Nov. 21 (Bloomberg) -- Treasuries fell, with 10-year notes eroding the biggest weekly gain since the market crash of 1987, as Asian shares advanced and Standard & Poor's 500 futures rose.

Notes slid after Federal Reserve Bank of St. Louis President James Bullard said the central bank has limited room to cut interest rates and downplayed the risk of deflation. Yields climbed from record lows, after the five-year rate dropped to levels not seen since 1954 yesterday, as the gain in equities curtailed demand for the relative safety of sovereign debt.

``Treasury yields are probably too low,'' said Peter Jolly, head of markets research in Sydney at NabCapital, the investment- banking unit of National Australia Bank Ltd., the nation's largest lender. ``Asset markets are getting very cheap under any reasonable outlook.'' Investors should consider buying corporate bonds, Jolly said.

The yield on the 10-year note increased 12 basis points to 3.13 percent as of 7 a.m. in London, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 dropped 1 3/32, or $10.94 per $1,000 face amount, to 105 9/32. The yield fell 60 basis points this week and reached 2.99 percent yesterday, the lowest level since at least 1962.

Five-year rates climbed 13 basis points to 1.99 percent today, after declining to 1.864 percent in New York.

Treasuries fell as the MSCI Asia Pacific Index of regional shares advanced 3 percent, reversing a 2.3 percent loss. S&P 500 Index futures gained 2.7 percent.

Policy Shift

Investors plowed into debt yesterday as recessions in the U.S., Europe and Japan sent global stocks plunging. The S&P 500 is down 49 percent in 2008, poised for the worst annual decline in its 80-year history, prompting traders to add to bets for more interest-rate cuts by the Fed.

Futures on the Chicago Board of trade show 32 percent odds policy makers will lower the 1 percent target rate for overnight lending between banks to 0.25 percent at their next meeting on Dec. 16, from zero percent odds a week ago.

Consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, the Labor Department said this week.

The central bank may shift the focus of monetary policy to increasing liquidity, Bullard said yesterday in Evansville, Indiana.

``It would take some doing to get some deflation,'' he told reporters after a speech at an economic conference. Bullard doesn't vote on policy this year or next.

Longer-dated Treasuries, which are more sensitive to inflation expectations, outperformed this week on speculation the economic slump will trigger deflation, or a prolonged decline in consumer prices.

Long Maturities

JPMorgan Asset Management Japan Ltd. and Mizuho Asset Management Co. are favoring longer maturities.

``There's more room for the long end to rally,'' said Shinji Kunibe, a Tokyo-based senior money manager for JPMorgan Asset who helps oversee $847 billion globally. He said he shifted into longer maturities today.

Ten-year yields will fall to 2.5 percent in the first quarter of next year, he said.

``People are rushing to Treasuries,'' said Hiromasa Nakamura, senior investor in Tokyo at Mizuho Asset Management Co., which has $42.6 billion in assets. ``Bonds are attractive globally. The rally is the biggest that I can remember.''

Nakamura, who correctly predicted Treasuries would gain this year, said he bought 30-year bonds yesterday as they led the surge.

The extra yield that 30-year bonds offer over two-year notes narrowed to 2.55 percentage points from 3.12 percentage points on Nov. 13.

Job Cuts

The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, was a negative 4 basis points. The figure dropped below zero yesterday, indicating traders are preparing for the possibility of deflation.

Job cuts in the financial services industry may double to about 350,000 worldwide by mid-2009, said Brian Sullivan, chief executive officer of search firm CTPartners.

JPMorgan Chase & Co., the largest U.S. bank, plans to fire about 10 percent of its investment banking staff, or about 3,000 people. Bank of New York Mellon Corp., the world's largest custodian of financial assets, plans to cut about 4 percent of its workforce, or 1,800 people.

The rally in Treasuries spread to German and U.K. bonds, and Goldman, Sachs & Co., one of the 17 primary dealers that underwrite U.S. debt sales, said the gains have further to go.

Goldman Sach's Forecasts

The yield on the benchmark U.S. 10-year bond may decline to 2.75 percent by early next year, Francesco Garzarelli, Goldman's chief interest-rate strategist, wrote in a report.

German 10-year bond yields may fall to 3.0 percent from 3.40 percent late yesterday and yields on similar-maturity U.K. securities may decline to 3.5 percent from 3.89 percent, according to Goldman Sachs.

Treasuries have returned 9.3 percent in 2008, heading for their best year since 2002, according to Merrill Lynch & Co.'s U.S. Treasury Master Index.

U.S. corporate bonds with an A rating have handed investors a 13 percent loss, set for the worst year since the Merrill figures start in 1989. The ranking is No. 6 of S&P's 10 investment-grade levels.

The index yields 6.20 percentage points more than Treasuries, almost doubling since the start of September.

Figures like that are starting to attract investors, said Tan Su Shan, head of private wealth management for Southeast Asia and Australia at Morgan Stanley.

``Clients are now looking for opportunities,'' she said in a Bloomberg Television interview in Singapore. ``There should be some flow into the investment-grade bond areas.'' Morgan Stanley, based in New York, was the second-biggest U.S. securities firm before converting to a bank in September.

Former Fed Chairman Paul Volcker, an adviser to President- elect Barack Obama, told Major League Baseball owners that weakness in the economy will last for a while, according to Tampa Bay Rays owner Stuart Sternberg, who attended the meeting yesterday.

The Fed has cut its target for overnight lending between banks from 5.25 percent in 14 months as it tries to revive an economy that may shrink 2.05 percent in the fourth quarter, based on a Bloomberg News survey of banks and securities companies. Gross domestic product contracted 0.3 percent in the three months through September.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: November 21, 2008 02:09 EST