By David Yong Dec. 15 (Bloomberg) -- Treasuries fell, led by five-year notes, as Asian stocks advanced on speculation the U.S. government will provide financial aid to prevent the nation’s biggest automakers from going bankrupt. The securities halted a six-week rally, pushing up yields from record lows, as President George W. Bush said there’s a “possibility” of tapping the Treasury Department’s $700 billion bank bailout fund to keep General Motors Corp. and Chrysler LLC solvent. Investors were more bearish on Treasuries, according to a weekly index from Ried, Thunberg & Co. “The bond market is going into a corrective phase because of the anticipated rescue plan,” said Akira Takei, general manager for international bonds in Tokyo at Mizuho Asset Management Co., which manages about $42 billion. “Yields will rise.” The yield on the five-year note rose four basis points, or 0.04 percentage point, to 1.56 percent as of 1:47 p.m. in Tokyo, according to BGCantor Market Data. The price of the 2 percent security due in November 2013 dropped 6/32, or $1.88 per $1,000 face amount, to 102 3/32. The yield on the two-year note rose three basis points to 0.80 percent while rates on 10-year Treasuries gained two basis points to 2.59 percent. Three-month bill yields held at 0.01 percent after falling below zero last week for the first time. Two-year notes yield 20 basis points less than the Federal Reserve’s target rate for overnight loans between banks of 1 percent before the central bank’s last rate meeting of 2008. Fed Outlook Futures contracts showed a 72 percent chance last week that Fed Chairman Ben S. Bernanke and his colleagues will cut the rate to 0.25 percent tomorrow. The rest of the bets are for a half- percentage point reduction. The MSCI Asia Pacific Index of regional shares rose 4.3 percent, the most in a week, following gains in U.S. equities on Dec. 12. Futures contracts on the Standard & Poor’s 500 Index climbed 0.5 percent. The Senate last week voted against a bill to offer a $14 billion lifeline to the car makers. Bush, speaking en route to Afghanistan, told reporters the rescue plan “won’t be a long process” because of the “fragility” of the auto industry. He said he wasn’t ready to announce any plan just yet. Demand for Treasuries is still rising even as estimates of a stimulus package planned by President-elect Barack Obama and the budget deficit rise to a record $1 trillion as investors flee risky assets. Treasuries in Demand U.S. government bonds have returned 12.4 percent on average this year, the best since they gained 13.4 percent in 2000, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The Standard & Poor’s 500 Index lost 40 percent and Merrill Lynch’s broadest corporate bond index fell 15 percent. “You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.” Federal Reserve reports on factory output today may show the U.S. economic slump is deepening, increasing demand for the relative safety of government debt. Economic Slump Manufacturing in the New York area contracted for a fourth month in December to a record low of minus 27.5, according to a Bloomberg News survey of economists before the New York Fed’s general economic index. Industrial production fell 0.8 percent in November versus a 1.3 percent gain in October, a separate survey showed. Ried, Thunberg’s measure of money manager sentiment toward Treasuries through the end of June fell to 40 for the seven-day period ended Dec. 12, from 41 a week earlier. Readings below 50 indicate investors expect bonds to decline. The survey from the Jersey City, New Jersey-based company includes 27 investors overseeing $1.38 trillion of assets. “This news on the automakers plan will be negative for Treasuries and bullish for stocks,” said Hong Kong-based Xin Li, who manages $1 billion in a trading account on U.S. government bonds at Industrial & Commercial Bank of China Ltd., China’s biggest lender. “Treasuries have gone too far and are overvalued and yields are more likely to go up.” To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net; Matthew Benjamin in Washington at mbenjamin2@bloomberg.net.

Source