Sept. 19 (Bloomberg) -- Treasuries tumbled, sending two- year notes yields up the most in 23 years, after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke announced plans to help stem a collapse in financial- market confidence.

The decline pushed the two-year note yield up from the lowest level since mid-March, as investors abandoned the relative safety of government debt for stocks and higher returning assets. The plan, which would include taking on troubled assets of financial companies and insuring money-market mutual funds against losses, may result in $1.2 trillion in new debt, according to two people briefed by congressional staff.

``We have stepped back from the abyss,'' said Jerry Webman, head of fixed income at Oppenheimer Funds Inc. in New York, which manages about $220 billion. ``We're backing off from the really extreme trade that went into Treasuries.''

Two-year note yields climbed 47 basis points, or 0.47 percentage point, the most since February 1985, to 2.19 percent at 11:59 a.m. in New York, according to BGCantor Market Data. It had dropped to 1.36 percent yesterday. The 2.375 percent security due August 2010 dropped 28/32, or $8.75 per $1,000 face amount, to 100 11/32.

Yields on 10-year notes increased 24 basis points to 3.78 percent, while climbing 17 basis points to 4.36 percent on 30- year bonds.

U.S. stocks surged, extending the biggest two-day global rally since 1970, with the Standard & Poor's 500 Index increasing 4 percent.

`Real Difference'

Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon to shore up banks. The Fed said it will lend to banks to meet demands for redemptions from money-market mutual funds and will buy debt of the largest mortgage-finance firms, Fannie and Freddie, from primary dealers to spur liquidity.

``We're talking hundreds of billions,'' Treasury Secretary Henry Paulson said in a press conference. ``This needs to be big enough to make a real difference and get to the heart of the problem.''

Options U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff.

`No Treasuries Shortage'

``I hesitate to call this crisis finished,'' said Axel Blase, a fund manager in Frankfurt at Invesco Asset Management, which manages about $160 billion in fixed-income products. ``In the medium-term, we will see lower yields. This is an opportunity to buy the market.''

The deficit will climb to a record $565 billion in the fiscal year that starts Oct. 1, Goldman Sachs Group Inc. economists Ed McKelvey and Alec Phillips wrote to clients on Sept. 10. The world's biggest securities company increased its estimate by more than $100 billion.

The Congressional Budget Office had projected the figure will be $438 billion next year versus $407 billion in 2008.

``Obviously the government is taking this stuff onto its balance sheet so there won't be a shortage of Treasuries over the next few years,'' said Michael Atkin, head of sovereign research at Putnam Investments in Boston. ``The fact that we have stepped back from the edge of the cliff doesn't mean everything is wonderful.''

Three-Month Bills

Global finance firms have reported more than $515 billion in credit losses and writedowns since that start of 2007 linked to the slump in the U.S. housing market and slowing economic growth.

Rates on three-month bills remained below 1 percent as many investors still sought the safest assets after the bankruptcy of Lehman Brothers Holdings Inc. and the U.S. government takeover of insurer American International Group Inc. and Fannie and Freddie. Three-month bills rose 65 basis points to 0.72 percent. They touched 0.02 percent on Sept. 17, the lowest since World War II.

``How does the government get the message to Mr. and Mrs. America, `don't panic?''' said Michael Cheah, who manages $2 billion in bonds at AIG SunAmerica Asset Management in Jersey City, New Jersey. ``Watch the dollar and watch bills, because these will tell us whether people believe that this is going to help.''

Flight to Safety

Corporate short-term borrowing had slumped the most since December this week as investors flocked to the safety of government debt. The U.S. commercial paper market fell $52.1 billion, or 2.9 percent, to a seasonally adjusted $1.76 trillion for the week ended Sept. 17, the Fed said yesterday. Investors pulled a record $89.2 billion from funds on Sept. 17, according to data compiled by the Money Fund Report, a newsletter based in Westborough, Massachusetts.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, rose to 3.13 percent yesterday, up more than 2.00 percentage points from a low of 1.04 percent Sept. 5.

The pace of U.S. economic expansion will slow to 0.55 percent in the fourth quarter, a Bloomberg survey of banks and securities companies shows. The growth rate was 3.3 percent in the second quarter, according to the most recent figures available from the Commerce Department.

Futures contracts on the Chicago Board of Trade show 44 percent odds the Fed will cut its 2 percent target rate for overnight bank lending a quarter-percentage point at its meeting on Oct. 29. The odds were zero percent a month ago.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net

Last Updated: September 19, 2008 12:02 EDT