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BLBG: Treasuries Gain Most in Week Since 2001 on Rate-Cut Speculation
By Dakin Campbell

Oct. 3 (Bloomberg) -- Treasury two-year notes posted the biggest weekly gain in seven years on speculation the Federal Reserve will cut interest rates to avert a recession.

The securities rose a sixth straight week, the longest winning run since February, as a government report said companies cut jobs in September for a ninth straight month. President George W. Bush signed into law a financial-rescue package intended to end banks' reluctance to lend.

``As we go forward, financial concerns will be replaced by signs of economic weakness,'' said Matthew Moore, an interest- rate strategist in New York at Banc of America Securities LLC, one of 17 primary dealers that trade directly with the Fed. ``Treasuries will remain well bid.''

The yield on the two-year note fell 3 basis points, or 0.03 percentage point, to 1.58 percent at 5 p.m. in New York, according to BGCantor Market Data. It touched 1.54 percent, the lowest since Sept. 18. The 2 percent security due in September 2010 rose 1/32, or 31 cents per $1,000 face amount, to 100 25/32.

The two-year note's yield tumbled 51 basis points this week, the most since the terrorist attacks in September 2001.

Ten-year yields dropped 2 basis points to 3.60 percent. They declined 25 basis points for the week.

The financial-rescue package authorizes the government to buy troubled assets from financial institutions rocked by record home foreclosures. The legislation also includes $149 billion in tax breaks, a higher limit on federal bank-deposit insurance and a change in securities laws.

`Return to Economy'

The U.S. plans to hire five to 10 asset-management firms as Treasury Secretary Henry Paulson establishes an office to handle the financial bailout, a Treasury official said.

``The focus will return to the economy and how quickly this rescue package will be put into action,'' said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., another primary dealer.

The loss of 159,000 jobs last month was the most in five years, a Labor Department report showed. Analysts surveyed by Bloomberg had anticipated a drop of 105,000. The unemployment rate, the last to be reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964.

Kansas City Fed President Thomas Hoenig said late yesterday the economic situation is ``very serious.'' The U.S. may fall into a recession as the financial rout deepens, the International Monetary Fund said yesterday.

Rate Bets

Futures on the Chicago Board of Trade show a 76 percent probability the Fed will lower its 2 percent target rate for overnight lending between banks by a half-percentage point at its Oct. 29 meeting, and 24 percent odds it will reduce the rate by three-quarters of a point. Traders saw no chance of a cut a month ago.

Money-market rates jumped to records. The London interbank offered rate, or Libor, the rate banks charge each other for three-month dollar loans, climbed for a fifth day. It reached 4.33 percent, the highest since Jan. 10, data from the British Bankers' Association showed.

The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, widened to 3.86 percentage points, the most since Bloomberg began compiling the data in 1984.

California Governor Arnold Schwarzenegger told the U.S. Treasury that his and other states may need emergency federal loans if credit-market turmoil continues to impede their access to financing. The crunch ``has the power to grind the U.S. economy to a halt,'' he e-mailed Paulson last night, Treasury spokeswoman Jennifer Zuccarelli said in Washington.

Volatility Soars

Schwarzenegger said in his message California expects to sell $7 billion of revenue anticipation notes in ``a matter of days.''

A measure of price swings was near an all-time high. Merrill Lynch & Co.'s MOVE Index, an options-based gauge for Treasury volatility, rose to 206.7 on Oct. 2, near the 208.5 reached Sept. 30, the highest since it was created in 1988. The latest reading means traders expect a yield range on Treasuries of 206.7 basis points on an annualized basis in the coming month. That's almost double the level of 105.9 a month ago.

``We'll see extremely tight conditions in the money market through the end of the year,'' said Vincent Boberski, senior vice president of portfolio strategies at FTN Financial in Memphis. ``It's difficult to see the short end of the curve giving back a significant amount.''

Analysts had forecast two-year note yields would be at 2.40 percent by year-end, according to the median of 34 estimates in a Bloomberg News survey. Most of the predictions were gathered last month.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net