By Matthew Brown and Wes Goodman Nov. 30 (Bloomberg) -- Treasuries fell, eroding the biggest monthly gain since March, after the United Arab Emirates’ central bank said it will back the state’s lenders as they face losses from Dubai World’s possible default. Ten-year notes slid for the first time in a week and Asian stocks gained the most in almost eight months after the Abu Dhabi-based regulator said it will lend to banks at half a percentage point above the three-month local benchmark interest rate. It acted after Dubai World, a state-owned holding company, announced on Nov. 25 that it was seeking to delay loan payments. “The moment of panic where people buy Treasuries has passed,” said Luca Jellinek, a senior rates strategist in London at ANZ Banking Group Ltd. “Treasuries are not back where they were before this happened, so people are still de-risking into year end.” The 10-year note yield increased 2 basis points to 3.22 percent as of 10:12 a.m. in London, according to BGCantor Market Data. The 3.375 percent security maturing in November 2019 fell 5/32, or $1.56 per $1,000 face amount, to 101 10/32. Treasuries slid as the MSCI Asia Pacific Index of regional shares rose 3.2 percent. The Dow Jones Stoxx 600 Index of European shares fell 1 percent. Dubai World, with $59 billion of liabilities, said last week it would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30. The benchmark three-month Emirates interbank offered rate was 1.941 percent, dropping from 4.31 percent at the end of 2008, according to Bloomberg data. Dubai Swaps The cost of protecting Dubai government notes from default more than doubled last week to 6.47 percentage points. The swap contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt. Dubai credit-default swaps tightened for the first time in a week today, declining 72 basis points to 574 basis points, according to prices from CMA Datavision. Nakheel PJSC, the property company that is owned by Dubai World and wants to defer payment on its bonds, asked Nasdaq Dubai to suspend trading in the securities until it provides information to the market. Monthly Return U.S. government securities returned 1.3 percent in November, according to Merrill Lynch & Co.’s U.S. Treasury Master index. It is the steepest gain since March, when the Federal Reserve began buying Treasuries to cap consumer borrowing costs, purchasing $300 billion of the securities by the time the program ended in October. Two-year yields were little changed today at 0.68 percent. They fell to 0.61 percent on Nov. 27, one basis point above the record low set Dec. 17. Treasuries gained this month as the Fed, under Chairman Ben S. Bernanke, indicated it would hold its benchmark interest rate near zero. Central bank statements on Nov. 4 and Nov. 24 repeated the Fed’s view that it would keep the rate “for an extended period.” The Fed reduced its target for overnight bank lending to a range of zero to 0.25 percent in December. “Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives,” according to minutes of the Fed’s November meeting released Nov. 24. Jobless Rate The unemployment rate probably held at a 26-year high of 10.2 percent in November, according to the median forecast in a Bloomberg News survey of economists before the Labor Department reports the figure on Dec. 4. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, narrowed to 2.11 percentage points from 2.22 percentage points a week ago. The five-year average is 2.17 percentage points. Even as the nation’s debt increased by $1.15 trillion this year to $6.95 trillion in October, the government’s interest expense under Treasury Secretary Timothy Geithner dropped 15 percent, the biggest decrease since before 1989, according to data compiled by Bloomberg. Less than a week after deflecting calls for his resignation, Geithner sold bonds on behalf of U.S. taxpayers at the lowest yields on record in a show of confidence in his policies. The Treasury auctioned $44 billion of two-year notes Nov. 23 at a yield of 0.802 percent, the lowest level on record. Economic Growth The economy will likely expand 2.6 percent in 2010, after the government and Fed lent, spent or committed almost $12 trillion to keep financial markets from collapsing, according to the median estimate of 63 analysts surveyed by Bloomberg. That’s in line with average growth of 2.63 percent from 2002 to 2007. “There have been many criticisms of him, but he’s done a good job,” said Tsutomu Komiya, who invests in Treasuries for Tokyo-based Daiwa Asset Management Co., which oversees $77 billion in assets. Yields will rise as the U.S. economy improves, Komiya said. A survey of investors by Ried, Thunberg & Co. shows fund managers became more bearish on the outlook for Treasuries for the rest of 2009. The company’s index measuring investor sentiment toward government debt fell to 46 for the seven days ended Nov. 25 from 47 the previous week. A reading below 50 shows investors expect prices to fall. The economic analysis company based in Jersey City surveyed 27 fund managers controlling $1.41 trillion. Last week’s gains in Treasuries created a selling opportunity, according to Citigroup Inc. “The latest rally may well provide investors with an excellent opportunity to set new short positions going into 2010,” Mark Schofield, head of interest-rate strategy in London at Citigroup Global Markets Ltd., wrote in a report today. “We have previously estimated 3.10 percent to be a good target level to set new shorts. Notwithstanding the risk of a liquidity- driven overshoot, this still broadly holds good.” To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net

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