U.S. Two-Year Notes Set for Weekly Gain as Credit Losses Spread

U.S. two-year Treasury notes headed for a fourth weekly advance on speculation spreading losses tied to subprime mortgages at securities companies will lead the Federal Reserve to cut interest rates next month.

The stretch of gains is the longest since the week ended Aug. 3 as Morgan Stanley, Merrill Lynch & Co. and Citigroup Inc. said they lost money on securities linked with home loans to risky borrowers. U.S. notes also rallied because credit-market losses increased demand for the relative safety of government debt.

``We're bullish on Treasuries,'' said Masayuki Yoshihara, who helps manage the equivalent of $26.6 billion of non-yen bonds in Tokyo at Sumitomo Life Insurance Co., the nation's third- largest life insurer. ``Further losses will occur so the Fed must cut rates. The market is in turmoil.''

The two-year yield rose 1 basis point to 3.5 percent by 8:22 a.m. in London, according to bond broker Cantor Fitzgerald LP. The price of the 3 5/8 percent note due in October 2009 was little changed at 100 7/34.

The yield declined 18 basis points this week and fell to 3.41 percent yesterday, the lowest since February 2005. A basis point is 0.01 percentage point.

Ten-year yields increased 1 basis point today to 4.29 percent. They will probably fall to 4 percent early next year, Yoshihara said.

Notes rose yesterday as Fed Chairman Ben S. Bernanke told Congress he expects the U.S. economy to ``slow noticeably.''

Traders increased bets the Fed will cut borrowing costs for a third time this year at its meeting next month.
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