By Ron Harui Dec. 17 (Bloomberg) -- Treasuries fell for the first time in five days, driving yields up from record lows, as stocks rallied after the Federal Reserve cut interest rates to zero and said it may increase purchases of riskier securities. Thirty-year bonds, which led gains since the collapse of Lehman Brothers Holdings Inc. in mid-September, declined the most after the Fed said it may buy more Fannie Mae and Freddie Mac mortgage debt to push down home-loan rates. Treasuries are still poised for the best returns this year since 1995 as investors accepted even the lowest yields to safeguard their money as the global economy slipped into a recession. “Investors sold into the recent sharp rally,” said Mitsuo Masuda, a Tokyo-based manager in the foreign-bond section at Sumitomo Life Insurance Co., which has the equivalent of $235 billion in assets. “Economic stimulus packages may emerge from the next administration that could push up yields.” Yields on 30-year bonds rose five basis points to 2.76 percent as of 8:04 a.m. in London, according to BGCantor Market Data. The price of the 4.5 percent security maturing in May 2038 dropped 1 6/32, or $11.88 per $1,000 face amount, to 134 25/32. Two-year yields climbed two basis points to 0.66 percent and rates on 10-year notes were little changed at 2.25 percent. The MSCI Asia Pacific Index of regional shares rallied 2.7 percent following a 5.1 percent advance in the Standard & Poor’s 500 Index yesterday, the biggest gain in three weeks. The dollar dropped to a 13-year low versus the yen as demand for U.S. assets waned with Fed rates now the lowest among industrialized nations. Fannie, Freddie The Fed said in a statement that it “will employ all available tools” to promote economic growth after cutting the federal funds rate target to between zero and 0.25 percent, from 1 percent. It also lowered the rate on direct loans to banks and securities dealers to 0.5 percent. A senior Fed official told reporters yesterday that the central bank may accept lower-rated securities as collateral for loans to help ease the credit crunch. Yields on Fannie Mae and Freddie Mac mortgage bonds fell to all-time lows. Rates on Washington-based Fannie’s current-coupon 30-year fixed-rate mortgage bonds slid 30 basis points to 3.86 percent yesterday, according to Bloomberg data. Yields on Freddie 30-year bonds slumped 46 basis points to 3.98 percent. Treasury Sales U.S. government debt returned 13.7 percent in 2008, the most since an 18.5 percent increase in 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. German bunds rose 10.6 percent and Japanese securities 2 percent, separate Merrill indexes show. “People are more concerned about losing their money rather than getting a good return,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “They’d rather have the knowledge that their money is safe.” The Treasury may announce tomorrow record sales of two- and five-year notes scheduled for auction next week, according to Wrightson ICAP, a research unit of the world’s largest inter- dealer broker based in Jersey City, New Jersey. The government may sell $37 billion of two-year debt on Dec. 22 and $27 billion of five-year notes the following day, Wrightson forecast. Purchases of U.S. securities drove yields on two-year notes to 0.62 percent, the lowest level since sales began in 1975, and rates on 10-year debt to 2.25 percent, the least since 1953. Longer-Dated Debt Ten-year notes have outperformed their two-year counterparts this week. The difference in yield between the securities narrowed to 1.62 percentage points, near the least since Sept. 16, and down from the year’s high of 2.62 percentage points in November. “Short-term yields are almost zero, so longer-dated bonds such as the 10-year sector are likely to perform well,” said Shun Totani, senior fund manager for Tokyo-based Asahi Life Asset Management Co., which handles the equivalent of $340 million in debt. Fed policy makers said in a statement yesterday that they’re weighing the potential benefits of buying longer-term Treasuries and are “ready to expand” purchases of agency debt and mortgage-backed securities “as conditions warrant.” With the Fed’s statement, policy makers joined the Bank of Japan as the only other major central bank in modern times to adopt a policy of rate cuts with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target interest rate at zero. Default Risk Declines The cost of protecting Asia-Pacific bonds from default declined. The Markit iTraxx Australia index of credit-default swaps fell 45 basis points to 360 basis points, Citigroup Inc. data show. The Markit iTraxx Japan index was 20 basis points lower at 310, according to BNP Paribas SA. The swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. The Fed also said inflation pressures “have diminished appreciably,” hours after a government report showed consumer prices fell by the most on record in November. The breakeven rate, or the difference in yields between 10- year Treasury Inflation Protected Securities and conventional U.S. notes, was 0.15 percentage point compared with 0.36 percentage point at the start of the month and the year’s high of 2.67 points in March. The gap reflects the rate of inflation traders expect for the next decade. To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

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