Nov. 30 (Bloomberg) -- Treasuries headed for their best month in 12 years as Federal Reserve Chairman Ben S. Bernanke signaled he may lower interest rates because of ``turbulence'' in financial markets.

An index of Treasury securities returned 3.2 percent in November, according to Merrill Lynch & Co., as traders bet the Fed will cut the target rate for overnight loans between banks next month by as much as half a percentage point. Rising gasoline prices, a housing slump and reduced access to credit will probably create ``headwinds for the consumer,'' Bernanke said in a speech yesterday.

``Bernanke basically said, `Guys, we've got a big headwind coming here,' and opened the door completely to a rate cut in December,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking arm of Credit Agricole SA, France's second-biggest bank. ``And I suspect we will get a couple more after that as well.''

Ten-year yields rose 1 basis point at 3.94 percent as of 6.40 a.m. in New York, according to bond broker Cantor Fitzgerald LP. They are down from 4.47 percent on Oct. 31. The price of the 4 1/4 percent security due in November 2017 fell 3/32, or 94 cents per $1,000 face amount, to 102 16/32. Bond yields move inversely to prices.

The ``TED'' spread, or the difference between three-month Treasury yields and the London interbank offered rate, increased to 2.16 percentage points, matching the widest since Aug. 20. The increase indicates reluctance among banks to lend to each other as losses in the credit markets spread.

`Renewed Turbulence'

``The outlook has also been importantly affected over the past month by renewed turbulence in financial markets,'' Bernanke said in a speech in Charlotte, North Carolina.

Treasuries outperformed German bunds on speculation the European Central Bank will leave rates unchanged because of policy makers' concern about inflation, while the Fed will cut them. Bunds yielded 15 basis points more than U.S. 10-year notes today. They have yielded more than U.S. debt since Nov. 21.

Gains in Treasuries were limited by concern that it will take a recession to push them higher. None of the 68 economists that Bloomberg News surveyed Nov. 1 to Nov. 8 forecast a contraction before the end of 2008.

Authorities are examining options to limit the damage caused by subprime mortgage losses. U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.

``The market is really expensive,'' said Kazuaki Oh'e, a bond salesman at CIBC World Markets Japan in Tokyo. ``Investors should wait to buy.''

Yield Forecast

The two-year note's yield will rise to 3.55 percent by the end of 2007, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

The last time Treasuries returned so much was May 1995. U.S. employers shed jobs that month, for the first time since 1993, as economic growth slowed. German government debt gained 1.2 percent this month after including interest income, versus 0.6 percent in Japan, the Merrill indexes show. U.S. corporate bonds delivered a 0.2 percent return.

Merrill, Citigroup Inc. and other securities firms reported more than $60 billion of losses and writedowns related to subprime mortgages, and the Standard & Poor's 500 Index declined 6.7 percent from a record set Oct. 11.

Futures on the Chicago Board of Trade show a 70 percent chance of the Fed reducing its target rate by at least a quarter- point to 4.25 percent at its next meeting Dec. 11. The odds of a half point cut rose to 30 percent from 10 percent a week ago.

Consumer spending probably increased in October, reflecting rising energy costs that trimmed demand for other goods and services, economists said before the Commerce Department releases the data today.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

Last Updated: November 30, 2007 06:41 EST