By Anchalee Worrachate and Wes Goodman Nov. 6 (Bloomberg) -- Treasuries rose, led by two-year notes, before government reports today and tomorrow that may show the weakest employment market in the U.S. in five years as the worst financial crisis since the Great Depression forced companies to shed jobs. Bonds in the U.S. and Europe extended gains, pushing two- year yields to the lowest in eight months, after the Bank of England cut interest rates by a greater-than-predicted 150 basis points to 3 percent. Economists surveyed by Bloomberg News forecast the number of people receiving unemployment benefits rose to the most since 2003, and the U.S. lost 200,000 jobs last month, also the most in five years. The Treasury said yesterday it plans to sell $55 billion in government debt this quarter, the most in four years. ``People in the market are talking about the Fed funds rate going to zero, which in my view is totally justified by the poor U.S. economic outlook,'' said Christoph Kind, head of asset allocation in Frankfurt at Frankfurt-Trust Investment GmbH. ``Yields may have been underpinned by concern over supply lately, but I see scope for short-dated bond yields to fall further.'' The yield on the two-year note fell 4 basis points to 1.29 percent as of 7:20 a.m. in New York, according to BGCantor Market Data. The 1.5 percent security due October 2010 rose 2/32, or 63 cents per $1,000 face amount, to 100 13/32. The yield earlier fell to 1.24 percent, a level not seen since March. The 10-year yield declined 3 basis points at 3.67 percent. Rate Bets Traders increased bets the Federal Reserve will cut interest rates on Dec. 16 to spur the shrinking economy. Futures on the Chicago Board of Trade show a 92 percent chance the Fed will reduce its target rate for overnight bank loans by a half point to 0.5 percent. The odds rose from 55 percent the day before. The U.K. central bank unexpectedly slashed the benchmark rate by 1.5 percentage points as policy makers tried to contain the damage caused by the financial crisis. The European Central Bank is forecast to cut its benchmark rate by 50 basis points today. The MSCI World Index of equities fell for a second day, dropping 2.2 percent, and futures on the Standard & Poor's 500 Index of U.S. stocks sank 1.1 percent. U.S. two-year notes, among the most sensitive to interest- rate changes because of their short maturities, have rallied for five months. Ten-year notes handed investors a loss of 0.8 percent in October, according to Merrill Lynch & Co.'s U.S. Treasury Master index, as the U.S. increases long-term debt sales to pay for its $700 billion bank-rescue package. `Recession' ``The economy is going to get worse and be in a recession,'' said Shun Totani, senior fund investor for Tokyo- based Asahi Life Asset Management Co., which handles the equivalent of $1.28 billion in debt. ``I'm bullish.'' The total number of people receiving jobless benefits climbed to 3.743 million in the seven days ended Oct. 26 from 3.715 million the week before, according to the median estimate in a Bloomberg survey of economists before the Labor Department report at 8:30 a.m. in Washington. The decline forecast in tomorrow's employment report would be the most since March 2003. Citigroup Inc. and Goldman Sachs Group Inc. began firing workers as part of the firms' plans to cut more than 12,000 jobs, people with knowledge of the matter said. Dell Inc., the world's second-largest personal-computer maker, this week said it is offering unpaid leave to workers and severance packages to employees who voluntarily quit their jobs. IMF Forecasts The International Monetary Fund projects the economies of the U.S., Japan and euro zone will shrink next year, according to a fund staffer who cited revised forecasts. President-elect Barack Obama's plans to spur economic growth will help send 10-year notes down further, said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., part of Japan's second-largest brokerage. ``Obama plans economic stimulus and tax cuts,'' Nagai said. ``Yields will increase.'' They may rise to 3.88 percent by month-end, he said. He increased his proposed ``middle-class rescue plan'' last month to $175 billion from $115 billion. The Treasury yesterday said it would bring back auctions of three-year notes at the debt sales this quarter as a slowing economy swells the budget deficit to a record level. The government will sell $25 billion in three-year debt on Nov. 10, $20 billion in 10-year notes Nov. 12 and $10 billion in 30-year bonds on Nov. 13. Yield Spread The difference in yield, or spread, between two- and 10- year notes widened to 2.37 percentage points, from 1.39 percentage points two months ago as yields on shorter-maturity debt fell faster than longer-term rates. Treasuries rose yesterday as stocks fell after a report from ADP Employer Services showed companies shed more jobs than economists predicted and the Institute for Supply Management's non-manufacturing index decreased to the lowest level since records began in 1997. 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. The cost of borrowing in dollars for three months fell 12 basis points to 2.39 percent, the lowest level since November 2004, the British Bankers' Association said yesterday. 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 percentage points from 3.82 percentage points a month ago. 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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