Nov. 3 (Bloomberg) -- U.S. two-year notes were little changed before the Treasury announces debt-sale plans this week that may show its borrowing needs doubled this quarter as the government seeks to finance a bailout of the nation's banking system. The difference in yield between two- and 10-year notes also stayed near the highest in more than four years as traders speculated the Federal Reserve will cut interest rates in December. Any declines in two-year notes, those most sensitive to changes in monetary policy, may be tempered before a report today forecast to show manufacturing contracted. ``We could see some moderate risk appetite returning this week and with the prospects of higher issuance, yields should go up,'' said Niels From, chief analyst in Copenhagen at Nordea Bank AB, the biggest Nordic bank by market value. ``But rising yields should be viewed as short term in the context of a broader bull market for treasuries.'' Two-year notes yielded 1.57 percent as of 7:01 a.m. in New York, 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 3.95 percent. Japan's financial markets were shut for a holiday. The yield spread between the two- and 10-year notes was 238 basis points, near the most since 2004, after investors sought the safest assets as the U.S. lost almost 1 million jobs this year, property values and stocks tumbled and credit markets froze. Borrowing Requirement The Treasury will announce its quarterly borrowing needs on Nov. 5. The U.S. may sell a net $388 billion of bills, notes and bonds this quarter, up from $178.4 billion in the previous three months and $33.4 billion in the same period of 2007, according to a quarterly survey by the Securities Industry and Financial Markets Association released Oct. 31. Declines in U.S. notes may be tempered as a report today from the Institute for Supply Management will probably show manufacturing contracted in October for a seventh month in 2008. The factory 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 below 50 signals a contraction. A Labor Department report on Nov. 7 will show payrolls shrank by 200,000 workers last month, according to the median estimate in a separate survey. The unemployment rate may jump to its highest level in more than five years. `Deep Recession' ``The U.S. ISM index, similar to the employment report on Friday, may stoke fears of a deep recession in the U.S.,'' Peter Mueller, a fixed-income strategist in Frankfurt at Commerzbank AG, Germany's second-largest bank by assets, wrote in a note today. ``Market expectations that the Fed has not reached the low in this rate-cutting cycle should not only persist but will even get further massive support.'' Futures on the Chicago Board of Trade show a 50 percent chance the Fed will reduce its target rate for overnight bank loans to 0.5 percent at its Dec. 16 meeting, compared with zero a week ago. The remaining bets are for a cut to 0.75 percent. Falling U.S. economic growth and rising unemployment may further erode banks' willingness to lend to consumers and businesses, Richmond Federal Reserve Bank President Jeffrey Lacker said. ``The deterioration of economic conditions is playing a more prominent role in the tightening of credit terms right now than the direct effects of financial market turbulence,'' Lacker said today in Jerusalem. Even as Chairman Ben S. Bernanke lowers 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. Foreign investors 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 Goldman Sachs 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.'' Sales Forecast 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. 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. The company 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.

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