March 19 (Bloomberg) -- Treasuries rose and three-month bill rates plunged to the lowest level in almost 50 years on speculation credit market losses will widen, prompting investors to seek the relative safety of government debt.

Bonds gained on concern the investment firm run by ex-Long- Term Capital Management LP chief John Meriwether is facing losses and Thornburg Mortgage Inc. may go bankrupt. This week the Federal Reserve has cut interest rates, opened the so-called discount window to investment banks and arranged the sale of Bear Stearns Cos. to relieve market turmoil.

``There's a whole flight-to-quality trade,'' said Joe Tully, managing director of the money-market desk in Newark, New Jersey, at Prudential Investment Management, who's betting $1 against a colleague that bill rates won't fall below zero. ``The markets are totally skittish. They just want to be in bills.''

The rate on the three-month bill, viewed by investors as a haven in times of trouble, dropped 32 basis points, or 0.32 percentage point, to 0.56 percent at 5:30 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It's the lowest level since May 1958.

The yield on the 10-year note fell 16 basis points to 3.34 percent, after rising the most in four years yesterday. The price of the 3 1/2 percent security due in February 2018 rose 1 11/32, or $13.44 per $1,000 face amount, to 101 10/32. The two- year note's yield dropped 16 basis points to 1.47 percent.

`Capital Preservation'

Treasuries also gained as stocks retreated. The Standard & Poor's 500 Index, which surged the most in five years yesterday, fell 2.2 percent, while the Dow Jones Industrial Average lost 2.1 percent.

``It's a capital preservation trade,'' said Michael Cloherty, an interest-rate strategist at Banc of America Securities LLC in New York. ``The rationale is, `I'll buy a bill, I know that when the thing matures I'll get 100 cents on the dollar.'''

The three-month London interbank offered rate, or Libor, for dollars rose for the first time in three weeks, indicating the Fed is struggling to instill confidence in money markets. The difference between what the government and companies pay for three-months loans, known as the TED spread, increased 32 basis points to 1.98 percentage points, the biggest gain since Jan. 22, when the Fed made an emergency cut in borrowing costs.

Margin Calls

Bills have also gained as volatility in higher-yielding assets caused lenders to increase margin calls, or collateral requirements, on loans, according to Prudential's Tully. ``We've been so volatile lately that there's been a lot of need for collateral,'' he said. ``Treasury bills are the margin of choice.''

Treasuries of all maturities have returned 4.42 percent in 2008, the best start to a year since 1995, as financial institutions worldwide reported $190 billion in losses linked to the U.S. subprime mortgage market since the start of 2007.

Yields on 30-year Treasury bonds, among the most bullish bets an investor can make that inflation will cool, fell 14 basis points to 4.22 percent, the most since Dec. 11. Gold plunged the most since June, leading a decline in commodities including crude oil.

The central bank cut the target lending rate by three- quarters of a percentage point to 2.25 percent yesterday, saying in its statement that inflation remained ``elevated.'' The 10- year yield fell by the most in four years after the cut, which was less than the 1 percentage point traders had expected.

Fed Action

The Fed on March 16 reduced the rate on direct loans to commercial banks and said it would allow primary dealers of U.S. government securities, including non-banks, to borrow at the rate in exchange for a ``broad range'' of investment-grade collateral. Policy makers cut the so-called discount rate again at its meeting yesterday to 2.5 percent.

The central bank also backed JPMorgan Chase & Co.'s agreement to buy Bear Stearns Cos. for about $240 million. The central bank provided financing support for as much as $30 billion of Bear Stearns's ``less-liquid assets.''

``The actions that have been taken so far by the Fed have not and cannot address the underlying problems in housing and mortgages,'' said John Canavan, a fixed-income analyst in Princeton, New Jersey, at Stone & McCarthy Research Associates.

In a sign the central bank's efforts to relieve the cash shortage may eventually gain traction, Goldman Sachs Group Inc. and Morgan Stanley said they've used the Fed's lending facility.

JWM's Losses

JWM Partners LLC, the investment firm run by Meriwether, lost 24 percent in its $1 billion fixed-income hedge fund this year through March 14, according to two people with knowledge of the matter. Meriwether's Relative Value Opportunity fund was hurt as bond managers such as Peloton Partners LLP and Carlyle Capital Corp. were forced to sell securities to meet margin calls, said the investors, who asked not to be identified because JWM doesn't publicly disclose returns. Meriwether declined to comment.

Thornburg Mortgage, the ``jumbo'' mortgage specialist struggling to meet margin calls, may declare bankruptcy if it can't raise $948 million by next week. Failing to find the needed capital could force Thornburg to sell securities backed by home loans in a depressed market, which won't cover all the money it owes, the Santa Fe, New Mexico-based company said in a regulatory filing today.

CIT Group Inc., the largest independent commercial finance company in the U.S., may need to tap $7.3 billion in unsecured bank lines because its access to traditional debt markets has become ``materially constrained,'' Fitch Ratings said today.

The odds policy makers will cut the target lending rate by a half-percentage point at their April 30 meeting was 82 percent, according to futures on the Chicago Board of Trade. The rest of the bets are for a quarter-point reduction.

To contact the reporter on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net

Last Updated: March 19, 2008 17:36 EDT