Aug. 16 (Bloomberg) -- Treasuries advanced, pushing two-year yields to the lowest in 22 months, as a slide in global stocks fed demand for the relative safety of government debt.

Two-year notes rose for a fourth day following the biggest gain in three-month bills since 1989, pushing the gap between two- and 10-year yields to the widest since May 2005. Sydney- based Rams Home Loans Group Ltd. said it was unable to refinance the equivalent of $5 billion of U.S. loans due to tightening credit. Canada's Coventree Inc. today sought emergency funding to refinance debt after its units failed to sell asset-backed commercial paper yesterday.

``There's a real sense of fear in the market as everyone awaits the next piece of bad news,'' said Marc Ostwald, a strategist at Insinger de Beaufort in London. ``Treasuries are benefiting on the back of this.''

The yield on the benchmark two-year note fell 10 basis points, or 0.10 percentage point, to 4.18 percent as of 7:50 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 5/8 percent security due July 2009 rose 6/32, or $1.88 per $1,000 face amount, to 100 26/32.

Ten-year yields declined 7 basis points to 4.65 percent, the lowest since May. 11. The two- and 10-year yield spread was 46 basis points, showing investors preferred shorter-maturity debt.

The yield on the three-month Treasury bill fell 0.54 percentage point yesterday to 4.09 percent, the lowest since 2005, and slipped further to 4.0 percent today.

Equities in Europe and Asia dropped, led by a 6.9 percent slide in South Korea. U.S. stocks fell yesterday, with the Standard & Poor's 500 Index erasing all this year's gains.

Half-Point Cut

Toronto-based Coventree today said it doesn't know if its failure to sell any debt was due to market disruption or technical issues. It rolled over C$600 million ($555 million) of C$950 million of maturing debt on Aug. 14.

Treasuries returned 1.9 percent including reinvested interest in the past month, compared with a 0.4 percent loss on U.S. corporate bonds, according to Merrill Lynch & Co. indexes. That's already the best monthly gain since August 2004.

Gilts gained 3.2 percent over the same period, German bunds rose 1.7 percent and Japanese bonds advanced 1.8 percent.

Traders see a 36 percent chance the Fed will lower its overnight rate for loans between banks by half a percentage point to 4.75 percent at its Sept. 18 meeting, from zero odds a week ago, according to interest-rate futures. Bets for the same cut at the Oct. 31 meeting rose to 50 percent from 5.6 percent.

`Flight to Safety'

William Poole, president of the Federal Reserve Bank of St. Louis, said there's no sign the subprime-mortgage rout is harming the broader economy and an interest-rate cut isn't yet needed.

Barring a ``calamity,'' there is no need to consider an emergency rate cut, Poole said in an interview in the bank's boardroom.

``The flight to safety will definitely continue for some time and the Fed may have to act,'' said Rachana Mehta, global bonds and currency strategist at DBS Asset Management Ltd. in Singapore.

Treasury Secretary Henry Paulson said the turmoil will ``extract a penalty'' on U.S. growth rates, yet the economy is strong enough to weather problems without falling into recession, the Wall Street Journal reported, citing an interview.

The Reserve Bank of Australia today added A$3.04 billion ($2.5 billion) to the market to help ease a credit crunch as increased risks prompted lenders to jack up borrowing costs. Central banks in Japan, Europe and the U.S. have pumped more than $350 billion into their systems in the past five trading days.

Rams Home Loans has lost two-thirds of its market value this week on the Australian Stock Exchange as it failed to roll over A$6.17 billion of short-term notes.

Credit-default swaps on Countrywide Financial Corp., the biggest U.S. mortgage lender, climbed yesterday on skepticism about the company's solvency after Merrill Lynch downgraded the stock, citing the possibility of bankruptcy.

Corporate Risk

Treasuries have benefited from heightened risk aversion as corporate bond risk in Japan rose to the most since Aug. 6, tracking higher risks in Europe and North America, according to traders of credit-default swaps.

Contracts on the iTraxx Europe Index of 125 companies, a benchmark for the cost of protecting investment-grade bonds against default, gained 4.5 basis points to 58 basis points, the highest since Aug. 7, according to JPMorgan Chase & Co.

UBS AG, Europe's largest bank, said its Risk Index reached a record high today, driven by the volatility in the currency and equity markets.

`Bullish' on Treasuries

``It's an ongoing repricing of risk premium,'' said Jeremy Wu, who trades U.S. government bonds at Shinkong Life Insurance Co., Taiwan's second-largest life insurer with an equivalent of $10 billion in overseas investments. ``I'm bullish on Treasuries.''

The Fed will cut its key rate by year-end to respond to the subprime crisis and slowing U.S. growth, he said.

The average spread, or extra yield, on emerging-market bonds over U.S. Treasuries widened to 2.27 percentage points today, according to JPMorgan's EMBI Plus index. The risk premium was the most since June 2006.

A Commerce Department report today is forecast to show the slowest housing starts in a decade in July.

Housing starts fell 4.6 percent to an annual rate of 1.4 million last month, the lowest since August 1997, following a 1.467 million pace in June, according to the median forecast in a Bloomberg survey.

``Housing will remain weak and this will later affect growth and consumer spending,'' said Patrick Shum, a consultant at Karl Thomson Investment Consultancy in Hong Kong. ``People will keep shifting to Treasuries.''

Economists shaved their U.S. growth forecast for the next three quarters on concerns a housing slowdown and a rout in subprime borrowing hampers consumer spending, according to a Bloomberg survey.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Last Updated: August 16, 2007 07:56 EDT