Nov. 10 (Bloomberg) -- Treasuries fell as stocks and commodities rose after China announced a $586 billion economic- stimulus package and the U.S. prepared to start its biggest debt-sale program in four years.

Two-year note yields increased to the highest in five days as U.S. stocks climbed and prices for copper and oil gained after China pledged to expand investment in the economy, curbing demand for the safest assets. The U.S. begins its quarterly refunding today with a $25 billion auction of three-year notes, part of a $55 billion program of note and bond sales that's the biggest since 2004.

``This is the discount, or concession, going into the refunding -- we're bringing in lower prices to bring in some interest,'' said Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment- banking arm of Canada's biggest lender. ``What helped the down- trade was the Chinese stimulus package.''

Benchmark two-year note yields rose 4 basis points, or 0.04 percentage point, to 1.37 percent at 9:40 a.m. in New York, according to BGCantor Market Data. The 1.5 percent security maturing in October 2010 fell 2/32, or 63 cents per $1,000 face amount, to 100 1/4.

The yield on the 10-year note increased 4 basis points to 3.83 percent. The three-year note to be sold today yielded 1.93 percent in pre-auction trading.

AIG Bailout

``It's going to be quite tricky for the market to take down all this supply,'' said Jason Simpson, a fixed-income analyst at Royal Bank of Scotland Group Plc in London. ``Equity markets have also pushed higher. An environment where risky assets do well is not generally one where bonds tend to prosper.''

Bonds extended their drop as American International Group Inc., the insurer bailed out by the U.S., got an expanded rescue package valued at more than $150 billion. The U.S. will reduce the original $85 billion loan to New York-based AIG to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, according to the Federal Reserve.

China will increase spending on housing, roads, railways and airports, following Treasury Secretary Henry Paulson's $700 billion plan to rescue U.S. banks. China was the second-biggest holder of U.S. Treasuries as of August after Japan, according to Treasury Department data.

Copper jumped 8 percent and equities rose, with the MSCI World Index advancing 2.4 percent, on optimism China's 4 trillion yuan package may help spur growth around the world. The Standard & Poor's 500 Index gained 1.9 percent.

Previous Sale

The U.S. is reviving its three-year note after an 18-month suspension as it increases debt auctions to pay for the Treasury's economic plan and fund a widening budget deficit. The government also plans to sell $20 billion in 10-year notes Nov. 12 and $10 billion in 30-year bonds Nov. 13 as part of its quarterly refunding, the biggest since February 2004. Today's auction will be held at 11:30 a.m. New York time.

The previous three-year sale in May 2007 was for $14 billion. It drew a yield of 4.574 percent and investors bid for 2.39 times the amount of debt offered.

The Securities Industry and Financial Markets Association recommends trading close at 2 p.m. in New York and stay shut worldwide tomorrow for the U.S. Veterans Day holiday.

Government securities have returned 5.6 percent this year, after gaining 9.06 percent in 2007, according to Merrill Lynch & Co.'s U.S. Treasury Master index. Demand for the safest assets is being fueled by the risk of a global recession after a U.S. housing slump led to a seizure in credit markets.

Payrolls Plunge

The U.S. economy shed 240,000 jobs in October, a government report showed last week. Economists surveyed by Bloomberg News had forecast a drop of 200,000. Goldman Sachs Group Inc. forecast the deepest recession since 1982, with the economy contracting 3.5 percent in the fourth quarter and 2 percent in the first three months of 2009.

It will take at least 18 months to turn around the U.S., even if President-elect Barack Obama ``does everything perfectly,'' Columbia University Professor Joseph Stiglitz, a Nobel Prize-winning economist, wrote in the Washington Post yesterday.

The difference between yields on two- and 10-year notes, known as the yield curve, may widen to a record 3 percentage points from 2.45 percentage points now, according to strategists at Morgan Stanley and Credit Suisse Group AG.

`Continue to Decline'

Shorter-term yields are falling as investors bet the Fed will reduce its target rate for overnight loans between banks to spur the economy. Ten-year yields are likely to rise as the government increases its long-term debt sales, the strategists said.

``I think yields will remain depressed and continue to decline here, particularly on the front end,'' said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co. ``The Treasury needs to fund all these bailout programs they are announcing, and that could keep pressure on the curve and keep it relatively steep and that could present a struggle for the long end.''

Two-year notes will trade in a range of 1.25 percent to 1.50 percent ``in the next few weeks,'' while 10-year notes will yield between 3.5 and 4 percent over the next six weeks, Mitchell forecast.

Manager Survey

The difference between two- and 10-year yields reached a record of 2.74 percentage points in 2003 after the Fed finished a series of 13 rate reductions. Typically, the spread is steepest as the central bank stops lowering borrowing costs and investors anticipate an economic recovery, according to Tony Crescenzi, chief bond strategist at Miller Tabak & Co. LLC in New York.

A weekly survey of fund managers by Ried, Thunberg & Co., an economic advisory company in Jersey City, New Jersey, shows investors are bearish on U.S. government securities.

The measure of money manager sentiment through the end of December held at 43 for the seven days ended Nov. 7 from the week before. Readings below 50 indicate investors expect 10-year notes to decline. The company surveyed 29 fund managers overseeing $1.43 trillion.

To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net

Last Updated: November 10, 2008 09:51 EST