By Sandra Hernandez Nov. 7 (Bloomberg) -- Treasuries declined as investors shifted their focus from a government report showing the U.S. economy shed more jobs last month than economists forecast to the $55 billion in government debt to be auctioned next week. U.S. government securities are still headed for a weekly gain after earlier reports showed the manufacturing and service sectors contracted and traders bet the Federal Reserve will lower borrowing costs again this year to revive the economy. ``Clearly the number's weak, but I think the weakness was expected,'' said William Bellamy, a fixed-income portfolio manager in Richmond, Virginia, at Thompson, Siegel & Walmsley, which oversees $6.8 billion. ``We have $55 billion in supply; in the short term that could weigh on yields, push them up.'' The yield on the two-year note rose 5 basis points to 1.33 percent as of 8:56 a.m. in New York, according to BGCantor Market data. The 1.5 percent security due in October 2010 fell 3/32, or 94 cents per $1000 face amount, to 100 11/32. Payrolls shrank for a 10th straight month in October, by 240,000 workers, the Labor Department said today. Economists surveyed by Bloomberg News forecast a drop of 200,000, according to the median estimate. The unemployment rate jumped to 6.5 percent. Treasuries gained on Nov. 5 after ADP Employer Services said companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years. ADP includes only private employment and does not take into account hiring by government agencies, which is included in the government's report. Yield Spread Two-year notes, the most sensitive to monetary policy, yielded 2.40 percentage points less than 10-year notes, close to the biggest gap since 2004. A widening difference between the securities' yields indicates traders favor shorter maturities in anticipation of interest-rate cuts. Traders yesterday pushed two-year yields to 1.24 percent, the lowest in almost eight months. While the yield gap may widen before next week's auctions as traders push down prices of longer-term debt, 10- and 30-year Treasuries should outperform afterward, amid speculation the economy will weaken and consumer prices will fall, said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut. In addition, accounts ``don't have a lot of duration exposure,'' he said, referring to longer maturities. Treasury Inflation Protected Securities, or TIPS, due in five years yesterday yielded 0.50 percentage points more than similar-maturity notes, indicating traders expect consumer prices to fall 0.50 percent on average over the next five years. European Rate Cuts Futures on the Chicago Board of Trade show traders see a 99 percent chance the Fed will reduce its target rate for overnight loans between banks by a half-percentage point to 0.5 percent at its Dec. 16 policy meeting. The likelihood was 55 percent a week ago. The target rate was 4.25 percent at the start of the year. Two-year note yields have been 23 basis points higher than the federal funds target on average this decade. They'll end the year at 1.43 percent, according to the weighted average of analysts in a Bloomberg survey. Ten-year notes will yield 3.65 percent at year-end, another Bloomberg survey showed. European policy makers are also slashing rates to counter the worst financial crisis in almost a century. The U.K. central bank yesterday reduced its benchmark rate by the most since 1992, to a five-decade low of 3 percent. The European Central Bank and the Swiss and Danish central banks also trimmed their key rates yesterday, by a half point. ISM Report Two- and 10-year yields have both fallen an average of 2 basis points on the days of this year's payroll reports, according to Bloomberg calculations. Treasuries of all maturities have gained 1.4 percent this month on average, according to Merrill Lynch & Co.'s Treasury Master index. That compares with a 1 percent advance by German government bonds, the benchmark for Europe, according to another Merrill index, and a 7 percent drop in the Standard & Poor's 500 Index. The Institute for Supply Management's services index, which covers almost 90 percent of the economy, fell to 44.4 for October, the lowest since records began in 1997, the Tempe, Arizona-based group said Nov. 5. Fifty is the dividing line between growth and contraction. The group's manufacturing index dropped to 38.9, the lowest level in 26 years, the group said Nov. 3. The economy likely contracted by 0.3 percent this quarter, the same rate as in the July to September period, according to the weighted average of 77 forecasts in a Bloomberg survey. The Treasury plans to 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. U.S. borrowing needs are expected to rise to a record $550 billion in the three months to Dec. 31, the Treasury said Nov. 3. All else being equal, rising supply depresses prices. ``Supply and demand both drive the market, and in these stressful times there's been a lot of demand for safe haven assets,'' Suvrat Prakash, an interest-rate strategist at BNP Paribas Securities Corp. in New York, said before today's report. ``We don't see why supply should be such a big cheapening force down the road.'' To contact the reporter on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net.

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