Nov. 28 (Bloomberg) -- Treasuries rose, set for their biggest monthly gain since 1981, as President-elect Barack Obama said the U.S. faces a “time of great trial” and the economy shrinks.

Ten-year notes led the advance, sending yields to a record low, as investors sought the relative safety of government debt while the world’s biggest economies are in recession. Three-month bill rates approached zero after the government pledged $800 billion to revive lending to consumers. Futures contracts indicate the Federal Reserve will cut its benchmark interest rate by at least 50 basis points at its next meeting Dec. 16.

“Globally, interest rates will decline,” said Hiromasa Nakamura, senior investor in Tokyo at Mizuho Asset Management Co., which has $41.9 billion in assets. “Housing prices and stock prices are falling. Consumer spending is declining sharply.” Mizuho favors bonds in the U.S., the U.K., Europe and Australia, he said.

The yield on the 10-year note fell four basis points to 2.94 percent as of 7:58 a.m. in London, according to BGCantor Market Data. The price of the 3.75 percent security due November 2018 rallied 3/8, or $3.75 per $1,000 face amount, to 106 31/32.

The yield was as low as 2.91 percent, a level not seen since daily Fed numbers began in 1962.

Two-year note yields rose four basis points to 1.14 percent.

Treasuries returned 5.07 percent this month as of yesterday, the most since October 1981, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The gain was 3.8 percent in Germany and 0.4 percent in Japan.

Lower Volumes

Trading volumes may be lower than usual today. The Securities Industry and Financial Markets Association recommended trading stop at 2 p.m. in New York, after the market was closed yesterday around the world for Thanksgiving.

U.S. yields tumbled to record lows this month as the government prepared its second financial package and arranged an emergency rescue of Citigroup Inc.

Three-month bills rates are 0.04 percent. The figure fell to 0.01 percent on Nov. 21, the lowest level since the 1940s, according to monthly figures from the Fed.

“It will take the hard work, innovation, service and strength of the American people” to end the financial crisis, Obama said yesterday in his weekly radio address.

Futures on the Chicago Board of trade show 64 percent odds the Fed will lower the target overnight lending rate between banks by 0.5 percentage point from 1 percent on Dec. 16 and a 36 percent chance of a 0.75 percentage-point cut.

Corporate Debt

Corporate debt in the U.S. and Europe rose the most since 2003 in November, luring investors with record yield spreads relative to government securities.

Investment-grade U.S. corporate bonds returned 3.6 percent, after losing 7.4 percent last month, according to indexes compiled by Merrill Lynch. European notes returned 1.7 percent, the most since May 2003.

The extra yield on U.S. investment-grade corporate debt over government bonds rose by 0.33 percentage point to an average 6.39 percentage points, the highest since Merrill started collecting the data in 1999. Spreads on European bonds rose 0.2 percentage point to a record 4.13 percentage points.

Wider spreads were “the best possible news for the market,” said Santiago Rubio, Madrid-based head of asset allocation at a unit of La Caixa, Spain’s biggest savings bank. “There was a chance that premiums offered wouldn’t be enough to attract investors,” but they “are working,” he said.

Default Swaps

The cost of protecting Australian bonds from default fell, credit-default swaps show, eroding some of the demand for sovereign debt.

Markit’s iTraxx Australia index of credit-default swaps declined 10 basis points to 3.2 percentage points, Citigroup Inc. data show. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.

The MSCI Asia Pacific Index of regional shares rose 1.4 percent and was up 6.7 percent this week, the biggest five-day gain this month. The Standard & Poor’s 500 Index had its steepest four-day surge since 1933. It is down 40 percent this year.

“We don’t think Treasuries are attractive,” said Shuhei Mochizuki, Tokyo-based assistant manager in the foreign bond section at Sumitomo Life Insurance Co., which has the equivalent of $31.5 billion in non-Japanese debt. “After yields fell in November, they don’t offer good value. The rally may pause.”

Yield Survey

A Bloomberg survey of banks and securities companies shows 10-year yields will increase to 3.56 percent by year-end. The most recent forecasts are given the heaviest weightings.

An index of emerging-market bonds compiled by JPMorgan Chase & Co. yielded 7 percentage points more than Treasuries, narrowing from 8.65 percentage points five weeks ago.

Rates indicate banks are more willing to lend than they were last month.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 2.16 percentage points from 4.64 percentage points on Oct. 10, which was the most since Bloomberg began compiling the data in 1984. It is up from 2008’s low of 76 basis points set in May, a sign that access to credit is still limited.

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

Last Updated: November 28, 2008 03:04 EST