Nov. 17 (Bloomberg) -- Treasuries advanced, led by 10-year notes, after a gauge of manufacturing in New York fell to the lowest since 2001 amid an economy hobbled by the seizure in credit markets.

The difference in yields between two- and 10-year notes narrowed from a five-year high as a survey of analysts forecast the world's biggest economy will shrink next year. Citigroup Inc., the fourth-biggest U.S. bank by market value, plans to eliminate 50,000 jobs and cut expenses by 20 percent as the global economy contracts.

``The recent data certainly feeds into the idea that we are in a contraction, and it's likely to intensify,'' said Christopher Sullivan, who oversees $1.3 billion as chief investment officer at United Nations Federal Credit Union in New York. ``There is that mood of continuing economic weakness not only here, but abroad as well. So the move in Treasuries is really a continuation of those broad themes.''

The yield on the 10-year note dropped two basis points, or 0.02 percentage point, to 3.71 percent at 12:14 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security maturing in November 2018 gained 5/32, or $1.56 per $1,000 face amount, to 100 10/32. The two-year note yield was little changed at 1.22 percent.

Treasuries pared gains as stocks reversed course and rose. The Standard & Poor's 500 Index advanced 0.3 percent.

New York Manufacturing

After growing 1.4 percent this year, the U.S. economy will contract 0.2 percent in 2009, according to the median estimate in a poll taken by the National Association for Business Economics.

The Federal Reserve Bank of New York's general economic index, the first of more than a dozen measures of the economy to be announced this week, fell to minus 25.4, the lowest since records began in 2001, the bank said today. It was minus 24.6 percent in October. Readings below zero for the Empire State index signal manufacturing is shrinking.

President-elect Barack Obama said in an interview yesterday on the CBS News program ``60 Minutes'' the government will do ``whatever it takes'' to revive the economy, and that means ``we shouldn't worry about the deficit next year or even the year after.''

Japan's economy, the world's second-biggest, entered its first recession since 2001, a government report showed today.

Yield Curve Narrows

The so-called yield curve narrowed as 10-year notes rose more than two-year securities. The gap between yields on two- and 10-year notes fell to 2.48 percentage points, down from a five-year high of 2.62 percentage points Nov. 13.

The Treasury will announce on Nov. 20 the size of the two- and five-year note auctions it will hold next week in its efforts to fund a growing budget deficit. It will sell $38 billion in two-year notes and $27 billion in five-year notes, according to Wrightson ICAP, a Jersey City, New Jersey-based research firm specializing in U.S. government finance. The department will hold the two-year sale Nov. 24 and the five-year auction one day later.

The prospect of more supply will continue to flatten the yield curve this week, said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co.

Yields on 10-year notes, which have traded in a range between 3.88 percent and 3.63 percent since the beginning of September, will also keep the curve from widening further, according to strategists at UBS Securities LLC, one of the 17 primary dealers that trade with the Fed. A lack of change in 10- year note yields should act as an ``anchor'' for the short end, strategists led by William O'Donnell wrote in a note today.

European Bonds

U.S. government securities returned 6.5 percent this year, according to Merrill Lynch & Co.'s U.S. Treasury Master index, as tumbling credit markets and a global recession spurred demand for the safest assets. German bonds earned 8 percent, while Japanese securities handed investors 1.5 percent.

Investors are shifting to European government bonds at the expense of Treasuries on speculation policy makers have more scope to cut interest rates than the Fed. The European Central Bank's key rate of 3.25 percent and the Bank of England's 3 percent target compare with 1 percent in the U.S.

Pacific Investment Management Co., which runs the world's biggest bond fund, favors two- and three-year European notes, Paul McCulley, a managing director at the Newport Beach, California, firm said in a Bloomberg Radio interview on Nov. 13.

Futures on the Chicago Board of Trade show a 94 percent chance the Fed will halve its 1 percent target rate for overnight bank lending at its next meeting on Dec. 16. The odds were 82 percent a week ago.

Industrial Production

Interest rates on U.S. commercial paper rose to the highest in more than a week, according to data compiled by Bloomberg, on concern that the U.S. fiscal rescue plan hasn't fixed banks' credit woes.

Industrial production rose more than forecast in October as work resumed at Gulf Coast refineries after shutdowns caused by hurricanes. The 1.3 percent increase in production at factories, mines and utilities followed a revised 3.7 percent drop in September, the Fed said today.

The U.S. central bank may consider buying Treasuries to hold down yields if the global financial crisis deepens, according to a report Nov. 14 by Goldman Sachs Group Inc., another primary dealer.

Treasury Secretary Henry Paulson will speak about the economy at 6:30 p.m. today in Washington.

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 17, 2008 12:21 EST