By Dakin Campbell Oct. 8 (Bloomberg) -- Treasuries gained after coordinated interest rate cuts by the Federal Reserve and other central banks failed to calm turmoil in global financial markets. Ten-year note yields exceeded those on two-year securities by the most since 2004 on concern that the half-percentage point cut in the Fed's target rate to 1.50 percent won't be enough to keep the U.S. from lapsing into a recession. The cost of borrowing in dollars overnight in London surged for a third day amid speculation more bank failures are ahead. ``All the rate cuts in the world are not going to get the capital markets to start to function,'' said David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. ``The economic numbers are going to look horrific and injecting more liquidity is not going to help it.'' The yield on the two-year note fell 14 basis points to 1.33 percent at 9:19 a.m. in New York, according to BGCantor Market Data. The 2 percent security maturing in September 2010 rose 9/32, or $2.81 per $1,000 face value, to 101 9/32. Ten-year note yields fell 6 basis points to 3.43 percent, widening the gap with two-year securities to 210 basis points. That's the biggest difference since June 2004. The London interbank offered rate, or Libor, that banks charge each other for overnight loans climbed to 5.38 percent, the British Bankers' Association said. It is the second day the rate has climbed by more than 100 basis points. Coordinated Reductions ``The Fed is reliquifying the market and the path of the fed funds target rate generally drives the path of the two-year yields,'' said William O'Donnell, a U.S. government bond strategist in Stamford, Connecticut, at UBS Securities LLC. ``With official rates going down market rates will tend to follow.'' The Fed, European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point. The Fed also trimmed the discount rate by 50 basis points, to 1.75 percent. ``The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,'' according to a joint statement by the central banks. ``Some easing of global monetary conditions is therefore warranted.'' Emergency Powers The Fed will probably cut its benchmark rate by another 50 basis points to 1 percent at its next meeting, Goldman Sachs Group Inc. chief economist Jim O'Neill said. The central bank invoked emergency powers yesterday and said it will shore up the $1.6 trillion commercial paper market, lending directly to U.S. corporations for the first time since the Great Depression. Fed Chairman Ben S. Bernanke said in a speech yesterday an intensifying credit crunch means officials must ``consider'' lowering borrowing costs. ``We've had coordinated rate cuts and Treasuries don't seem to care,'' said Jane Caron, chief economic strategist in Burlington, Vermont, a Dwight Asset Management Co., which oversees $70 billion. ``We've already priced in the end of the world so what's next.'' Policy makers are trying to unfreeze credit markets after the premium on three-month interbank loans over the Fed's main rate doubled in two weeks to a record. The three-month Libor rose to 4.52 percent today, the BBA said. It is the most since Bloomberg began compiling data in 1984. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 3.91 percentage points from 1.10 percentage points a month ago, the most since Bloomberg began compiling the data in 1984. The spread increased from 3.54 percentage points yesterday. A Situation of `Unknowns' ``The coordinated nature of this is dramatic,'' said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut. ``The market had it priced in as evidenced by what's happening at the front end of our curve.'' Financial firms worldwide have now written down more than $593 billion in losses related to the credit crisis. Britain became the latest government to bailout its banking system, announcing an unprecedented 50 billion-pound ($87 billion) government lifeline and emergency loans from the Bank of England. ``We're back in a situation where we still have a lot of unknowns,'' said Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc. ``It took us years to get into this mess it would be surprising if we got out of this in six months.'' To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

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