Oct. 29 (Bloomberg) -- Treasuries rose for the first time in three days on speculation the Federal Reserve will cut the benchmark interest rate as much as 75 basis points today as it tries to stem the financial crisis.

U.S. government securities headed for a fifth monthly gain after former Fed Governor Frederic Mishkin said the market shock is ``more pervasive'' than during the Great Depression. Investors sought the relative safety of Treasuries as banks shut off credit, world stocks wiped out about $12 trillion in value this month and corporate bonds fell the most since at least 1997.

``Every bump up in risk aversion should have a positive impact on Treasuries,'' said Edward Lee, a fixed-income strategist at Standard Chartered Bank in Singapore, part of the U.K. lender that specializes in emerging markets. ``Sell-offs provide opportunities to buy.''

Two-year yields fell 7 basis points to 1.58 percent as of 6 a.m. in London, according to BGCantor Market Data. The price of the 1.5 percent security maturing in October 2010 increased 4/32, or $1.25 per $1,000 face amount, to 99 27/32.

The yield is 8 basis points more than the Fed's current target for overnight loans between banks. The difference has averaged 36 basis points for the past six months. The securities are among the most sensitive to interest-rate changes because of their short maturities.

Ten-year rates were little changed at 3.85 percent. A basis point is 0.01 percentage point.

Japan's five-year government bonds headed for their biggest gain since 1999 after the Nikkei newspaper said the central bank is ``leaning toward'' cutting rates by a quarter point from 0.5 percent.

The yield on the 1.2 percent note due in September 2013 slid 12.5 basis points to 0.93 percent, according to Japan Bond Trading Co., the nation's largest interdealer debt broker.

Fed Odds

Standard Chartered predicted yesterday that the Fed will lower its benchmark rate by half a percentage point today and by the same amount at its Dec. 16 meeting.

Futures on the Chicago Board of Trade show a 46 percent chance the central bank will trim its target for overnight bank loans to 0.75 percent from 1.5 percent, as of late yesterday in New York. The odds increased from 34 percent a day before. The rest of the bets are for a half-point reduction.

In a Bloomberg News survey of 69 economists, only Lena Komileva at Tullett Prebon Plc in London, an inter-dealer broker, predicted 0.75 percent.

``We have had a major deflationary shock,'' Mishkin said yesterday on Bloomberg Television.

Stocks Guide Treasuries

The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, narrowed to 0.81 percentage point from 1.62 percentage points a month ago. The figure reflects the outlook among traders for consumer prices.

A Commerce Department report today may show orders for U.S. durable goods fell in September for a second month. The figure dropped 1.1 percent, after slumping 4.8 percent in August, according to the median estimate in a Bloomberg survey of economists.

Yields indicate banks are less willing to lend than earlier in 2008. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.71 percentage points from this year's low of 0.76 point in May. The figure was 4.64 percentage points on Oct. 10, the most since Bloomberg began compiling the data in 1984.

Standard & Poor's 500 Index dropped 36 percent so far in 2008, heading for its steepest decline since 1937. The index and two-year Treasuries moved in opposite directions 88 percent of the time in the past three months, Bloomberg data show.

Notes may have a tough time rallying as the U.S. increases debt sales to fund its $700 billion bank rescue, said Tsutomu Komiya, an investor at Daiwa Asset Management Co.

Ten-year securities fell the most in two weeks yesterday after Anthony Ryan, acting Treasury undersecretary for domestic finance, said the U.S. may sell more long-term debt to address ``unprecedented'' needs to finance a growing budget deficit.

The U.S. sold $34 billion of two-year notes yesterday, which matched a record, and it plans to sell $24 billion five-year securities tomorrow. It will announce on Nov. 5 how it plans to boost its debt sales later in the month.

``Everyone is talking about supply,'' said Komiya, who helps oversee the equivalent of $100.6 billion at the unit of Japan's second-largest brokerage. ``Yields will tend to go up. After the November auctions, investors will be buying again.'' He bought Treasuries in September and hasn't added since.

Treasuries broke the pattern of trading inversely to stocks today, rising as Asian shares gained. The MSCI Asia Pacific Index of regional shares increased 3.7 percent, climbing for a second day.

Treasuries returned 0.5 percent so far in October, according to Merrill Lynch & Co.'s U.S. Treasury Master index. Corporate bonds handed investors a 9.3 percent loss, the most since Merrill began compiling the figures in 1997.

``We still wouldn't get rid of Treasuries at this point,'' said James Keegan, senior portfolio manager at Ridgeworth Capital Management in Upper Saddle River, New Jersey. ``We do believe the flight-to-quality bid is going to be here with us for a while.'' He spoke in a Bloomberg Television interview in New York yesterday.

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

Last Updated: October 29, 2008 02:03 EDT