By Wes Goodman Nov. 7 (Bloomberg) -- Treasuries headed for a weekly gain before a government report that will probably show the economy lost the most jobs in October since 2003, increasing odds that the Federal Reserve will cut interest rates. Two-year yields were near the lowest level in more than seven months as Asian stocks fell for a second day, fueling demand for the relative safety of government debt. Economic indicators have ``turned decidedly negative,'' Fed Governor Kevin Warsh said in a speech yesterday in New York. ``Yields should be dramatically lower,'' said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has $58.5 billion in assets. ``Jobs will be weak. The Fed has to cut rates. It's quite a good time to buy.'' Two-year note yields rose 1 basis point to 1.29 percent as of 1:33 p.m. in Tokyo, according to BGCantor Market Data. The 1.5 percent security due October 2010 traded at a price of 100 13/32. The yield dropped 27 basis points this week, the most since the period ended Oct. 3. Ten-year yields declined 28 basis points this week to 3.69 percent, the most since February. A basis point is 0.01 percentage point. Futures on the Chicago Board of Trade show a 90 percent chance the Fed will reduce its target for overnight bank loans, now 1 percent, to 0.5 percent at its next meeting Dec. 16, rising from 55 percent odds a week ago. Zero Rates The Fed will cut the rate to zero percent, bringing two-year yields to less than 1 percent, next year, Okumoto said. Today's Labor Department figures will show U.S. payrolls shrank by 200,000 workers, the biggest decline since March 2003, according to the median forecast in a Bloomberg News survey of economists. The jobless rate climbed to a five-year high of 6.3 percent, the survey shows. Data suggest the U.S. economy will probably be ``weak'' this quarter, Fed Governor Warsh said. The Treasury this week said it plans to sell the most debt since 2004 this quarter and bring back auctions of three-year notes as a slowing economy balloons the federal budget deficit to a record level. The department will sell $25 billion in three-year notes on Nov. 10, $20 billion in 10-year notes Nov. 12 and $10 billion in 30-year bonds Nov. 13. Three-year notes, which had been suspended since May 2007, will now be issued on a monthly basis, it said. ``The market is struggling to find the right balance between positioning for Friday's employment report and setting up for next week's Treasury refunding,'' Richard Bryant, a 30-year-bond trader at Citigroup Global Markets Inc. in New York, said yesterday. Citigroup is one of the 17 primary dealers that trade government securities with the Fed. Money Rates Decline Declining money market rates indicate banks are more willing to lend, alleviating some demand for the safest assets. The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 2.08 percentage points from 4.64 percentage points on Oct. 10, which was the most since Bloomberg began compiling the figures in 1984. A contraction in the U.S. economy is curbing price gains in the economy, making inflation protected bonds ``very attractive,'' fixed-income strategist Michael Brandes and researcher Steve Reich at Citi Private Bank in New York, wrote in a report issued yesterday. Citi is part of the biggest U.S. lender. The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional securities narrowed to 0.91 percentage point from 2.26 percentage points three months ago. The difference represents traders' outlook for inflation for the next decade. Comparative Returns Treasuries have returned 5.9 percent so far this year, versus 9.06 percent for all of 2007, according to Merrill Lynch & Co.'s U.S. Treasury Master index. The gain has been 7.2 percent in Germany, 3.2 percent in the U.K., and 1.4 percent in Japan, the Merrill figures show, fueled by the spreading economic meltdown. The International Monetary Fund predicted yesterday the U.S., Japan and euro region will all go into recession next year Japanese investors bought a net $10.9 billion in overseas bonds and notes in the week ended Nov. 1, the most in almost a year, the Ministry of Finance in Tokyo reported. U.S. 10-year notes yield 2.19 percentage points more than similar-maturity bonds in Japan, and the difference has averaged 2.30 percentage points for the past six months. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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