March 3 (Bloomberg) -- Treasuries rose for a fifth day after stocks fell in Asia and futures contracts indicated the Federal Reserve will increase the size of its interest-rate cuts to avoid a recession.

Notes also gained before private and government reports this week that economists said will show manufacturing shrank and unemployment rose. UBS AG last week forecast writedowns stemming from defaulted subprime mortgages will keep rising and American International Group Inc. reported its largest quarterly loss. Fed Chairman Ben S. Bernanke, who will speak on mortgage foreclosures tomorrow, said last week some small banks may fail.

``Panic and meltdown are the topics of the day,'' said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. ``If Bernanke cannot improve on last week's testimony, then the markets will continue the flight to quality. His statement that banks may fail is tantamount to yelling fire in a crowded theater.''

Two-year yields fell 3 basis points to 1.59 percent as of 7:26 a.m. in London, according to bond broker Cantor Fitzgerald LP. The price of the 2 percent note due February 2010 rose 2/32, or 63 cents per $1,000 face amount, to 100 25/32. A basis point is 0.01 percentage point.

Ten-year rates declined 1 basis point to 3.51 percent. The difference between two- and 10-year yields widened to 1.92 percentage points, near the most since 2004. The spread indicates greater demand for shorter maturities, those most sensitive to interest-rate changes.

`Not Bullish'

Gains in Treasuries were tempered as some traders said the securities had become too expensive.

Last week's rally in prices pushed two-year yields to about 1.4 percentage points below the Fed's target for overnight loans between banks, the biggest deficit since January.

``Even though the economic situation in the U.S. is worse than before, this level is too low,'' said Jaemin Cheong, who trades Treasuries at Industrial Bank of Korea in Seoul. ``I'm not bullish.'' He is avoiding Treasuries for now, he said.

Japan's Nikkei 225 Stock Average fell 4.5 percent today to the lowest close in more than a month. The Standard & Poor's 500 Index declined 2.7 percent and stock markets in Europe dropped at least 1 percent on Feb. 29.

Fed fund futures contracts on the Chicago Board of Trade show 68 percent odds the Fed will lower borrowing costs by 75 basis points to 2.25 percent by its March 18 meeting. A week ago, the odds were 2 percent. The central bank trimmed the target rate by 50 basis points to 3 percent on Jan. 30, following a 75-basis-point reduction on Jan. 22.

Manufacturing Index

The Institute for Supply Management's factory index fell to 48 in February from 50.7 the previous month, according to the median forecast of economists surveyed by Bloomberg News before the report today. A reading of 50 is the dividing line between expansion and contraction.

The jobless rate rose to 5 percent last month from 4.9 percent, another Bloomberg survey showed prior to the Labor Department report March 7. The economy added 25,000 jobs, compared with a monthly average of 124,000 for the past two years, the survey showed.

``Manufacturing, employment and financial companies are deteriorating,'' said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., a unit of Japan's second-largest brokerage. ``There's some room for yields to decline.''

The two-year yield will fall to 1.4 percent by the end of March, Nagai said. He changed his earlier forecast for an increase to 1.8 percent.

Bernanke Speech

Bernanke, speaking on Feb. 28, before a congressional panel, also tried to ease lawmakers' concerns that interest-rate cuts will lead to faster inflation. His speech tomorrow will be before a group of bankers in Orlando, Florida.

Treasuries added to gains from last week, when two-year yields declined to the lowest level since April 2004, as mounting losses in credit markets and the slowing U.S. economy drove investors to the relative safety of government debt.

Two- and 10-year notes posted their biggest weekly gains since October as UBS predicted banks, brokers and insurers are likely to face at least $600 billion of losses.

More than $181 billion in losses linked to subprime- mortgage loans have made banks around the world less willing to lend. These losses, triggered by the worst housing recession in a quarter of a century, have prompted the Fed to cut rates to 3 percent from 5.25 percent since September.

Increased Losses

Bond insurer MBIA Inc. said last week that losses will increase significantly, and AIG, the world's biggest insurer, reported the biggest quarterly loss in its 89-year history.

The risk of Japanese and Australian companies defaulting on their debt rose to records today, based on credit-default swaps, contracts providing insurance in case borrowers fail to pay. The Markit iTraxx Australia Series 8 Index climbed 9.5 basis points to 1.61 percentage points, according to Citigroup Inc.

Investor sentiment toward Treasuries was mixed last week, Ried, Thunberg & Co. said in its weekly survey of fund mangers. An index measuring attitudes to Treasuries through the end of March rose to a ``neutral'' 50 for the seven days to Feb. 29, from 49 a week before. A number below 50 indicates investors expect prices to fall.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Aaron Pan in Hong Kong at Apan8@bloomberg.net.

Last Updated: March 3, 2008 02:45 EST