By Gavin Finch and Bob Chen Dec. 23 (Bloomberg) -- Treasuries rose before a government report forecast to show sales of new U.S. homes slumped to the lowest level in 17 years, providing further evidence the U.S. recession is deepening. The difference, or spread, between two- and 10-year note yields narrowed to the least since June as investors favored longer-dated securities after the Federal Reserve cut interest rates as low as zero last week. Five-year notes rose even as the U.S. prepares to sell a record $28 billion of the securities. “The Fed has set a zero interest-rate policy so the two- year yield is as low as it can go, which means investors are looking for capital gains further along the yield curve,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets. “The Fed also hinted last week that it might buy longer-dated Treasuries outright, which has given the market a massive bid.” The 10-year note yield slid two basis points to 2.15 percent as of 7:10 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 rose 7/32, or $2.19 per $1,000 face amount, to 114 6/32. The five-year note yield fell one basis point to 1.41 percent. The Securities Industry and Financial Markets Association recommended a full closure for Treasuries in Japan today because of a public holiday and normal trade in the U.K. and U.S., according to its Web site. Five-Year Auction The Treasury sold $38 billion of two-year notes yesterday at a yield of 0.922 percent. While the lowest on record since the Treasury began regular auctions of the securities in 1975, the average forecast in a Bloomberg survey of eight firms that bid on the sale was for a yield of 0.912 percent. Investors bid for 2.13 times the securities offered, compared with an average of 2.25 times at the previous six auctions. Sales of new homes declined to an annual pace of 415,000 in November, the lowest level since January 1991, according to a Bloomberg survey. Existing home sales fell 1 percent from a month earlier, after dropping 3.1 percent in October, a separate survey showed. Treasuries have returned 14.6 percent this year, the best annual performance since rising 18.5 percent in 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. Thirty-year bonds handed investors almost 18 percent in December compared with 7 percent in 10-year securities and 0.4 percent in two-year debt, Merrill indexes show. A deepening global recession and $1 trillion in writedowns and credit-market losses tied to U.S. mortgage securities drove investors to the relative safety of government debt. Money-Market Rates Two-year notes yielded 0.89 percent, after dropping to 0.6 percent last week, the lowest since regular sales began in 1975. Three-month Treasury bill rates were 0.02 percent after falling to minus 0.05 percent last week. The TED spread, a gauge of banks’ willingness to lend, slipped below 150 basis points yesterday for the first time since the collapse of Lehman Brothers Holdings Inc. in mid-September amid speculation interest rates near zero and promises of more government cash will help thaw credit. The spread, the difference between the London interbank offered rate, or Libor, that banks charge each other for three- month loans and Treasury bill rates, narrowed to 145 basis points, the lowest since Sept. 12, the last trading day before the Lehman collapse. The Treasury last auctioned five-year debt on Nov. 25, selling $26 billion at a yield of 2.11 percent. Investors bid for 2.44 times the securities offered, compared with an average of 2.29 times at the previous six auctions.

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