By Dakin Campbell and Cordell Eddings Nov. 14 (Bloomberg) -- Treasuries rose, led by longer-term securities, as a report showed U.S. retail sales fell the most on record in October, driving investors to the relative safety of government debt. The rally in longer-term securities amid concern that a deepening slump will further erode corporate earnings narrowed the yield difference between two- and 10-year notes from a five- year high. Freddie Mac asked the Treasury for $13.8 billion to keep its net worth above zero. The Group of 20 heads of state meet in Washington amid divisions over what steps to take to shore up the slowing global economy. ``The Treasury market is factoring in a very weak economy,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. ``Given the economic outlook and with some supply behind us, we have some green lights for lower yields.'' The 10-year note's yield tumbled 13 basis points, or 0.13 percentage point, to 3.72 percent at 12:10 p.m. in New York, according to BGCantor Market Data. The notes were sold at a yield of 3.78 percent on Nov. 12. The 3.75 percent security due in November 2018 rose 1 3/32, or $10.94 per $1,000 face amount, to 100 9/32. The yield on two-year notes fell 5 basis points to 1.18 percent and is down 16 basis points this week. Ten-year yields fell 8 basis points this week. The difference in yield, or spread, between two- and 10-year notes, the so-called yield curve, narrowed to 2.54 percentage points from 2.62 percentage points yesterday, the widest since October 2003. G-20 Divisions Sales at U.S. retailers dropped 2.8 percent last month, the Commerce Department said today in Washington. It was the fourth consecutive drop and the biggest since records began in 1992. Treasuries pared gains after the Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly rose this month, though it remained near a 28-year low. The reading was 57.9, from 57.6 in October. The median forecast in a Bloomberg News survey was for a fall to 56.7. Conflicting approaches to global economic turmoil are expected at the two-day G-20 summit. German Chancellor Angela Merkel said today she wants ``more rules so as to prevent us from ever having to face such a situation again.'' President George W. Bush remains averse to too much government meddling even after he backed bailouts of American International Group Inc. and Bear Stearns Co., saying the ``aim should not be for more government.'' Global Central Bankers Federal Reserve Chairman Ben S. Bernanke said central bankers worldwide are prepared to take additional actions to unfreeze credit markets, without saying what those would be. He spoke in Frankfurt at a European Central Bank conference. Mortgage finance company Freddie Mac, seized by the government two months ago, asked for additional funds after reporting a record third-quarter loss of $25.3 billion. Traders increased bets the Fed will cut interest rates at its Dec. 16 policy meeting. Futures on the Chicago Board of Trade show an 82 percent chance the Fed will lower its 1 percent target rate for overnight bank lending by half a percentage point. The odds were 64 percent a week ago. ``People do expect rate cuts for the U.S.,'' said William O'Donnell, a U.S. government bond strategist at UBS Securities LLC in Stamford, Connecticut. UBS is one of 17 primary dealers that trade with the Fed. ``As Bernanke said, there's more that central banks can do.'' Falling Demand Treasuries declined yesterday as demand fell at a $10 billion auction of 30-year bonds and U.S. stocks rallied. Speculation the U.S. will increase shorter-maturity debt sales to fund its $700 billion bank-bailout plan will eventually ``weigh on the front end of the curve'' and cause the so-called yield curve to ``flatten,'' said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, another primary dealer. Thirty-year yields dropped 14 basis points today to 4.22 percent after rising 19 basis points yesterday, the most since Sept. 30. Treasuries gained earlier as Europe's economy fell into its first recession in 15 years in the third quarter. The region's gross domestic product shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's statistics office said today. U.S. stocks fell, with the Standard & Poor's 500 Index losing 4.3 percent. TED Spread Treasuries have returned 6.1 percent this year, according to Merrill Lynch & Co.'s U.S. Treasury Master Index, as investors sought the safest securities amid the global economic slump. Corporate bonds declined almost 13 percent in the same period, a separate Merrill index shows. The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars rose for a second day. The rate increased 9 basis points to 2.24 percent today, according to British Bankers' Association data. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.09 percentage points, from 2.01 percentage points a week ago. It was 4.64 percentage points on Oct. 10. To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

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