By Ron Harui Nov. 14 (Bloomberg) -- Treasury 10-year notes rose before U.S. reports that economists say will show retail sales fell the most in almost seven years and consumer confidence dropped to the lowest level in more than a quarter century. Yields declined from the highest level in more than a week as the credit crunch started to erode corporate earnings, leading traders to raise bets for central bank interest-rate cuts. Treasury Secretary Henry Paulson urged Congress to come up with a plan to bail out U.S. automakers, and said he will use some of the $700 billion bank-rescue program to reduce pressures on consumer credit instead of buying devalued mortgage assets. ``We are expecting the U.S. economy to be in a recession currently and certainly for the next few quarters,'' said Adam Carr, senior economist at ICAP Australia Ltd. in Sydney. ``I'm bullish. Retail sales are expected to be fairly woeful.'' Ten-year yields fell 1 basis point to 3.84 percent as of 2:24 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security due November 2018 rose 3/32, or 94 cents per $1,000 face amount, to 99 9/32. The yield may decline to 3.65 percent over the next week, Carr forecast. Yields on two-year notes increased 1 basis point to 1.24 percent and five-year yields rose 1 basis point to 2.42 percent. Sales at U.S. retailers dropped 2.1 percent in October, the fourth consecutive decrease and the biggest since November 2001, according to a Bloomberg News survey of economists. The Commerce Department will release the report at 8:30 a.m. in Washington. The Reuters/University of Michigan preliminary index of consumer sentiment fell to 56.2 in November, the lowest level since 1980, from 57.6 the prior month, a separate Bloomberg survey showed. The report is due at 10 a.m. in New York. Bailout for Automakers Futures on the Chicago Board of Trade show an 82 percent chance the Federal Reserve will lower its 1 percent target rate for overnight bank lending by a half percentage point at its Dec. 16 meeting. The odds were 58 percent a week ago. Two-year yields, those most sensitive to changes in monetary policy because of their short maturities, declined 9 basis points this week, while 10-year rates rose 3 basis points. Investors bought two-year notes on the outlook for further Fed cuts and sold 10-year bonds on concern the Treasury will increase longer- maturity debt sales to fund the government's rescue package. Treasuries declined yesterday as demand fell at a $10 billion auction of 30-year bonds. Thirty-year yields were at 4.34 percent after rising 19 basis points yesterday, the most since Sept. 30. The difference in yield, or spread, between two- and 10-year notes widened to 2.59 percentage points from 2.47 percentage points a week ago. The margin was 2.62 points yesterday. The most since 2003. Supply Increase ``Supply may increase in order to fund the financial-rescue package as well as possible economic stimulus measures in the future,'' said Minako Iida, a strategist for non-yen debt at Barclays Capital Japan Ltd. in Tokyo. ``Treasuries are likely to be sold.'' China, the second-biggest overseas holder of Treasuries after Japan, may increase its holdings of gold on concern the U.S. bank rescue plan will cause the dollar and prices of government debt to decline, Hong Kong's Standard newspaper reported, citing an unidentified person familiar with the situation. Treasuries have returned 6.1 percent so far this year, according to Merrill Lynch & Co.'s U.S. Treasury Master Index, as investors sought the safest securities amid the global economic slump. Corporate bonds declined almost 13 percent in the same period, a separate Merrill index shows. ``Recessionary fears will still play high,'' ICAP's Carr said. ``Today's data will act as a reminder that the earnings environment isn't great.'' Chrysler, Ford Chrysler LLC, General Motors Corp. and Ford Motor Co. have asked for $25 billion in U.S. aid to help weather the deepest auto-sales decline in 17 years. Paulson said yesterday his $700 billion in funds isn't intended for manufacturers and that Congress should tackle the troubled auto industry. Senators Charles Schumer and Christopher Dodd offered conflicting opinions on the fate of any auto-rescue plan, with Schumer saying legislation would likely succeed with some Republican support and Dodd indicating the measure may not have the votes to pass. Chrysler Chief Executive Officer Robert Nardelli said yesterday the company is in crisis and may have to close two more assembly plants if aid is not forthcoming. ``It would be very difficult to make it through this unprecedented downturn'' without help, he said at Ernst & Young's Strategic Growth conference in Palm Desert, California. To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

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