By Keith Jenkins and Wes Goodman May 12 (Bloomberg) -- Treasury 10-year notes declined as stock markets rose and the U.S. prepared to sell $24 billion of the securities. The drop sent the yield to within 5 basis points of its highest this week. Two-year yields also advanced as the Stoxx Europe 600 Index climbed 0.7 percent. Ten-year notes rose earlier on concern Europe’s 750 billion-euro ($949 billion) rescue plan won’t fix the region’s debt crisis and after the Wall Street Journal said Morgan Stanley is being investigated by U.S. prosecutors over allegations it misled investors. “Treasuries are drifting lower before the 10-year auction,” said Orlando Green, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. “There are still lingering doubts regarding the global picture in terms of sovereign debt, which gives an underlying demand for quality.” The yield on the 10-year note rose 3 basis points to 3.55 percent as of 6:35 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security due February 2020 fell 6/32, or $1.88 per $1,000 face amount, to 100 19/32. The Wall Street Journal said Morgan Stanley arranged and sold debt backed by home loans even as its trading desk would sometimes bet that its value would fall, citing traders. The investigation is reviewing whether Morgan Stanley clearly represented its roles, the WSJ said. Report Denied Morgan Stanley Chief Executive Officer James Gorman denied the allegations. “We have no reason to believe there is any substance behind any supposed investigation that appeared in the Wall Street Journal article,” Gorman said at the press conference, convened to discuss the firm’s Japanese securities and investment banking ventures with Mitsubishi UFJ Financial Group Inc. Demand for U.S. debt has made Treasuries the world’s top- performing bonds in the past month, amid concern Europe’s most- indebted nations such as Greece will struggle to contain their deficits. U.S. notes due in 10 years and longer gained 4.7 percent on average in the past month, the most of 174 bond indexes after accounting for currency rates, according to data compiled by Bloomberg. The 16 nations that share the euro agreed on a loan package two days ago and the European Central Bank pledged to buy government bonds to tackle the region’s sovereign-debt crisis. Yields indicate banks have become less willing to lend and investors are concerned the rescue plan won’t contain the crisis. Extra Yield The extra yield on the three-month London interbank offered rate over the overnight indexed swap rate, the Libor-OIS spread, widened to 20 basis points, the highest level since August 21. A basis point is 0.01 percentage point. The spread was as large as 3.64 percentage points when credit markets froze in 2008. The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, increased to 28 basis points from this year’s low of 10.6 basis points in March. It was as wide as 30.8 basis points on May 7, a nine-month high. Europe’s debt woes are thwarting corporate borrowers, with bond issuance tumbling. Borrowers worldwide have sold $15 billion of corporate debt this month, a 62 percent decline from the same period in April and 83 percent less than the average for the past year, according to data compiled by Bloomberg. The extra yield investors demand to own corporate debt instead of government securities soared last week to the highest in more than four months. Treasury bears say yields will rise later in 2010 as the U.S. economy expands. ‘Path Is Improving’ “The recovery path is improving,” said Tsutomu Komiya, who handles U.S. government debt in Tokyo at Daiwa Asset Management Co., which has $77 billion in assets. “Treasuries will sell off” as European officials move to increase confidence in their markets, he said. Ten-year yields will climb to 3.75 percent by June 30, according to Komiya. Vanguard Group Inc., which manages $1.4 trillion in mutual funds, said people should diversify their bond holdings. “Vanguard is fielding more questions than ever about how investors should react to prospects of rising interest rates,” the company, based in Valley Forge, Pennsylvania, said in a press release yesterday. U.S. 10-year rates will advance to 4.06 percent by year- end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The figure dropped from 4.12 percent yesterday. The 10-year notes being sold today yielded 3.54 percent in pre-auction trading, declining from 3.9 percent at the prior auction of the securities on April 7. Crisis Boosts Demand Europe’s debt crisis will help drive demand at the auction, said Marc Fovinci, who helps oversee $2.5 billion as head of fixed income for Ferguson Wellman Capital Management Inc. in Portland, Oregon. “There will be more buyers,” he said. “They’re starting to solve their problems but they’ve got a long way to go.” Three-year notes rose yesterday as the refuge appeal of U.S. government debt helped push demand at the $38 billion auction to the highest since November. “People have to buy U.S. Treasuries” as a haven, said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities Capital Markets Co., a unit of Japan’s second-largest brokerage. The bid-to-cover ratio, which compares total bids with the amount of notes offered, was 3.27, the highest since 3.33 at the Nov. 9 sale of the debt. “The fact that the auction was well received confirms the fact that there will be enduring demand for U.S. Treasuries,” said Keith Blackwell, an interest-rate strategist at Royal Bank of Canada in New York, one of the 18 primary dealers required to bid at Treasury auctions. The U.S. is also scheduled to sell $16 billion of 30-year bonds tomorrow, the last of its auctions this week. To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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