March 12 (Bloomberg) -- Two-year Treasuries rose, after the biggest decline in 12 years, on speculation the Federal Reserve's plans to accept mortgage debt as collateral for loans won't be enough to stem credit-market losses.

``The Fed provided relief to the market but it doesn't immediately solve the fundamental problem,'' said Shinji Kunibe, who helps oversee $847 billion at the Tokyo branch of JPMorgan Asset Management, part of the third-biggest U.S. bank. ``The Fed will still cut at the next meeting and yields should come down.''

Treasuries gained as interest-rate futures showed there's a 62 percent chance the central bank will cut its benchmark rate by 75 basis points to 2.25 percent on March 18. The difference in yield between two- and 10-year Treasuries widened to 1.89 percentage points. The spread was as much as 2.08 percentage points on March 6, the most in almost four years.

The two-year yield declined 3 basis points, or 0.03 percentage point, to 1.71 percent as of 8 a.m. in London, according to bond broker Cantor Fitzgerald LP. The price of the 2 percent security due in February 2010 rose 1/32, or 31 cents per $1,000 face amount, to 100 17/32. Ten-year yields were little changed at 3.59 percent.

The dollar fell 0.2 percent to $1.5367 per euro and 0.4 percent to 103.04 yen on speculation the Fed's measures won't avert a recession.

The central bank's plan is ``a strong attempt to stabilize a crisis,'' Henry Kaufman, a former chief economist at Salomon Brothers Inc. who runs his own consulting firm, said in an interview. ``It will not eliminate the credit problem.''

Mortgage Securities

The Fed said it will make $200 billion available by lending Treasuries in exchange for debt including mortgage-backed securities.

The central bank will lend Treasuries for 28-day periods in return for debt including AAA-rated mortgage securities sold by government agencies Fannie Mae, Freddie Mac and by banks, prompting Asian stocks to rise by the most in a month, extending a global rally. The MSCI Asia Pacific Index climbed by as much as 2.9 percent.

The loans will be made under a new program, the Term Securities Lending Facility, to primary dealers, the 20 banks and securities firms that trade directly with the central bank. The first auction will take place on March 27. Dealers held $139.7 billion in agency debt and $60.2 billion in mortgage bonds, according to the Fed.

`Temporary Boost'

``The action will do nothing about the problem of writedowns and the shrinking capital base in the banking sector,'' Dariusz Kowalczyk, chief investment strategist with CFC Seymour Ltd. in Hong Kong, wrote in a note to clients today. ``It will provide only a temporary boost to markets.''

The so-called TED spread, a measure of the willingness of banks to do business, was little changed at 1.40 percentage points, after narrowing 18 basis points yesterday.

The difference between the rate banks charge for one-month dollar loans in London relative to the overnight indexed swap rate, the so-called Libor-OIS spread used by the Fed as the minimum bid level at its auctions, showed an increase in the availability of bank funds. The spread narrowed to 41 basis points, from 56 basis points on March 10. It averaged about 6 basis points in the first quarter of 2007.

The cost of borrowing dollars for three months fell 3 basis points to 2.87 percent, the British Bankers' Association said yesterday.

Worst to Come

``We had a very aggressive move downward in Treasuries overnight and today in Asia we're seeing some correction,'' said Peter Jolly, head of markets research in Sydney at NabCapital, the investment-banking arm of National Australia Bank Ltd. ``The pressure is still on the Fed to keep cutting rates and the worst is still to come.''

Jolly predicts the 10-year Treasury yield will rise to 3.80 percent by the end of the month and 4 percent by the end of June as Fed rate cuts spur inflation.

Two-year yields will advance to 1.79 percent by the end of the second quarter, according to the median prediction of 45 analysts surveyed by Bloomberg News, with the most recent forecasts given the heaviest weightings. The 10-year yield will rise to 3.63 percent, the survey showed.

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Aaron Pan in Hong Kong at Apan8@bloomberg.net.

Last Updated: March 12, 2008 04:01 EDT