Feb. 8 (Bloomberg) -- Treasuries rose, paring yesterday's biggest decline in 30-year bonds since 2004, as economists said there is an even chance the U.S. economy will enter a recession.

Two-year notes led the gains, heading for their eighth straight weekly advance, after Janet Yellen, president of the Federal Reserve Bank of San Francisco, said U.S. policy makers must be ``prepared to act.'' Futures traders raised bets this week that the Fed may cut rates by three-quarters of a percentage point in March.

``The Fed commentary has been supportive,'' said Marius Daheim, a senior bond strategist at Bayerische Landesbank in Munich. ``We're expecting further cuts toward 2 percent but yields at these levels should sufficiently factor in those cuts.''

Two-year yields fell 7 basis points to 2 percent at 7:25 a.m. in New York, down 7 basis points on the week. The price of the 2 1/8 percent security due February 2018 rose 1/8, or $1.25 per $1,000 face amount, to 100 1/4. A basis point is 0.01 percentage point. Two-year yields fell to 1.84 percent on Jan. 23, the lowest since April 2004.

Benchmark 10-year yields declined 7 basis points to 3.69 percent. A Bloomberg News survey of economists shows the yield will slide to 3.55 percent by the end of March, with the most recent forecasts given the heaviest weightings.

Two-year yields will be at 2 percent in three months while 10-year yields will be at 3.22 percent, Daheim forecast.

Thirty-Year Slump

Treasuries declined yesterday after the government's $9 billion auction of 30-year bonds. The securities were sold to yield 4.449 percent, the lowest ever, before slumping by the most in more than three years after the sale.

``We regard Treasuries as not very attractive,'' said Warren Bird, who helps manage the equivalent of $39 billion at Colonial First State Investments in Sydney. The biggest manager of funds in Australia will consider buying 10-year notes when the yield rises to 4 percent, he said.

Yellen, speaking yesterday in Honolulu, said the U.S. economy will probably avoid a recession, though growth will be ``anemic'' in the first six months of 2008. She doesn't vote on interest rates this year.

U.S. economic growth is poised to accelerate in the second half of the year, Fed Bank of Dallas President Richard Fisher said yesterday. The U.S. Congress approved a $151 billion stimulus package yesterday that will send tax rebate checks to more than 100 million homes.

`Good Tequila'

Monetary policy ``is like a really good tequila: it takes time to make a punch,'' Fisher said in a Bloomberg Television interview in Mexico City conducted in Spanish. The remark reflects his vote on Jan. 30 to oppose the Fed's most recent reduction.

Treasuries have underperformed European bonds this week, with the yield difference between respective two-year notes shrinking to 1.12 percentage points, from 1.31 points at the end of last week.

The European Central Bank left the region's key rate at 4 percent yesterday, while the bank's President Jean-Claude Trichet said there's ``unusually high uncertainty'' about economic growth in the region, stoking speculation of a rate cut in coming months.

The difference between what banks and the U.S. government pay for three-month loans indicated corporate borrowing costs are declining. The so-called TED spread narrowed to 90 basis points today, from 2.08 percentage points two months ago.

Rate-Cut Odds

The Fed, led by Chairman Ben S. Bernanke, reduced the target for overnight loans between banks by 1.25 percentage points this year to 3 percent. It trimmed the rate by 1 percentage point in the final three months of 2007.

Traders are assigning 68 percent odds to the chance the central bank will cut its benchmark rate by 50 basis points to 2.50 percent by its March 18 meeting, futures on the Chicago Board of Trade show. Wagers on a 75 basis point reduction were at 32 percent from zero last week.

Speculation the economy will fall into a recession helped Treasuries return 2.3 percent so far this year, based on an index compiled by Merrill Lynch & Co. January was the seventh straight month of gains. The MSCI World Index of stocks was down 5 percent this week.

The world's largest economy will grow at a 0.5 percent annual rate from January through March, capping the weakest six months since the last economic slump in 2001, according to the median estimate of 62 economists polled from Jan. 30 to Feb. 7.

`Last Leg'

``It's hard to go short given all the talk of recession,'' said Roger Bridges, who oversees the equivalent of $5.37 billion of debt at Tyndall Investment Management Australia Ltd. in Sydney. ``We may be in the last leg of the rally.''

Bridges said he has long positions in Treasuries. The Tyndall International Bond Fund returned 4.81 percent last year, beating almost 60 percent of its competitors, according to data compiled by Bloomberg.

The rally in 30-year bonds helped push the yield to 4.10 percent on Jan. 23, the lowest since the Treasury Department started regular sales of the securities in 1977. The decline in long-term rates still wasn't as steep as the slide in shorter- maturity yields because of concern that Fed rate cuts and government efforts to spur the economy will spur inflation.

Two-year Treasuries yielded 1.71 percentage points less than their 10-year counterparts, within 1 basis point of the widest differential since 2004. Shorter-maturity notes are more sensitive to changes in monetary policy, while securities of 10 years or longer are influenced by prices for goods and services.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: February 8, 2008 07:30 EST