) -- Treasuries were little changed, following a fifth monthly gain in two-year notes, as economists said a report today will show manufacturing contracted, bolstering the case for another interest-rate cut. Two-year notes, those most sensitive to changes in monetary policy, outperformed longer maturities as traders bet the Federal Reserve will lower borrowing costs in December by a half-percentage point. Ten-year securities offer value after yields climbed toward 4 percent, according to Tyndall Investment Management Ltd. in Sydney. ``There's a lot of doom and gloom,'' said Roger Bridges, who manages the equivalent of $8.11 billion as head of bonds at Tyndall. ``It's hard to see yields pushing through 4 percent given the economic outlook.'' Tyndall's International Bond Fund returned 1.1 percent in the past month, beating 91 percent of its competitors, according to data compiled by Bloomberg. Two-year notes yielded 1.56 percent as of 7:25 a.m. in London, according to BGCantor Market Data. The price of the 1.5 percent security maturing in October 2010 was 99 28/32. Ten-year notes yielded 3.96 percent compared with the Oct. 15 high of 4.10 percent. Japan's financial markets are shut today for a holiday. The Securities Industry and Financial Markets Association recommended trading as usual in the U.K. and the U.S. Investors sought the relative safety of government debt as the U.S. lost almost 1 million jobs this year, property values and stocks tumbled and credit markets froze. Manufacturing, Payrolls Two-year notes returned 1.1 percent in October, the most since February, according to Merrill Lynch & Co.'s Treasury indexes. The difference between two- and 10-year yields widened to 2.40 percentage points, the most since 2004, as traders forecast the Fed will add to October's rate cuts and the Treasury will increase debt sales to pay for a financial system rescue package. Manufacturing probably contracted in October for a seventh month in 2008, the Institute for Supply Management's factory index may show today. The index fell to 41.5, the lowest level since October 2001, from 43.5 in September, according to economists surveyed by Bloomberg News. A reading less than 50 signals contraction. Payrolls shrank by 200,000 workers last month, according to the median estimate in a separate survey before the Labor Department's report on Nov. 7. The unemployment rate may jump to its highest level in more than five years. Rate Cuts, Supply Futures on the Chicago Board of Trade show a 55 percent chance the Fed will reduce its target for overnight bank loans to 0.5 percent at its next meeting Dec. 16 compared with odds of zero percent a month ago. The rest of the bets are for a cut to 0.75 percent. Even as Chairman Ben S. Bernanke cuts borrowing costs to 50-year lows, trimming the central bank's target to 1 percent on Oct. 29, taxpayers will likely be paying ever increasing interest rates on U.S. debt. The next president may find foreign investors, the biggest creditors to the U.S., unable to absorb a growing supply of Treasury bonds as the financial crisis prompts nations to invest in their own banks and currencies. That would drive up yields just as a widening budget deficit pushes borrowing needs to a record $2 trillion, according to estimates by Goldman Sachs Group Inc. and Wrightson ICAP LLC. ``It's hard to see how demand for Treasuries is going to keep up with supply once the risk aversion trade subsides,'' said Tony Norris, who oversees $10 billion in international strategies as chief investment officer and senior portfolio manager at Evergreen International Advisers in London. ``There's going to be pressure on yields to rise.'' Sentiment Bearish Ten-year notes handed investors a loss of 0.8 percent last month because of concern the U.S. will mainly increase its long- term debt sales as it raises money for its $700 billion bank- rescue package. The Treasury will announce its quarterly borrowing plans on Nov. 5. A weekly survey of fund managers by Ried, Thunberg & Co., an economic advisory company in Jersey City, New Jersey, shows investors are bearish on U.S. government securities. The measure of money manager sentiment toward Treasuries through the end of December slipped to 43 for the seven days ended Oct. 31 from 44 the week before. Readings below 50 indicate investors expect bonds to decline. Ried surveyed 30 fund managers overseeing $1.39 trillion. Yields indicate efforts by governments and central banks to bolster confidence and trading in the credit markets are working. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 2.65 percentage points from 3.87 percentage points a month ago. The Reserve Bank of Australia, European Central Bank and Bank of England will all cut interest rates this week, according to Bloomberg surveys of economists. The MSCI Asia Pacific Index of regional shares rose 2 percent, the fourth gain in five days, and U.S. stock futures climbed. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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