Treasuries rose, with 10-year notes gaining the most in five days after Moody’s Investors Service said it may downgrade Ireland’s debt, increasing demand for the relative safety of U.S. government debt. Two-year debt fluctuated before a $35 billion auction of the securities today, part of $99 billion of note sales this week. Moody’s Investors Service said it may lower Ireland’s credit rating by more than it previously anticipated as the aid plan from the European Union and the International Monetary Fund threatens to boost the country’s debt. “We are seeing a delayed reaction to the Ireland story which has accelerated as New York market’s opened,” Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies & Co., one of the 18 primary dealers that trade with the Federal Reserve. ‘Going ahead with the bailout forces people in the market where they might not have acted before. The falling euro has the effect of pushing new money into risk free assets.” The yield on the 10-year note fell four basis points, or 0.04 percentage point, to 2.83 percent at 9:13 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 gained 11/32 or $3.44 per $1,000 face value, to 98 6/32. Yield Spread The spread between 2- and 30-year debt fell to 368 basis points, the narrowest on a closing basis since Nov. 2. The 10- and 30-year spread dropped to 136 basis points. The yield on the 30-year bond decreased 5 basis points to 4.19 percent. Ireland’s aid will “crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign’s debt burden,” Frankfurt-based Moody’s analyst Dietmar Hornung said in an e-mailed note today. Increases in state debt “being discussed exceed the expectation we had in October when we put Ireland’s Aa2 rating on review for downgrade. A multinotch downgrade” is “now the most likely outcome.” outcome.” Ireland yesterday became the second euro-region state to ask for external aid after surging costs to bail out the country’s banks pushed up the budget deficit and eroded investor confidence. The package may total as much as 95 billion euros ($130 billion), further boosting government debt, Moody’s said. Moody’s Acts Moody’s placed Ireland on review for a rating reduction in October, when it said it was “most likely” to cut the grade by one level if a downgrade went ahead. It said today that a cut would still leave the country within the investment-grade category. Two-year Treasury notes have outperformed longer-dated counterparts this month after the Federal Reserve said on Nov. 3 that it would buy $600 billion more in government debt to keep borrowing costs low. The notes have handed investors a 0.3 percent loss this month, compared with a 4 percent drop for 30-year bonds, according to Bank of America Merrill Lynch indexes. Treasuries yielded less than tax-exempt bonds for the first time since the financial crisis, a relationship that history shows doesn’t last, especially as the Fed kindles inflation expectations. Investors buying AAA municipal general obligation bonds due in two years get a yield equal to 119 percent of similar- maturity Treasuries, Bloomberg Fair Market Value data show. A ratio above 100 percent means those in the 38.3 percent federal tax bracket get higher yields plus tax-sheltered income. Before the credit crisis in 2008, that happened twice in the 20 years for shorter-maturity debt. Bad Combination The combination of worsening state and local finances and a surge in sales that included $15.5 billion of offerings last week, the most in more than seven years, has pushed tax-exempt bond payouts above Treasuries. “The value pendulum has swung from Treasuries to munis,” said Jonathan Lewis, founding principal of New York-based Samson Capital Advisors LLC, which manages $7.3 billion. “Municipals are a good place to park your money and get a yield advantage that typically wouldn’t be there.” Fund managers in a survey by Ried Thunberg ICAP Inc., a unit of the world’s largest interdealer broker, became less bearish on the outlook for Treasuries through year-end. Ried’s sentiment index rose to 49 for the seven days ended Nov. 19 from 46 the week before. A figure less than 50 indicates investors expect prices to fall. To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net.

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