Nov. 28 (Bloomberg) -- Treasuries posted their biggest monthly gain since Ronald Reagan was in the White House, as President-elect Barack Obama said the U.S. faces a “time of great trial” and the economy shrinks.

The advance drove yields on 10- and 30-year U.S. securities to record lows today after reports this week showed durable- goods orders fell more than twice as fast as forecast, consumer spending dropped the most since 2001 and the economy shrank in the third quarter more than first estimated. Traders bet the Federal Reserve will cut its benchmark interest rate by at least a half-percentage point on Dec. 16 to limit the slump.

“The primary driver behind the fall in Treasury yields this month was the deterioration in the economy and the sinking realization that deflation could be a factor of life going forward,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., one of the 17 primary dealers that trade government securities with the Fed.

The yield on the 10-year note decreased six basis points, or 0.06 percentage point, to 2.93 percent at 3:29 p.m. in New York, according to BGCantor Market Data. It touched 2.90 percent, the lowest since the Fed’s daily records on the note began in 1962, and since 1958 on a monthly basis. The 3.75 percent security due in November 2018 rose 15/32, or $4.69 per $1,000 face amount, to 107 2/32.

The 30-year bond fell nine basis points to 3.44 percent. It touched 3.43 percent, the lowest since regular sales of the security started in 1977.

The two-year note’s yield dropped 10 basis points to 1 percent. It fell below 1 percent on Nov. 20, the lowest since regular sales began in 1975.

$600 Billion Plan

“The flight-to-safety trade is alive and well -- there is uncertainty due to the terrorist attacks overseas, and some don’t want to be short over the weekend and are covering,” said Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina. Still, Treasuries’ gains today are “more of a continuation of the buying from the last few days after the government announced their plans to buy mortgage-backed securities.”

Bonds rallied this week after the U.S. announced a plan to buy as much as $600 billion of mortgage securities, spurring demand for U.S. securities as a replacement for bonds backed by home loans that may be repaid early.

The death toll in a series of terrorist attacks in Mumbai was at least 124, at 370 more were injured, the Indian government said.

Futures on the Chicago Board of Trade show 68 percent odds the Fed will lower the target overnight lending rate between banks by a half-percentage point from 1 percent on Dec. 16 and a 32 percent chance of a three-quarter percentage point cut.

Yield Spread

Investors have piled into longer-dated debt on speculation the contracting economy will subdue inflation, flattening the so-called yield curve. The difference in yield, or spread, between two- and 10-year notes narrowed to 1.94 percentage points, from 2.62 percentage points on Nov. 13, a five-year high.

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

Investors seeking the safest assets kept yields on three- month Treasury bills at 0.04 percent, where they have been since Nov. 26. The yields dropped to 0.01 percent on Nov. 21, the lowest level since the 1940s, according to monthly figures from the central bank.

U.S. notes and bonds may gain on speculation investors will buy notes to match changes in benchmark indexes as the gauges adjust to include debt sold this month. The Treasury holds its quarterly auctions of notes and bonds in February, May, August and November.

Treasury Returns

Treasuries returned 5.07 percent this month, Merrill Lynch & Co. indexes showed. It was the most since October 1981, when former Fed Chairman Paul Volcker was battling to tame inflation that was running at more than 10 percent. Obama this week appointed Volcker, 81, to head a new White House economic board that will propose ways to revive growth. German bonds handed investors 3.8 percent this month and Japanese government securities 0.4 percent.

Corporate debt in the U.S. and Europe rose the most since 2003 in November. Investment-grade U.S. bonds returned 3.6 percent, after losing 7.4 percent last month, according to Merrill indexes. European notes returned 1.5 percent.

TED Spread

Yields indicate banks are less willing to lend than earlier in the year. The difference between what banks and the Treasury pay to borrow money for three months, known as the TED spread, was at 2.18 percentage points today. The gap, which reached a low this year of 76 basis points in May, was at 4.64 percentage points on Oct. 10, the most since Bloomberg began compiling the data in 1984.

The Standard & Poor’s 500 Index rose 1 percent, capping its best week since 1974.

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.

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 for the Thanksgiving holiday in the U.S.

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net.

Last Updated: November 28, 2008 15:39 EST