By Sandra Hernandez and Cordell Eddings Nov. 4 (Bloomberg) -- U.S. two-year notes fell as gains in stock markets curbed demand for the safest assets and before the U.S. government announces debt-sale plans that are likely to show its borrowing needs soared. The spread between two- and 10-year-note yields narrowed amid speculation the Treasury may more than double sales of securities in the fourth quarter. Global stocks rose as earnings results tempered concerns about slowing economic growth. Money- market interest rates eased. ``What it boils down to is fixed-income investors are faced with a tremendous amount of supply coming their way,'' said Jane Caron, chief economic strategist in Burlington, Vermont, at Dwight Asset Management Co., which oversees $70 billion. ``Increased supply could lead to lower prices in the very near term.'' The yield on the two-year note rose 2 basis points, or 0.02 percentage point, to 1.46 percent at 12:08 p.m. in New York, according to BGCantor Market Data. The 1.5 percent security due in October 2010 declined 1/32, or 31 cents per $1,000 face amount, to 100 2/32. Ten-year Treasury yields decreased 1 basis point to 3.90 percent. The difference between two- and 10-year yields narrowed by 4 basis points to 2.44 percentage points. Supply Announcement Caron, whose firm bought five-year notes last week, said she is still bullish on Treasuries because U.S. government debt isn't fully priced for an economic slowdown. Five-year notes climbed by the most since Oct. 22 yesterday as the Institute for Supply Management's U.S. manufacturing index dropped in October to the lowest level since 1982, the Tempe, Arizona-based group reported. Five-year yields were little changed today at 2.70 percent. U.S. borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, the Treasury said in a statement in Washington yesterday. The department will announce plans for its auction calendar tomorrow. ``Yields will struggle to fall because we will get a quarterly refunding announcement tomorrow,'' said David Keeble, London-based head of fixed-income strategy at Calyon, the investment-banking unit of Credit Agricole SA. ``The government is going to sell a lot of bonds into a market that doesn't want them. I'm negative on Treasuries.'' U.S. stocks rose, with the Standard & Poor's 500 Index gaining 3.6 percent. The MSCI World Index of equities advanced for the sixth straight day, the longest run of advances since July. Money-market interest rates declined. `Whole Lot of Supply' ``There is going to be a whole lot of supply coming, and that will make a difference at the margins in the short term,'' said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee, Wisconsin. ``You would think that would tend to push rates much higher, but if the macro environment remains weak that won't happen in the longer term.'' Ten-year notes handed investors a loss of 0.8 percent last month, Merrill Lynch & Co.'s Treasury Master index showed. U.S. voters go to the polls today to elect a new president. The winner -- Democrat Barack Obama, who leads in national polls, or Republican John McCain -- must contend with an economy crippled by declining corporate profits and the highest unemployment in five years. ``There's a modicum of pressure ahead of the refunding announcement and the U.S. election,'' said Richard McGuire, senior fixed-income strategist in London at RBC Capital Markets. ``Increasingly poor economic backdrops should ensure bonds continue to operate in a bullish environment.'' Factory Orders Orders placed with U.S. factories in September dropped three times as much as forecast, a government report showed. They declined 2.5 percent after a revised 4.3 percent decrease in August, the Commerce Department said in Washington. Futures on the Chicago Board of Trade show a 67 percent chance policy makers will lower the target rate for overnight bank loans to 0.5 percent on Dec. 16 from 1 percent. The rest of the bets are for a quarter-percentage point cut. The Fed also has created six loan programs channeling at least $700 billion in cash and collateral into money markets. ``There are limits to what the central bank can do,'' Dallas Fed President Richard Fisher said today in the text of a speech in Grapevine, Texas. ``Complementary action must now be undertaken by the fiscal authorities,'' including the new president to be elected today. Two-year notes returned 1.1 percent in October, according to Merrill's index. The Fed cut interest rates twice last month and investors sought the safest securities as credit markets froze and the S&P 500 fell 17 percent, the most since 1987. Libor Falls Banks' borrowing costs for dollars declined for a 17th day, with the London interbank offered rate for three-month funding dropping 15 basis points to 2.71 percent, the British Bankers' Association said. It was the lowest rate in almost five months. The gap between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, shrank to 2.22 percentage points, from 3.87 percentage points a month ago. ``The flight-to-quality bid for bonds that was associated with a teetering financial system is starting to come undone,'' said Peter Jolly, head of markets research in Sydney at NabCapital, the investment-banking unit of National Australia Bank Ltd., the nation's largest lender. ``There's supply coming as well.'' Ten-year yields will probably hold little changed through year-end, Jolly said. To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

Source