Dec. 12 (Bloomberg) -- Treasuries fell the most in 11 years after central banks led by the Federal Reserve agreed to a coordinated effort to break a logjam in credit markets.

Yields on two-year notes rose more than a quarter of a percentage point on speculation that central banks will do what is necessary to ensure that banks have adequate access to capital through the end of the year, when demand is typically the greatest. Today's decline wiped out yesterday's rally, which was sparked by concern that the Fed wasn't doing enough to prevent the economy from falling into recession.

``It's a very serious and legitimate effort by policy makers to grow risk appetites because that's been the problem,'' said Steve Rodosky, the head of Treasury and derivatives trading at Pacific Investment Management Co. in Newport Beach, California, which oversees $720.6 billion. ``There's been so much risk aversion it was shutting markets down.''

Two-year note yields surged 29 basis points, or 0.29 percentage point, to 3.21 percent as of 10:29 a.m. in New York, according to bond broker Cantor Fitzgerald LP. That's the biggest rise in yields since March 1996. The price of the 3 1/8 percent security due in November 2009 fell 17/32, or $5.31 per $1,000 face amount, to 99 27/32. Ten-year yields climbed 17 basis points to 4.14 percent.

Yields on three-month Treasury bills, regarded as a haven for investors in times of turmoil, rose 9 basis points to 2.99 percent as U.S. stock markets surged. They had dropped yesterday near their three-and-a half-month low of 2.89 percent.

In a sign traders expect banks to be less reluctant to lend to each other, the rate on the three-month dollar London interbank offered rate traded one-month forward fell to 4.67 percent from 4.87 percent yesterday. It climbed to 4.85 percent yesterday after the Fed's announcement.

Central Banks

The Fed is coordinating the measures with the European Central Bank, Bank of England, Bank of Canada and Swiss National Bank, the Fed said in a statement in Washington. The Fed will auction term funds to banks against a ``wide variety of collateral.'' All ``generally sound'' institutions can participate, the Fed said in a statement.

The central banks are taking the steps after demand for cash sent borrowing costs climbing. The Fed's previous attempts to ease the credit squeeze that began in August have failed to have lasting effects. One gauge watched by central bankers, the three-month dollar London Interbank Offered Rate, rose to 5.15 percent a week ago, the highest in almost two months.

Swap Spreads

The difference, or swap spread, of the two-year swap rate above the two-year Treasury yield contracted to 89 basis points, after widening to 107 basis points yesterday after the Fed announcement. The high rate on the spread yesterday set a record, at least as far back as November 1988, according to Bloomberg data. The swap spread signals perceptions of general credit concern, with a wider spread signaling more credit risk.

In a swap, two parties agree to exchange fixed for variable-rate payments over a set period. Swap rates are higher than Treasury yields because the floating rate payments on a swap are based on interest rates that contain credit risk, such as the London Interbank offered rate.

``The market is obviously taking it as good news and easing concerns about credit issues into year end,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 20 primary dealers of U.S. government securities that trade with the Fed.

To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.netKim-Mai Cutler in London at kcutler@bloomberg.net;

Last Updated: December 12, 2007 10:31 EST