Oct. 31 (Bloomberg) -- Treasuries fell this week, with 10-year notes posting their worst five days since June, as government efforts to unfreeze credit markets reduced the haven appeal of U.S. debt.

Yields on longer-maturity debt increased the most as the London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped to the lowest since September. The Federal Reserve reduced the benchmark interest rate to 1 percent. Sales of short-term corporate debt climbed to a record as the Fed began buying the obligations.

``Some of the Fed programs are having a meaningful impact, reversing some of the flight to quality,'' said Michael Cloherty, head of Treasury and agency strategy at Banc of America Securities LLC, one of 17 primary dealers that trade with the central bank. ``The theme for the week has been, and will be for the next couple of weeks, the meaningful improvement in Libor.''

The yield on the 10-year note climbed 29 basis points, or 0.29 percentage point, to 3.96 percent at 4:19 p.m. in New York, according to BGCantor Market Data. It was the biggest weekly increase since the period ended June 13. The yield was little changed for the day. The 4 percent security due in August 2018 fell 2 11/32, or $23.44 per $1,000 face amount, to 100 11/32.

Two-year note yields gained 4 basis points on the week to 1.56 percent. They were little changed today.

Treasuries lost 0.91 percent this week through yesterday, according to Merrill Lynch & Co.'s Treasury Master index.

Core Price Gauge

U.S. securities erased the gains they made earlier today when a government report showed consumer spending decreased 0.3 percent, adding to speculation the economy will continue to slow. The drop followed no change in August and July, the Commerce Department said. Economists had forecast a fall of 0.2 percent, according a Bloomberg News survey.

The central bank cut its target rate for overnight bank lending by half a percentage point Oct. 29 to 1 percent, the lowest level since June 2004, saying ``downside'' risks to growth remain. The economy declined in the third quarter the most since 2001, a Commerce Department report showed yesterday.

Futures on the Chicago Board of Trade indicate a 61 percent probability the Fed will reduce the target rate to 0.5 percent at its Dec. 16 meeting. The odds a week ago were zero. The rest of the bets are for a quarter-percentage point reduction.

Traders have questioned the futures market's ability to predict interest rates, because what banks charge each other for overnight loans has not followed the Fed's target rate. This suggests traders may not be able to accurately gauge the Fed's policy response.

`Still on Tenterhooks'

``The economy is still on tenterhooks,'' said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world's largest inter-dealer broker. ``People will put money into the front end in a more protectionary stance. People still want protection until liquidity comes back -- and that will only come back when confidence returns.''

Yields indicate banks are more willing to lend than they were three weeks ago. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 2.59 percentage points from a high of 4.64 percentage points Oct. 10.

Libor Falls

Banks' cost of borrowing dollars overnight fell to a record low. The Libor that banks charge each other for overnight loans in dollars tumbled 88 basis points on the week to 0.41 percent, according to the British Bankers' Association. Three-month Libor dropped to 3.03 percent.

The Bank of Japan cut its interest-rate for the first time in seven years in a week of reductions that spanned the world, with more possible next week in Europe and Australia.

``You've seen some of the liquidity measures from the Fed and around the globe have a positive impact,'' said Jamie Jackson, who oversees government debt trading at Minneapolis- based RiverSource Investments, which manages $93 billion of fixed-income assets.

Corporate borrowing in the U.S. commercial paper market soared the most on record after the Fed began buying the debt directly from issuers this week. The amount of corporate IOUs outstanding rose by $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29, according to Fed data.

The difference in yield, or spread, between two- and 10- year securities was 2.41 percentage points, the most since 2004. It was 2.17 points a week ago. The so-called yield curve has steepened as longer-term securities lagged behind in anticipation of increased government debt auctions.

Three-Month Bills

``A lot of the conservative money is still on the sidelines and suffering much lower yields in the Treasury market,'' said William Larkin, a portfolio manager at Cabot Money Management in Salem, Massachusetts, which manages about $500 million in assets. ``Three-month bills are alarmingly low.''

Rates on three-month Treasury bills shed 41 basis points this week to 0.44 percent.

U.S. borrowing needs will almost double this fiscal year to $2 trillion, Goldman Sachs Group Inc. forecast. The government auctioned off $64 billion in two- and five-year notes and five- year Treasury Inflation Protected Securities this week.

The Treasury is scheduled to announce Nov. 5 how it will boost debt sales. It has said it will have a decision at that time on reviving the three-year note and holding more frequent 10- and 30-year securities sales.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net.

Last Updated: October 31, 2008 16:24 EDT