By Lukanyo Mnyanda and Wes Goodman Oct. 13 (Bloomberg) -- Treasury futures on the 10-year note fell after the U.S. and Europe strengthened support for banks, giving investors confidence to buy stocks and corporate bonds. U.K. interest-rate swap spreads, a gauge of corporate credit risk, narrowed the most in three weeks after the government said it will invest 37 billion pounds ($63 billion) in Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group to avert a banking collapse. European leaders agreed this weekend to guarantee new bank refinancing, and use taxpayers' money to prevent lenders collapsing ``We've seen a lot of policy activity over the weekend and that's causing something of a relief rally in risky assets,'' said Russell Jones, head of global fixed-income and currency research in London at RBC Capital Markets. ``The flipside of that is that fixed income will come under pressure.'' The yield on 10-year futures contracts for December delivery climbed 8 basis points to 4.40 percent as of 10:23 a.m. in London, the highest since July 25, based on electronic trading at the Chicago Board of Trade. The price fell 21/32, or $6.56 per $1,000 face amount, to 112 28/32. A basis point is 0.01 percentage point. The two-year note may yield between 1.5 percent and 2.1 percent in the ``next few weeks,'' said Jones. Shorter-dated bonds remain ``an attractive proposition'' as the Federal Reserve will likely cut interest rates again this year, he said. Stocks Surge The MSCI World Index added 2.4 percent, headed for its biggest one-day gain since Sept. 19 as European and Asian stocks soared, after plunging last week. Japan's financial markets are shut today for a holiday as are those in the U.S. The Securities Industry and Financial Markets Association recommended trading of cash Treasuries be closed today. At a summit chaired by French President Nicolas Sarkozy yesterday, leaders of the 15 countries using the euro produced an unprecedented plan to use taxpayer money to keep distressed lenders in business. Australian Prime Minister Kevin Rudd said today his government will guarantee bank deposits. Portugal yesterday announced that it will make as much as 20 billion euros ($27 billion) available in guarantees for the financing operations of its banks. Norway, not a European Union member, offered lenders as much as $55.4 billion in government bonds in exchange for mortgage debt. U.S. Treasury Secretary Henry Paulson said he is studying Europe's plan to provide a backstop for debt issued by banks. Australia will guarantee deposits for the next three years. Lending Costs Fall The premium charged to exchange floating- for fixed-rate interest payments in the U.K. narrowed across the curve, with the two-year difference falling to 110 basis points from 127 percentage point on Oct. 10. U.S. government securities have returned 5.1 percent this year, versus 9.06 percent for all of 2007, according to Merrill Lynch & Co's. U.S. Treasury Master Index. They headed for a fifth straight month of gains in October as the crisis prompted the U.S. to approve a $700 billion program to buy troubled assets from banks, and governments from Iceland to Russia responded by supporting their financial institutions. The decision by European leaders ``marks an unprecedented regime change from the last year with governments now underwriting financial risk,'' said Lena Komileva, an economist at London-based Tullett Prebon Plc, the second-biggest broker of transactions between banks. ``This should bring banks' default risk and interbank lending costs towards the risk-free government benchmarks.'' Liquidity Injections The cost of protecting European corporate bonds from default declined as the rush for safety that pushed Treasuries higher since June waned. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings decreased 35 basis points to 695, according to JPMorgan Chase & Co. prices at 7:31 a.m. in London. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements. Yields on three-month Eurodollar futures for December delivery fell to 2.73 percent from 2.86 percent. Lending rates climbed this year even as the Fed, European Central Bank and other central banks in Europe and Asia pumped more than $1 trillion into the global financial system in a coordinated effort to stimulate lending and counter a seizure in credit markets. Libor, a benchmark for $360 trillion of financial products worldwide, ended last week at 4.82 percent, up from 2.82 percent on Sept. 15, the day New York-based Lehman Brothers Holdings Inc. filed for bankruptcy protection. The rate rose even though central banks around the world cut interest rates by half a percentage point on Oct. 8. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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