Oct. 24 (Bloomberg) -- Treasuries rose, pushing the yield on the 30-year bond to the lowest in more than three decades, as widening financial turmoil sparked a tumble in stocks worldwide and a flight out of emerging-market assets.

Yields on two-year notes dropped to the lowest in more than two weeks on speculation a deepening global slowdown will drive U.S. policy makers to cut borrowing costs. More than $10 trillion has been erased from the market value of equities so far this month, accounting for about one-third of the total value lost this year. Currencies fell from Brazil to India as investors fled from higher-yielding assets.

``We're getting very close to the emotional blow-off where everybody says, `I don't care; I want out,''' said E. Craig Coats Jr., who co-heads fixed income at Keefe, Bruyette & Woods Inc. in New York. ``Everybody seems to be saying `I want to be in cash or Treasuries.'''

The yield on the 4 1/2 percent bond due in May 2038 declined 1 basis point, or 0.01 percentage point, to 4.03 percent at 1:45 p.m. in New York, according to BGCantor Market Data. It plunged as low as 3.8676 percent shortly before 6 a.m. as Asian and European stocks tumbled. The price advanced 7/32, or $2.19 per $1,000 face value, to 108.

Ten-year note yields fell 5 basis points to 3.64 percent, and have decreased 30 basis points this week.

``There's a total risk aversion that keeps getting ramped up that is resulting in liquidation of risk assets,'' said Francis Mustaro, who heads a group managing about $500 million at J&W Seligman & Co. in New York. ``Now we have some new risks that are being highlighted that are sovereign-related,'' such as ``plunging currencies.''

`More Painful'

Treasuries fell from their highs as stocks pared losses. The Dow Jones Industrial Average and the Standard & Poor's 500 Index both dropped more than 5 percent before trimming declines to about 4 percent. The MSCI World Index fell 4.9 percent.

``So far, the world hasn't come to an end -- equities are not in full free fall,'' said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. ``There is a tremendous risk premium priced into the Treasury market. Their prices are very sensitive to equity prices.''

Trading in futures on the S&P 500 and the Dow was limited before the markets opened as declines in contracts of more than 6 percent triggered a so-called limit down restriction.

``There's no question that it's the plunge in equities around the globe that's causing the bid to Treasuries,'' said Kevin Flanagan, a fixed-income strategist at Morgan Stanley Global Wealth Management Group in Purchase, New York. ``People are realizing that this will be a lot more painful, deeper and longer than previously assumed.''

Rate Bets

While Treasuries will benefit from a flight to the relative safety of government bonds, investment-grade corporate debt and securities issued by mortgage finance companies Fannie Mae and Freddie Mac may be attractive ``from a tactical standpoint,'' Flanagan said.

The difference between yields on two- and 10-year notes widened today for the first time in more than a week as the shorter maturities, which are more sensitive to monetary policy, outperformed. The yield spread increased 8 basis points to 2.14 percentage points. It's still narrower than this year's high of 2.39 percentage points on Oct. 15.

Traders can profit from a widening yield spread by buying two-year notes and selling 10-year notes.

Two-year note yields dropped 9 basis points to 1.50 percent. They touched 1.35 percent, the lowest in more than two weeks.

This year's credit-market meltdown prompted Federal Reserve officials to make an emergency reduction in borrowing costs on Oct. 8, and they'll cut again when they meet on Oct. 29, interest-rate derivatives indicate.

Yen, Pound

Futures on the Chicago Board of Trade show a 100 percent chance policy makers will lower their target for overnight bank lending, now 1.5 percent, by at least a half-percentage point, compared with 38 percent odds a week ago.

The yen climbed to a 13-year high against the dollar as the global rout in stocks prompted investors to dump higher-yielding assets and pay back low-cost loans in Japan. The British pound weakened the most in at least 37 years after a report said the economy contracted 0.5 percent in the third quarter, exceeding the 0.2 percent forecast by analysts in a Bloomberg survey.

Investors sold emerging-market stocks, bonds, and currencies as the credit crisis imperiled developing economies. The Polish zloty and Hungarian forint had their biggest weekly declines. Ukraine's credit ratings were lowered for the second time since June by Standard & Poor's on concern about the country's banks, a day after Russia's credit rating outlook was lowered to ``negative'' from ``stable.''

Three-Month Bills

Yields on three-month Treasury bills, sought as a haven in times of uncertainty, fell 15 basis points to 0.81 percent after earlier touching a one-week low of 0.75 percent. They were 3.38 percent at the start of the year.

The difference between what banks and the U.S. government pay to borrow for three months, known as the TED spread, widened for a second day, to 2.70 percentage points. The spread, which is the difference between three-month bill yields and the three- month London interbank offered rate, is more than triple this year's low of 76 basis points in May.

Another indicator of credit stress, the difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate, the so-called Libor-OIS spread, widened to 2.61 percentage points from 2.54 percentage points yesterday.

`Price Pop'

Yields on Treasury Inflation-Protected Securities due in five years or less were higher than yields on conventional Treasuries of similar maturity in another sign investors are liquidating positions and betting on a deepening U.S. recession.

The difference between yields on five-year Treasuries and five-year TIPS, known as the breakeven rate, fell as low as minus 0.23 percentage points, a record. TIPS typically yield less than Treasuries because their principal payments rise at the rate of inflation. A shrinking yield gap indicates investors expect inflation to slow.

TIPS are ``a cheap sector,'' said William Chepolis, who oversees more than $9 billion of bonds as a fixed-income fund manager in New York at DWS Investment, a unit of Frankfurt-based Deutsche Bank AG. He said he favors 10-year TIPS. The 10-year breakeven rate was 0.84 percent today.

``At some point there will be inflation expectations greater than 1 percent, and you'll get a pretty nice price pop in that security,'' Chepolis said.

To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

Last Updated: October 24, 2008 14:00 EDT