Nov. 10 (Bloomberg) -- Treasuries fell for a second day before the U.S. sells $55 billion in notes and bonds this week, its biggest round of sales since 2004.

Two-year notes interrupted a rally that sent yields to the lowest since March after China announced a 4 trillion yuan ($586 billion) economic stimulus plan, helping lift Asian stocks and boosting demand for higher-yielding assets. The U.S. will start its so-called quarterly refunding with a $25 billion auction of three-year notes today.

``The increase in supply, and we're expecting more to come, will be a negative for the Treasury market,'' said Minako Iida, a strategist for non-yen debt at Barclays Capital Japan Ltd. in Tokyo. ``The short end of the market is too expensive.'' Barclays' U.S. arm is one of the 17 primary dealers required to bid at government auctions.

Two-year note yields climbed 6 basis points to 1.39 percent as of 12:19 p.m. in Tokyo, according to BGCantor Market Data. The price of the 1.5 percent security maturing in October 2010 fell 3/32, or 94 cents per $1,000 face amount, to 100 6/32.

The yield will climb to 1.5 percent by year-end, Iida said. Ten-year rates rose 4 basis points to 3.83 percent. A basis point is 0.01 percentage point.

The MSCI Asia Pacific Index of regional shares advanced 3 percent, snapping a two-day decline.

The U.S. is reviving its three-year note after an 18-month suspension as it increases debt auctions to pay for the Treasury Department's $700 billion bank-rescue plan. The government also plans to sell $20 billion in 10-year notes Nov. 12, and $10 billion in 30-year bonds Nov. 13.

The prior three-year sale on May 7, 2007, was for $14 billion. It drew a yield of 4.574 percent and investors bid for 2.39 times the amount of debt on offer. The security yielded 1.22 percent today.

Recession Fuels Demand

Government securities returned 5.6 percent this year and 9.06 percent for all of 2007, according to Merrill Lynch & Co.'s U.S. Treasury Master index. Demand for the safest assets is being fueled by the risk of a global recession after a U.S. housing slump led to a seizure in credit markets.

American Express Co., the largest U.S. credit-card company by purchases, said on Oct. 30 it would eliminate 10 percent of its workforce, or about 7,000 people.

It will take at least 18 months to turn around the U.S., even if President-elect Barack Obama ``does everything perfectly,'' Nobel Prize-winning economist Joseph Stiglitz wrote in the Washington Post yesterday.

China plans to use the funds allocated for growth programs by the end of 2010 for low-rent housing, infrastructure in rural areas, as well as roads, railways and airports.

Weak Growth

``From a tactical perspective, the market needs to be cheapened up to take down the supply,'' said Robert Tipp, chief investment strategist for fixed income in Newark, New Jersey, at Prudential Investment Management. ``Once you get through the refunding, the market represents pretty good value,'' given ``the prospect of weak growth,'' he said last week.

Treasury two-year notes, the worst-performing U.S. government securities in the past year, may beat longer-term debt as the Federal Reserve cuts interest rates to pull the U.S. economy out of a nosedive.

The difference between yields on two- and 10-year notes, known as the yield curve, may widen to a record 3 percentage points from 2.44 percentage points now, according to strategists at Morgan Stanley and Credit Suisse Group AG.

Steepening Curve

Shorter-term yields are falling as investors bet the Fed will reduce its target for overnight loans between banks to avert a prolonged recession. A series of nine cuts in the past 14 months lowered the rate to 1 percent from 5.25 percent. Ten-year yields are likely to rise as the government borrows more heavily, the strategists said.

The difference between two- and 10-year yields reached an all-time high 2.74 percentage points in August 2003 after the Fed finished a series of 13 rate cuts. Historically, the gap is steepest as the central bank stops lowering borrowing costs and investors anticipate an economic recovery, according to Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. LLC in New York.

``As we get into the teeth of this slowdown toward the end, you will see the yield curve steeply sloped,'' said Francis Mustaro, a money manager in New York at J&W Seligman & Co., which oversees about $15 billion. ``It's classic.''

Crescenzi, author of ``The Strategic Bond Investor,'' wrote that the yield curve ``is the closest thing the bond market has to a crystal ball.''

Yields indicate banks are less willing to lend than they were at the start of 2007, before the credit crisis.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.01 percentage points from 0.18 percentage point in February 2007.

The spread increased to 4.64 percent on Oct. 10, the most since Bloomberg began compiling the data in 1984.

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

Last Updated: November 9, 2008 22:41 EST