By Lukanyo Mnyanda and David Yong Dec. 15 (Bloomberg) -- Treasuries fell, raising yields from record low levels, as Asian and European stocks advanced on speculation the U.S. government will provide financial aid to prevent the nation’s biggest automakers from going bankrupt. Five-year notes led losses, halting a six-week rally, as President George W. Bush said there’s a “possibility” of tapping the Treasury’s $700 billion bank bailout fund to keep General Motors Corp. and Chrysler LLC solvent. The MSCI World Index of stocks advanced for their first time in three days, climbing 1.1 percent. Investors became more bearish on Treasuries last week, a survey from Ried, Thunberg & Co. showed. “The possible support for the automakers has had a positive impact on stocks, which could lead to a reversal of the safe-haven flows,” said Christian Zima, a fixed-income fund manager in Vienna at Raiffeisen KAG, which oversees about $30 billion of fixed-income assets. “That could be negative for Treasuries.” The yield on the five-year note gained eight basis points, or 0.08 percentage point, to 1.59 percent as of 7:16 a.m. in New York, according to BGCantor Market Data. The price of the 2 percent security due in November 2013 dropped 12/32, or $3.75 cents per $1,000 face amount, to 101 30/32. The yield on the two-year note rose six basis points to 0.82 percent while that on the 10-year Treasury gained three basis points to 2.60 percent. Three-month bill yields held at 0.01 percent after falling below zero last week for the first time. Keep Buying Treasuries Investors should continue buying Treasuries because the Federal Reserve is likely to keep cutting interest rates to revive the economy, Zima said. The 10-year yield will drop below 2.5 percent in the “next couple of months,” he said. Yields on two-, 10- and 30-year securities last week reached the lowest levels since the U.S. began regular sales. Two-year notes yielded 18 basis points less than the Fed’s 1 percent target rate for overnight loans between banks today. Policy makers hold their last rate-setting meeting of 2008 tomorrow. Futures contracts showed a 70 percent chance late 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. 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 bond prices to decline. The survey from the Jersey City, New Jersey-based company included 27 investors overseeing $1.38 trillion of assets. The company is a unit of ICAP Plc, the world’s largest broker of trades between banks. Stock Gains The MSCI Asia Pacific Index of regional shares rose 4 percent, the most in a week, following gains in U.S. equities on Dec. 12. Europe’s Dow Jones Stoxx 600 Index added 0.6 percent. The U.S. Senate last week voted against a bill to offer a $14 billion lifeline to the carmakers. Bush, speaking en route to Afghanistan today, 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 increasing even as estimates for the budget deficit and a stimulus package planned by President-elect Barack Obama rise to a record $1 trillion as investors flee risky assets. U.S. government bonds returned 12.4 percent this year, the most 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. ‘Massive Paranoia’ “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.” Two-year note yields dropped from this year’s peak of 3.11 percent on June 13, while the rate on 10-year securities fell from as high as 4.27 percent the same day. Gains for Treasuries will drive the yield on the U.S. 10- year note to as low as 1.65 percent and within 10 basis points of the yield on the comparable Japanese government bond amid “high uncertainty” next year, JPMorgan Chase & Co. said in a 2009 outlook report dated Dec. 12. Fed Reports Bernanke suggested in a Dec. 1 speech that the central bank would consider buying Treasuries to prevent yields from rising, saying one option is to buy “longer-term Treasury or agency securities on the open market in substantial quantities.” Fed reports on factory output today may show the U.S. economic slump is deepening, increasing demand for the relative safety of government debt. 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. The yield on the 10-year note below 2.50 percent by year- end, as investors bet a slowing economy will lead to deflation, Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking unit of France’s Credit Agricole SA. “Inflation is declining sharply and there are now deflation concerns,” Green said in a telephone interview. Global credit markets froze following the collapse of Lehman Brothers Holdings Inc. in September, prompting banks to hoard cash and making it difficult for companies to obtain funding. Money Markets Money-market rates showed banks’ reluctance to lend may be easing amid a global round of interest-rate cuts and cash injections. The difference between what banks and the U.S. government pay to borrow money for three months, the so-called TED spread, narrowed to 1.86 percentage points today, the lowest level since Nov. 11, compared with 2.18 points at the start of the month. It reached 4.64 percentage points in October, the highest level since Bloomberg began tracking the figure in 1984. “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 reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

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