Aug. 30 (Bloomberg) -- U.S. Treasury notes advanced on speculation demand will rise at a five-year auction today, after a two-year sale garnered the most orders since at least 1992.

Investors were attracted to the relative safety of U.S. debt after an increase in corporate borrowing costs caused by the impact of defaulted subprime mortgages. Australia's Basis Capital Fund Management Ltd. sought bankruptcy protection for one of its hedge funds today, stoking concern the fallout triggered by unpaid home loans will keep spreading.

``It's still a pretty nervous environment out there and I think there'll be plenty of buyers for this bond,'' said Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV in Amsterdam. ``The problem in the financial market will not blow over any time soon.'' Garvey predicts the Federal Reserve will cut interest rates a half-point from 5.25 percent on Sept. 18.

The yield on the benchmark five-year note fell 5 basis points to 4.25 percent as of 7:25 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 5/8 percent security maturing July 2012 rose 7/32, or $2.19 per $1,000 face amount, to 101 20/32. A basis point is 0.01 percentage point.

The yield on the two-year note declined 6 basis points to 4.09 percent. The yield will climb to 4.66 percent by Dec. 31, according to a Bloomberg News survey of economists, with the most recent forecasts given the heaviest weightings.

The Treasury is scheduled to sell $13 billion of five-year notes today, the same as the previous auction in July. Demand weakened at the last sale, with investors bidding for 2.15 times the amount of debt on offer, from 2.73 times the month before.

Credit-Crunch

Three-month bill yields fell yesterday as London-based hedge fund Cheyne Capital Management Ltd. indicated it may be forced to sell assets amid the global credit-market rout.

Companies that depend on commercial paper, debt due in 270 days or less, will continue to face funding problems as investors refuse to buy debt secured by assets including U.S. subprime mortgages, according to Tom Jenkins, London-based analyst at Royal Bank of Scotland Group Plc.

These so-called structured investment vehicles will need to sell as much as $43 billion of assets as their access to money dries up, Jenkins wrote in a report today.

The risk of owning U.S. corporate bonds rose yesterday, according to traders of credit-default swaps. Contracts on the CDX North America Investment Grade Index increased 2.75 basis points to 69 basis points by the close of trading in New York yesterday, Deutsche Bank AG said.

Standard & Poor's said yesterday business conditions for securities firms are worse than in the second half of 1998 when emerging markets were in crisis. It said revenue from investment banking and trading could fall 47 percent in the final six months of this year.

`Just Starting'

Demand for the safety of U.S. debt isn't about to end, said Hiroki Shimazu, a fixed-income economist at Mizuho Securities Co. in Tokyo. ``It's just starting, and it will continue,'' he said.

The yen rose against the 16 most-traded currencies today as investors sold riskier securities purchased with loans obtained in Japan.

In these so-called carry trades, investors borrow at Japan's 0.5 percent interest rate and convert the money to a currency whose rates are higher, such as the dollar or British pound. They lend the money at that higher rate and earn the spread between the two. The risk is that exchange rates may shift, wiping out profit.

Curve Steepens

The so-called yield curve steepened in the U.S., indicating credit-market turmoil is prompting investors to shift from riskier assets into short-dated government bonds.

Ten-year Treasuries yielded 45 basis points over two-year notes today, near the widest spread in a week.

Futures contracts show traders see a 56 percent chance the Fed will cut its target rate for overnight loans between banks by a quarter percentage point to 5 percent at its Sept. 18 meeting, compared with odds of 34 percent a month ago. There's a 44 percent chance of a reduction to 4.75 percent.

The Fed on Aug. 17 lowered the discount rate on direct loans to banks by half a percentage point to 5.75 percent to help avert the credit crisis. It held its main lending rate at 5.25 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

Last Updated: August 30, 2007 07:27 EDT