By Dakin Campbell and Gavin Finch Nov. 24 (Bloomberg) -- Treasuries declined as traders prepared for a $36 billion auction of two-year notes amid speculation a bailout of U.S. banks will force President-elect Barack Obama to spend more than previously estimated to boost the economy. The two-year yield touched the highest level in three days as Citigroup Inc. received government guarantees for tainted assets and a $20 billion injection to stabilize the bank after its stock fell 60 percent last week. Treasuries also slipped on expectations the government’s economic stimulus plan will run to $700 billion or more, exceeding the $175 billion package Obama proposed a month ago. “Supply is keeping the pressure on,” said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co. “It’s a lot of supply, and we’re looking at low 1 percent yields. But I think there is still a lot of demand from overseas.” The yield on the two-year note increased 3 basis points, or 0.03 percentage point, to 1.14 percent at 10:10 a.m. in New York, according to BGCantor Market data. It touched 1.18 percent. The 1.5 percent security due October 2010 fell 2/32, or 63 cents per $1,000 face value, to 100 22/32. The 10-year note yield rose 5 basis points to 3.28 percent. The Treasury Department is also scheduled to sell $26 billion of five-year notes this week. Demand at the last sale of two-year notes on Oct. 28 was stronger than the average at the previous 10 auctions, judging by the bid-to-cover ratio, which compares the number of bids with the amount of securities offered. The ratio was 2.49 at the last sale, compared with an average of 2.31. Citigroup Support Citigroup will receive protection against “unusually large losses” on $306 billion of assets and get an investment from the U.S. Treasury, according to a government statement. “The fact that they got backstopped shows there’s still a major problem going on,” said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank. “From a taxpayer’s perspective you don’t want to see the bailout situation continue, but it is for the betterment of the entire” economy. General Motors Corp., in danger of running out of cash, will seek to cut its debt and to negotiate new union rules to help it win federal loans, people familiar with the plan said. Home resales in the U.S. dropped in October and prices fell by the most on record, signaling a deepening housing recession going into 2009. Resales declined 3.1 percent last month to an annual rate of 4.98 million units, less than forecast, the National Association of Realtors said today in Washington. Stimulus Package Ten-year yields will rise to 4 percent by Dec. 31, from 3.23 percent at the end of last week, Deutsche Bank economists Joe LaVorgna and Carl Riccadonna in New York wrote to clients on Nov. 21. A Bloomberg survey of banks and economists shows the figure will increase to 3.69 percent, with the most recent forecasts given the heaviest weightings. Congress will send Obama an economic stimulus package the day he takes office on Jan. 20, two Democratic lawmakers said yesterday. Timothy Geithner, head of the Federal Reserve Bank of New York, will be nominated as Treasury secretary, and Lawrence Summers will head the National Economic Council, Democratic aides said. Obama’s incoming administration may also enlarge the $700 billion financial-rescue fund enacted last month. It may surge to perhaps $1.2 trillion, said Martin Baily, who served as White House chief economist under Clinton and is now at the Brookings Institution in Washington. U.S. yields tumbled to record lows last week, with the three-month bill at 0.01 percent, as the U.S. recession fueled demand for sovereign debt. Failed Trades Treasuries are in such demand that investors are lending money for almost nothing to obtain the securities through so- called repos, which dealers use to finance their holdings. In the $7 trillion-a-day repurchase market, one party provides cash to another in exchange for a security, and vice versa. One problem is that many parties aren’t delivering the bonds because there is no penalty for not doing so, causing “fails” to exceed $5 trillion a week, according to the Federal Reserve Bank of New York. The Treasury Market Practices Group wants to impose a “penalty” on failed trades, which New York Fed Executive Vice President William Dudley said may cause U.S. borrowing rates to rise if not rectified. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 216 basis points, from 2008’s low of 76 basis points set in May. The spread increased to 464 basis points on Oct. 10, the most since Bloomberg began compiling the data in 1984. “The economic situation gets worse by the day,” said Adam Donaldson, head of debt research at Commonwealth Bank of Australia in Sydney, the nation’s second-largest lender by assets. “Yields can still drift lower.” Ten-year rates may drop to 3 percent by year-end, he said. To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net.

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