Feb. 10 (Bloomberg) -- Treasuries rose, pushing yields on 10-year notes down the most in almost two months, on speculation a U.S. plan to rescue the banking system will prove inadequate, boosting demand for the safety of government debt.

U.S. securities gained as the Treasury’s sale of a record $32 billion of three-year notes drew more demand than forecast. Treasury Secretary Timothy Geithner pledged government financing for the bailout that may grow to as much as $2 trillion.

“The Geithner speech is short on details and long on rhetoric,” said Maxwell Bublitz, who oversees $3.5 billion in bonds as chief strategist at San Francisco-based SCM Advisors LLC. “In a word, it is weak.”

The yield on the 10-year note tumbled 17 basis points, or 0.17 percentage point, the most since Dec. 16, to 2.82 percent at 4:41 p.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 climbed 1 17/32, or $15.31 per $1,000 face amount, to 107 29/32.

The yield exceeded 3 percent yesterday for the first time since Nov. 28 after falling to a record low of 2.04 percent on Dec. 18.

The benchmark three-year note’s yield decreased 19 basis points, the most since the government resumed sales of the securities Nov. 10, to 1.26 percent. Five-year note yields plunged 22 basis points to 1.76 percent.

Stocks slumped, with the Standard & Poor’s 500 Index dropping 4.9 percent.

Three-Year Sale

The three-year note sold today, which matures in February 2012, drew a yield of 1.419 percent, compared with the 1.476 average forecast in a Bloomberg News poll of seven bond-trading firms. It yielded 1.469 percent in pre-auction trading.

The so-called bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold, was 2.67, compared with an average of 2.4 at the past 10 auctions. Indirect bidders, a group that includes foreign central banks, bought 44.8 percent of the amount sold, compared with 28 percent at the Jan. 7 three-year auction and an average of 27.6 percent at the past 10 sales.

“It was a good, strong auction with good demand from customers,” said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort, one of the 17 primary dealers that are required to bid in Treasury auctions. “Obviously you had a helping hand based on the disappointment with the Geithner plan.”

Toxic Assets

Geithner’s package is aimed at spurring new lending and addressing banks’ toxic assets. The Treasury is creating a Public-Private Investment fund, with an initial capacity of $500 billion, to provide financing for private investors to buy distressed securities, he said.

The department will also work with the Federal Reserve to finance as much $1 trillion in new consumer and business loans through a program modeled on the Term Asset Backed Securities Loan Facility.

“It doesn’t seem to be a forceful enough plan, given market expectations,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, another primary dealer.

The U.S. Senate approved an $838 billion economic stimulus package, clearing the way for negotiations with the House over a compromise plan lawmakers said they want to send to President Barack Obama quickly.

Fed officials have yet to resolve an internal debate over whether to purchase long-term U.S. debt, according to people familiar with the deliberations. Central bank Chairman Ben S. Bernanke first talked about the option of buying Treasuries on Dec. 1.

More Auctions

Traders reversed bets longer-maturity securities would decline ahead of the government’s sales of $21 billion of 10-year notes tomorrow and $14 billion of 30-year bonds Feb. 12. The difference between yields on 10- and two-year notes narrowed to 1.93 percentage points, the lowest in a week.

“The shorts, if anything, are in the long end of the market,” said Theodore Ake, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York, another primary dealer. “It may be nothing more than a short-cover as we get through the auction process.”

A short bet is a wager that Treasury prices will fall.

Treasuries lost 3.6 percent this year, their worst start to a year since 1980, according to Merrill Lynch & Co.’s Treasury Master Index data. Yields climbed on longer-maturity debt in five of the past six weeks as bond prices fell amid concern that the Fed won’t buy U.S. debt to keep yields low while the government increases borrowing.

Investors sold Treasuries this year as credit markets began to thaw, reducing the need for the haven of government debt. Three-month Treasury bill rates climbed to 0.32 percent today after plunging to minus 0.04 percent on Dec. 4.

Mortgage Rates

Average 30-year fixed mortgage rates rose to 5.25 percent in the seven days ended Feb. 5 from 4.96 percent three weeks earlier, according to loan finance company Freddie Mac. Rates today were 243 basis points higher than 10-year Treasury yields, widening from 162 basis points five years ago.

Investors are adding to inflation bets as Obama works to push his economic stimulus plan through Congress. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, was 124 basis points, near the widest since October.

New York Federal Reserve Bank President William Dudley said the U.S. government may need to adjust the issuance of inflation- linked bonds to boost trading volumes in the securities. Dudley, recently named head of the New York Fed to replace Geithner, spoke at a conference at his bank.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

Last Updated: February 10, 2009 16:49 EST