By Anchalee Worrachate and Wes Goodman Nov. 5 (Bloomberg) -- Treasuries fell, led by 10-year notes, as Barack Obama won the U.S. presidential race and his Democratic party picked up seats in Congress, making it easier to push through his plans to revive the shrinking U.S. economy. Two-year notes, which have rallied for five months, dropped the most in a week as a decline in money-market rates reduced the safe-haven appeal of U.S. debt. Treasuries also slid on speculation the U.S. will say it plans to increase the size of its debt sales in its quarterly refunding announcement today to finance its $700 billion bank-rescue package. ``There's a scope for some bounce in optimism following Obama's victory and that may help some risk assets at the expense of Treasuries in the near term,'' said John Stopford, who oversees about $12 billion of investments as global head of fixed income at Investec Asset Management. ``There's quite a lot of supply to absorb. That may also act as a restraint, even though the recessionary environment should support demand for bonds.'' The yield on two-year notes climbed 6 basis points to 1.43 percent as of 7 a.m. in New York, according to BGCantor Market Data. The 1.5 percent security maturing October 2010 fell 4/32, or $1.25 per $1,000 face amount, to 100 4/32. The 10-year yield advanced 8 basis points to 3.81 percent. A basis point is 0.01 percentage point. Yields may push higher until the government issues its October employment report on Nov. 7. The U.S. probably lost 200,000 jobs during the month, according to the median forecast in a Bloomberg News survey of economists. The yield difference between two- and 10-year notes narrowed to 236 basis points, still near the widest in almost five years. The so-called steep yield curve indicated investors remained pessimistic about the economic outlook. Comparative Returns Democrats captured at least 13 U.S. House seats across the country as the party expanded its majority. Three weeks ago, Obama increased his proposed ``middle-class rescue plan'' to $175 billion from $115 billion. He also plans to create 2 million jobs and ease access to retirement accounts. Government securities returned 5.6 percent so far this year, according to Merrill Lynch & Co.'s U.S. Treasury Master index. The Standard & Poor's 500 Index fell almost 32. German government bonds handed investors a 6.7 percent gain, while investors in Japanese sovereign debt earned 1.4 percent, the Merrill figures show. Government bailouts totaling about $3 trillion, interest- rate cuts around the world and unprecedented cash injections by central banks drove the London interbank offered rate, the benchmark for $360 trillion of securities worldwide, lower in the past month. Treasuries underperformed European bonds last month, handing investors a loss of 0.1 percent, compared with a 0.9 percent gain on their European counterparts, according to Merrill Lynch & Co.'s EMU Direct and Treasury Master indexes. Borrowing Costs The cost of borrowing in dollars for three months fell to the lowest level since December 2004, the British Bankers' Association said today. The three-month Libor banks charge each other for three-month loans fell 20 basis points to 2.51 percent today. While lending remains restricted, a measure of banks' reluctance to offer loans to each other eased to the lowest level since Sept. 15. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 2.03 percentage points from 3.82 percentage points a month ago. ``The worst is over,'' following a meltdown in the financial markets last month, said Kazuaki Oh'e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., part of the investment division at Canada's fifth-biggest bank. ``Supply is another big, big problem.'' Investors should sell 10-year notes at yields of 3.7 percent and buy at 4 percent, Oh'e said. U.S. borrowing needs will rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, according to the Treasury Department. Refunding Announcement At its refunding announcement today, the Treasury will probably say it plans to sell $25 billion in three-year notes, $20 billion in 10-year notes and $8 billion in 30-year bonds next week, according to a survey of economists by Bloomberg. Yields on Treasuries due in 2010 were near the lowest in almost two weeks as traders added to bets for the Federal Reserve to trim borrowing costs at its next meeting on Dec. 16. ``Everybody wants to buy two-year notes now,'' said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., part of Japan's biggest bank. ``The Fed is going to cut interest rates further.'' The yield may fall to 1 percent by year-end, Bando said. Futures on the Chicago Board of Trade show a 65 percent chance the Fed will reduce its target rate for overnight bank loans by 50 basis points to 0.5 percent next month. The odds rose from 55 percent the day before. Rate Cuts The central bank lowered borrowing costs twice last month to support the shrinking U.S. economy. Rising unemployment and slumping property values are forcing Americans to cut back on purchases of everything from home electronics to restaurant meals. Circuit City Stores Inc., the second-biggest electronics retailer, said this week it will close 155 American stores, reducing the company's workforce by 17 percent to conserve cash. Service industries in the U.S. probably shrank in October for the sixth time in 10 months. The Institute for Supply Management's non-manufacturing index, which covers almost 90 percent of the economy, dropped to 47, from 50.2 in September, according to the median estimate of forecasts in a Bloomberg News survey before the report at 10 a.m. New York time. The Treasury may also announce today it's considering selling seven-year bonds, Joe LaVorgna and Carl Riccadonna, economists at Deutsche Bank Securities Inc. in New York, wrote in a report yesterday. ``Fixed-income investors are faced with a tremendous amount of supply coming their way,'' Jane Caron, chief economic strategist in Burlington, Vermont, at Dwight Asset Management Co., which oversees $70 billion, said yesterday. ``Increased supply could lead to lower prices in the very near term.'' To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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