Nov. 4 (Bloomberg) -- Treasuries advanced, led by 10-year notes, as the presidential election helped ease risk aversion and prompted investors to purchase the securities to help protect their portfolios against declining interest rates.

The difference in yields between 10-year Treasuries and current-coupon, 30-year fixed-rate mortgage bonds of Washington- based Fannie Mae fell to the lowest in almost two weeks. Stocks advanced amid speculation the government will bail out more financial companies. The difference in yields between two- and 10-year Treasury notes narrowed the most in two weeks.

``It's a broad-based buy-a-thon today ahead of the election,'' said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co. ``Maybe people think we are moving to a period of change and everyone is excited.''

Ten-year Treasury note yields tumbled 18 basis points, or 0.18 percentage point, to 3.73 percent at 5 p.m. in New York, according to BGCantor Market Data. The 4 percent security due in August 2018 climbed 1 1/2, or $15 per $1,000 face amount, to 102 6/32. Two-year Treasury yields dropped 6 basis points to 1.38 percent.

The difference, or spread, between two- and 10-year Treasuries fell 13 basis points, the most since Oct. 20, to 2.35 percentage points.

The Standard & Poor's 500 Index rose 4.1 percent, the biggest gain on a presidential Election Day since 1984. Prices surged for oil, copper and gold. The U.S. dollar plunged.

Mortgage-Bond Yields

Treasury Secretary Henry Paulson is considering taking stakes in non-bank financial companies after already allocating $250 billion for government investments in banks, two people briefed on the matter said.

The winner of the election between Democrat Barack Obama, who is ahead in national polls, and Republican John McCain will put together a new administration to succeed the one led for eight years by President George W. Bush.

The spread between 10-year notes and Fannie Mae 30-year mortgage bonds plunged about 18 basis points to 1.88 percentage points, the lowest since Oct. 23, data compiled by Bloomberg show. The yield on the mortgage bonds, which lenders package new home loans into, fell 37 basis points to 5.60 percent.

The drop in mortgage-bond yields prompted investors to buy Treasuries to increase the average maturity, or duration, of their portfolios, according to Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. LLC in New York.

When rates fall, homeowners prepay their mortgages at a faster rate, leaving portfolio managers with more cash and a shorter duration in their portfolios, Crescenzi wrote in a note. Duration is a gauge of price sensitivity to changes in yield.

Interest-Rate Swaps

The spread between the rate on a two-year interest-rate swap and a comparable Treasury note narrowed by 11 basis points to 1.14 percentage points. Investors who receive a floating rate in the swap agreement look to hedge that by purchasing a fixed rate in the form of Treasuries, Crescenzi wrote.

The cost of protecting corporate bonds from default fell to the lowest in three weeks amid signs global efforts by central banks were helping to unfreeze credit markets. Credit swaps on the Markit CDX North America Investment Grade Index dropped 15.5 basis points to 182.5 basis points, according to broker Phoenix Partners Group.

Supply Announcement

U.S. borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, the Treasury said in a statement in Washington yesterday. The department will announce plans for its auction calendar tomorrow.

``What it boils down to is fixed-income investors are faced with a tremendous amount of supply coming their way,'' said Jane Caron, chief economic strategist in Burlington, Vermont, at Dwight Asset Management Co., which oversees $70 billion. ``Increased supply could lead to lower prices in the very near term.''

Orders placed with U.S. factories in September dropped three times as much as forecast, a government report showed. They declined 2.5 percent after a revised 4.3 percent decrease in August, the Commerce Department said in Washington.

Futures on the Chicago Board of Trade show a 67 percent chance policy makers will lower the target rate for overnight bank loans to 0.5 percent on Dec. 16 from 1 percent. The rest of the bets are for a quarter-percentage point cut.

`Complementary Action'

The Fed also has created six loan programs channeling at least $700 billion in cash and collateral into money markets.

``There are limits to what the central bank can do,'' Dallas Fed President Richard Fisher said today in the text of a speech in Grapevine, Texas. ``Complementary action must now be undertaken by the fiscal authorities,'' including the new president.

Two-year notes returned 1.1 percent in October, according to Merrill's index. The Fed cut interest rates twice last month and investors sought the safest securities as credit markets froze and the S&P 500 fell 17 percent, the most since 1987.

Banks' borrowing costs for dollars declined for a 17th day, with the London interbank offered rate for three-month funding dropping 15 basis points to 2.71 percent, the British Bankers' Association said. It was the lowest rate in almost five months.

The gap between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, shrank to 2.23 percentage points, from 3.87 percentage points a month ago.

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.

Last Updated: November 4, 2008 17:18 EST