(Corrects direction of yield in fourth paragraph.)

Oct. 23 (Bloomberg) -- Treasuries fell, pushing two-year yields up from near the highest level since March, on speculation the government will announce two record auctions for next week to help fund its $700 billion bailout of banks.

Notes also dropped as U.S. stock market futures rose and cash injections by central banks showed signs of thawing the freeze in money markets, reducing the allure of the safest government assets. The U.S. may say today it will sell a record amount of notes next week to meet ``unprecedented financing needs,'' Wrightson ICAP LLC, an economic advisory firm, said.

``The market is focusing on supply and this is something that's going to keep yields higher than they would be otherwise,'' said Niels From, chief analyst in Copenhagen at Nordea Bank AB, Scandinavia's biggest lender. ``We've already seen a sharp rally in Treasuries and the market is taking a bit of a pause.''

The yield on the two-year note rose 6 basis points, or 0.06 percentage point, to 1.56 percent at 9 a.m. in London, according to BG Cantor Market Data. The 2 percent security due September 2010 dropped 3/32, or 93 cents $1,000 face amount, to 100 28/32. The 10-year yield advanced 3 basis points to 3.62 percent and the five-year yield climbed 5 basis points to 2.58 percent.

Continuing bank losses and an imminent recession are keeping investors ``bond positive,'' said From, who recommends two-year notes as the Federal Reserve is likely to cut interest rates by 50 basis points by year-end.

TED Spread

The difference between what banks and the Treasury pay to borrow dollars for three months, the so-called TED spread, narrowed today as signs attempts by policy makers to revive lending between financial institutions are working. The spread was 254 basis points, the least in a month. The Libor-OIS spread, another measure of cash scarcity, fell yesterday below 250 basis points for the first time since Sept. 30.

The Treasury will announce today that it plans to sell $38 billion of two-year notes on Oct. 28 and $27 billion of five- year notes on Oct. 30, according to Jersey City, New Jersey- based Wrightson. It will also auction $6 billion of five-year Treasury Inflation Protected Securities on Oct. 27, declining from $8 billion at the prior sale, the firm said.

``I'm bearish,'' on Treasuries, said Satoshi Arai, chief portfolio investor at Toyota Asset Management Co. in Tokyo, a unit of Japan's largest automaker with $12 billion in assets. ``I'm worried about supply.''

Budget Deficit

The U.S. government had a record $455 billion budget deficit in the fiscal year ended Sept. 30 as financial-market strains slowed economic growth and spending rose. Morgan Stanley chief economist David Greenlaw predicts the shortfall may almost quadruple to about $2 trillion.

The U.S. may spend $40 billion to help stem home foreclosures, the Wall Street Journal reported on its Web site.

Notes rose earlier as tumbling stocks fed demand for the safest assets. The MSCI Asia Pacific Index of regional shares fell 2.8 percent, after earlier dropping as much as 5.2 percent. Europe's Dow Jones Stoxx 600 Index added 0.5 percent and futures on the Standard & Poor's 500 Index were 1.6 percent higher.

Futures contracts show an 80 percent chance the Federal Reserve will cut its target for overnight bank loans by half a percentage point to 1 percent on Oct. 29 as it seeks to revive the faltering economy. The odds of a reduction of that magnitude have doubled from a week ago.

``Funds are selling any kind of risky asset,'' said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., with $58.7 billion in assets. ``They will have to cut interest rates. I am quite bullish on government bonds.''

Job Losses

Former Fed Chairman Alan Greenspan said job losses will increase. ``Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,'' Greenspan said in speech released by his office before he is scheduled to deliver it today.

Initial jobless claims in the U.S. rose to 468,000 for the seven days ended Oct. 19 from 461,000 the week before, based on the median forecast in a Bloomberg News survey of economists before the Labor Department issues the report today.

The number of people continuing to collect jobless benefits climbed to 3.715 million in the week ended Oct. 12, the most since June 2003, the survey showed.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: October 23, 2008 05:23 EDT