Nov. 27 (Bloomberg) -- Treasury two-year notes fell the most in almost a month after Abu Dhabi agreed to invest $7.5 billion in Citigroup Inc. and the Federal Reserve pledged funds needed to avoid a year-end shortage of capital.

The promises calmed investors who drove two-year yields to 2.87 percent yesterday, the lowest since December 2004. The Fed said yesterday it will provide funds to the money markets, while the Citigroup purchase may help the world's biggest bank replenish capital hurt by subprime mortgage-related writedowns.

``The buying pressure on Treasuries has gone away,'' said Christoph Kind, a Frankfurt-based fund manager at Frankfurt Trust Investment GmbH, which manages about $9 billion in fixed- income assets. ``The news about Citigroup restored confidence a little. There's more value left in other bond markets.''

The yield on the two-year Treasury climbed 8 basis points to 2.97 percent as of 6:14 a.m. in New York, according to bond broker Cantor Fitzgerald LP, after rising to as high as 3.05 percent earlier. Ten-year yields rose 3 basis points to 3.87 percent, narrowing the spread with two-year Treasuries to 88 basis points, from 1.01 percentage point last week.

Notes also slid on speculation yields at the lowest since 2004 will curtail demand at government debt auctions this week. The Treasury will offer $20 billion of two-year notes tomorrow and $13 billion of five-year securities Nov. 29.

`Getting Whacked'

``Treasuries are getting whacked,'' said Kenny Borowicz, a bond-futures broker at MF Global Singapore Ltd., part of the world's largest broker of exchange-traded futures and options contracts. Abu Dhabi's purchase ``may restore investor confidence in Citigroup and perhaps in the banking sector and the economy in general.''

The price of the 3 5/8 percent security due October 2009 fell 3/16, or $1.88 per $1,000 face amount, to 101 5/32.

The ``TED'' spread, or the difference between three-month bill yields and the London interbank offered rate, narrowed 1 basis point to 1.94 percentage points, still near the widest since Aug. 20. The decline indicates easing willingness among banks to lend to each other. Three-month Libor still rose for a 10th day today to 5.06 percent, the highest in four weeks, the British Bankers' Association said today

``Liquidity is really drying up at the moment and that's a very powerful driver of bond-market sentiment,'' said Don Smith, a fixed-income strategist at ICAP Plc in London. ``Rate expectations are plunging and continuing lower on the back of that. The environment remains fundamentally bullish on the bond market.''

Fed Cut

Futures on the Chicago Board of Trade show traders have started to bet that the Fed will lower its target rate for overnight lending between banks by a half-percentage point on Dec. 11. Traders see an 88 percent chance rates will be reduced to 4.25 percent, and 12 percent odds of a cut to 4 percent.

A technical indicator measuring the momentum of changes in a security showed yields may climb further. The 14-day relative- strength index for the yield was at 29 from 32 a week ago. A figure below 30 indicates yields will increase.

Investors traded $6.7 billion of two-year Treasuries today and $5.3 billion of five-year notes, according to ICAP, the world's largest broker of transactions between banks. About $4.4 billion of 10-year securities changed hands.

Treasuries slid as the MSCI Asia Pacific Index of regional shares trimmed a 2.1 percent loss to 0.1 percent.

The Fed's New York branch said in a statement yesterday that it plans a series of repurchase agreements, starting with an $8 billion operation tomorrow. It follows the European Central Bank's commitment last week to make extra cash available to counter volatility in money markets.

Treasury Returns

Two-year yields, among the most sensitive to interest-rate expectations, have tumbled more than 2 percentage points from 2007's high set in June as credit market losses helped lead the Fed to cut interest rates.

An index of Treasuries of all maturities returned 9.5 percent so far this year, headed for their best performance since 2002, according to Merrill Lynch & Co. Banks and other financial companies have reported more than $50 billion of mortgage-related losses and writedowns, feeding expectations of a Fed cut next month.

Two-year yields declined yesterday after Goldman Sachs Group Inc. analysts said HSBC Holdings Plc may have to set aside a further $12 billion for bad debts.

Fed rate cuts may lead to economic growth and inflation later, making these yields unattractive, said Satoshi Okumoto, who helps oversee the equivalent of $53.1 billion in Tokyo at Fukoku Mutual Life Insurance Co., the eighth-biggest Japanese life insurer. ``This very low level of Treasury yields isn't justified,'' he said.

Fukoku Mutual's Treasury portfolios have shorter durations than the benchmarks it uses to gauge performance, he said. Duration measures a portfolio's sensitivity to changes in interest rates, and shorter figures indicate a more bearish position.

The yield will rise to 3.65 percent by year-end, a Bloomberg News survey of economists shows, with the most recent forecasts given the heaviest weightings.

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: November 27, 2007 06:58 EST