Two-Year Treasuries Rise Most on Credit Since Sept. 11 Attacks

Treasury two-year notes rose the most since the Sept. 11 terrorist attacks as credit-market losses increased speculation the Federal Reserve will lower interest rates this month.

Yields fell this week to the lowest in two years and U.S. stocks tumbled as home foreclosures led three of the biggest U.S. banks to report declines in third-quarter profit. Economic data next week is forecast by economists to show new home sales fell in September to the lowest in more than 10 years.

``The housing slowdown is going to play out for the next six months, not the next month,'' said Bill Chepolis, who helps manage $9 billion in New York at Deutsche Asset Management. ``The market is more aggressively pricing in an ease by buying two-year notes.''

The yield on the two-year note fell 45 basis points, or 0.45 percentage point, to 3.78 percent, according to bond broker Cantor Fitzgerald LP. The price of the 4 percent security due in September 2009 rose about 3/4, or $7.50 per $1,000 face amount, to 100 12/32. Yields move inversely to bond prices.

Two-year note yields fell this week to the lowest since September 2005. The last time they declined more was in the week ended Sept. 14, 2001, when they dropped 63.8 basis points after the terrorist attacks drove investors to the safety of government debt.

Fed Rate Outlook

U.S. stocks fell this week by the most since July on heightened concern over the health of the financial markets and the economy. The Standard & Poor's 500 Index declined 3.9 percent this week.

Futures traded on the Chicago Board of Trade yesterday suggested a 92 percent chance the Fed will reduce the target rate for overnight lending between banks a quarter percentage point to 4.5 percent on Oct. 31, compared with 32 percent odds a week earlier.

``We had the whole gamut of emotions in this week alone,'' said Raymond Remy, head of fixed income in New York at Daiwa Securities America Inc., one of the 21 primary government securities dealers that trade with the central bank. ``The market went from thinking the Fed will pause this month to the Fed is definitely going to ease.''

The yield on 10-year notes fell 29 basis points to 4.39 percent this week. The notes yield about 60 basis points more than the two-year note, compared with 45 basis points on Oct. 12. The yield curve has steepened the most this week since policy makers cut the target rate to 4.75 percent on Sept. 18.

`Flight to Quality'

The yield curve ``is consistent with this flight-to-quality credit concern,'' said Carl Lantz, an interest-rate strategist in New York at primary dealer Credit Suisse Group. ``People gravitate to the front end'' as they seek the most liquid securities.

Bank of America Corp., the second-largest U.S. bank, said Oct. 18 that earnings fell 32 percent, while Citigroup Inc., the biggest, on Oct. 15 reported a 57 percent decline in profit. Wachovia Corp. yesterday said net income fell 10 percent after write-downs for mortgage-backed securities and loans for leveraged buyouts.

``Everybody is exposed,'' said Jerry Webman, head of fixed- income in New York at OppenheimerFunds Inc., which manages about $220 billion.

Cheyne Finance Plc and IKB Deutsche Industriebank AG's Rhinebridge Plc, two structured investment vehicles that bought securities backed by home loans, defaulted on more than $7 billion of debt as the value of their holdings fell.

The companies borrow in the short-term debt market and use the proceeds for buying mortgage-backed bonds and collateralized debt obligations. Falling market prices for assets forced the companies to declare all of their debt due this week.

New-Home Sales

The Commerce Department will probably report on Oct. 25 that new-home sales dropped 3.1 percent last month to the lowest level since 1997, according to the median forecast of 65 economists surveyed by Bloomberg News.

Last month, builders broke ground on the fewest homes in 14 years, the Commerce Department said Oct. 17. Confidence among U.S. homebuilders dropped this month to the lowest since records began in 1985 as higher mortgage rates discouraged buyers, according to the National Association of Home Builders/Wells Fargo index on Oct. 16.

``Another sharp mover lower in yields in the weeks ahead'' is likely, Tom Fitzpatrick, a technical analyst at Citigroup Global Markets Inc. in New York, wrote in a report yesterday.

Treasuries of maturities from two to 30 years had what technical analysts term a ``weekly reversal.'' After rising the week ended Oct. 12, yields climbed further on Oct. 15, then reversed and ended this week lower than they were at any point the previous week. Technical analysts make predictions based on historical trading patterns.

The two-year note's yield will be 4.05 percent by year-end, according to a Bloomberg News survey of 72 economists, with the most recent forecasts given the heaviest weightings.