Nov. 30 (Bloomberg) -- Treasuries had their best month in 12 years as concern over banks' willingness to lend drove investors to the relative safety of U.S. government debt.

An index of Treasury securities returned 3.2 percent in November, the most since 1995, according to Merrill Lynch & Co. Federal Reserve Chairman Ben S. Bernanke indicated yesterday that the central bank will cut interest rates to keep the economy out of a recession.

``I'm still bullish on Treasuries,'' said Jim DeMasi, fixed-income strategist in Baltimore at the brokerage Stifel Nicolaus & Co. ``We still have quite a bit of bad news to get through.''

Two-year note yields fell 2 basis points, or 0.02 percentage point, to 3.01 percent at 4:03 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 3 1/8 percent security due in November 2009 rose 1/32, or 31 cents per $1,000 face amount, to 100 7/32.

The yield fell 78 basis points this month. That's the biggest drop since June 1989, when the Fed cut borrowing costs between meetings.

Ten-year note yields today rose 2 basis points to 3.97 percent. They are down from 4.47 percent on Oct. 31. Yields move inversely to bond prices.

Yields on three-month bills increased 20 basis points to 3.16 percent, the biggest increase since Nov. 13. The three- month London interbank offered rate for dollars increased for a 13th day, to 5.13 percent.

`TED' Spread

The ``TED'' spread, or the difference between three-month Treasury yields and Libor, fell for the first time in three days, narrowing to 1.98 percentage points. It rose yesterday to 2.16 percentage points, the widest since Aug. 20, reflecting banks' reluctance to lend to each other.

Gasoline prices above $3, the worst housing slump since 1991 and the highest global credit market rates in more than six years will probably create ``headwinds for the consumer,'' Bernanke said in a speech yesterday in Charlotte, North Carolina. He also said ``renewed turbulence'' in financial markets may have shifted risks between growth and inflation.

``Bernanke proposed an ease in rates to make sure the Fed is on top of what's going on in the financial sector,'' said Andrew Brenner, co-head of structured products in New York at MF Global Ltd.

Fed funds futures on the Chicago Board of Trade show traders raised bets that the central bank will reduce its 4.5 percent target rate for overnight lending between banks a half- percentage point at its next meeting Dec. 11. The odds of a reduction to 4 percent rose to 40 percent, while traders saw a 60 percent chance of a Fed cut to 4.25 percent.

Treasury Returns

Treasury securities returned 3.2 percent in November, the most since May 1995, when they returned 4.07 percent, according to Merrill Lynch indexes. Debt gained that month as U.S. employers shed jobs for the first time since 1993.

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. Merrill Lynch, Citigroup Inc. and other securities firms have reported more than $60 billion of losses and writedowns related to mortgages to borrowers with poor or incomplete credit histories.

The Fed's preferred inflation measure rose 1.9 percent from October 2006, matching a September increase that was revised upward, the Commerce Department said today. The price gauge, which is tied to spending patterns and excludes food and energy costs, is within the range of 1.6 percent to 1.9 percent that the central bank has projected for the next three years.

``The bond market is going to decide the Fed's taking its eye off the ball on inflation,'' said William Tedford, who helps manage $700 million in fixed-income assets in Little Rock, Arkansas, at Stephens Capital Management. ``I don't want to bet on further declines in longer rates for the next three to four months.''

To contact the reporters on this story: Deborah Finestone in New York at dfinestone@bloomberg.net; Sandra Hernandez in New York at shernandez4@bloomberg.net.

Last Updated: November 30, 2007 16:05 EST