Nov. 7 (Bloomberg) -- Treasuries declined as investors shifted their focus from a government report showing the U.S. economy shed more jobs last month than economists forecast to the $55 billion in government debt to be auctioned next week.

Traders pushed yields on two-year notes up from the lowest levels in almost eight months. Treasuries are still headed for a weekly gain after reports this week showed the manufacturing and service sectors contracted and traders bet the Federal Reserve will lower interest rates again this year to revive the economy.

``There are two themes playing out in the Treasuries market that are working against each other: the magnitude of the recession which is beginning to manifest itself, and the incoming supply,'' said Gary Pollack, who helps oversee $12 billion as head of fixed income trading at Deutsche Bank AG's Private Wealth Management unit in New York. ``The recession is going to win out in the end, but today the supply won.''

The yield on the two-year note rose 5 basis points, or 0.05 percentage point, to 1.33 percent at 4:18 p.m. in New York, according to BGCantor Market data. It touched 1.24 percent yesterday, the lowest since March 17. For the week, the yield plunged 23 basis points. The price of the 1.5 percent security due in October 2010 declined 3/32 today, or 94 cents per $1,000 face amount, to 100 10/32.

Ten-year note yields climbed 9 basis points to 3.78 percent. They dropped 19 basis points on the week.

Payrolls shrank by 240,000 workers last month, the Labor Department said. Economists surveyed by Bloomberg News had forecast a drop of 200,000, according to the median estimate. The jobless rate jumped to 6.5 percent.

`Pretty Good Value'

The Treasury said this week it plans to sell $25 billion in three-year notes on Nov. 10, $20 billion in 10-year notes Nov. 12, and $10 billion in 30-year bonds Nov. 13. U.S. borrowing needs are expected to rise to a record $550 billion in the three months to Dec. 31, it said.

``From a tactical perspective, the market needs to be cheapened up to take down the supply next week,'' said Robert Tipp, chief investment strategist for fixed income in Newark, New Jersey, at Prudential Investment Management. Still, ``once you get through the refunding, the market represents pretty good value,'' given `` the prospect of weak growth.''

President-elect Barack Obama will inherit a budget deficit that has swelled on the back of falling tax receipts and an increase in spending to support the banking system. The Securities Industry and Financial Markets Association projected a $687.5 billion deficit for fiscal 2009, according to a survey of its members released Oct. 31. Obama vowed today to confront the faltering economy ``immediately after'' taking office.

Recession Evidence

The Stanford University economist who leads the panel that dates economic cycles said there's now no doubt a recession is under way. ``The evidence is more than compelling,'' Robert Hall, who heads the National Bureau of Economic Research's business-cycle dating committee, said in an interview. The group is waiting to determine the exact start date.

Goldman Sachs Group Inc. forecast the deepest U.S. recession since 1982, with the economy shrinking 3.5 percent in the fourth quarter and 2 percent in the first quarter.

The U.S. may broaden spending programs to include struggling automakers. General Motors Corp., the biggest U.S. automaker, must get government aid because ``time is very short'' to stop its collapse, said Roger Altman, the former U.S. Treasury official advising the company.

Yield Forecasts

Two-year notes, the most sensitive to monetary policy, yielded 2.44 percentage points less than 10-year notes, close to the biggest difference since 2004, as prices of the longer maturities declined more steeply.

While the yield gap may widen before next week's auctions as traders push down prices of longer-term debt, 10- and 30-year Treasuries should outperform afterward amid speculation the economy will weaken and consumer prices will fall, said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut.

Yields on two-year notes have been 23 basis points higher than the federal funds target on average this decade. They'll end the year at 1.43 percent, according to the weighted average of forecasts in a Bloomberg survey. Ten-year notes will yield 3.59 percent at year-end, another Bloomberg survey showed.

Demand for the relative safety and liquidity of Treasuries amid financial-market turmoil has led to record failures to deliver or receive Treasuries in the market for borrowing and lending government debt. The Treasury Department opened a probe to identify any improper trading by investors in the 2 percent two-year-note due Sept. 30, 2010, and the 3 1/8 percent five- year note due Sept. 30, 2013.

Rate Bets

Treasuries rose earlier this week after ADP Employer Services said private companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, and the Institute for Supply Management said its services and manufacturing indexes indicated contraction.

Futures on the Chicago Board of Trade show a 99 percent chance the Fed will reduce its 1 percent target rate for overnight loans between banks by a half-percentage point at its Dec. 16 meeting. The likelihood was 55 percent a week ago. Traders have questioned the futures market's ability to predict interest rates, because what banks actually charge each other for overnight loans has not followed the Fed's target rate over the past two months.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Sandra Hernandez in New York at shernandez4@bloomberg.net.

Last Updated: November 7, 2008 16:24 EST