Treasuries Decline Most in a Week as UBS, Lehman Boost Capital

Treasuries fell the most in more than a week as UBS AG and Lehman Brothers Holdings Inc. said they will raise capital, spurring a global stock market advance and curbing demand for the safety of U.S. government securities.

Yields on 10-year notes climbed from close to a 4 1/2-year low as the announcements added to speculation credit-market losses will begin to diminish. UBS, Switzerland's biggest bank by assets, reported an additional $19 billion of writedowns, and Deutsche Bank AG, Germany's largest bank, said it will write down $3.9 billion of loans and asset-backed securities.

``A positive sign for the financial sector is these companies are able to add capital,'' said Andrew Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank's personal asset management division. ``Treasuries are selling off on the thought that perhaps things aren't as bad as people had thought.''

The yield on the benchmark 10-year note rose 12 basis points, or 0.12 percentage point, to 3.54 percent as of 2:14 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 3 1/2 percent security maturing in February 2018 fell 1 1/32, or $10.31 per $1,000 face amount, to 99 20/32. The yield touched 3.28 percent on March 17, the lowest since June 2003. Two-year yields rose 18 basis points to 1.77 percent.

Two- and 10-year note yields surged more than 20 basis points on March 24 as stocks rallied and Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds.

The Standard & Poor's 500 Index gained 2.6 percent today and European stock benchmarks surged.

Manufacturing Improves

Rates on three-month bills, considered among the safest securities because of their short maturities, increased 5 basis points to 1.37 percent. Rates touched 0.387 percent on March 20, the lowest level since 1954.

The difference between what banks and the U.S. government pay for three-month loans, the so-called TED spread, narrowed to 1.30 percentage points today, the least since Feb. 29.

Treasuries extended declines as U.S. manufacturing unexpectedly improved last month. The Institute for Supply Management said its factory index increased to 48.6, from 48.3 in February. The median forecast in a Bloomberg News survey was for a drop to 47.5. A reading below 50 signals contraction.

``While the manufacturing numbers are contractionary, they're not recessionary,'' said Michael Maurer, a portfolio manager in Tulsa, Oklahoma, at Axia Investment Management, which oversees $1.3 billion in fixed income assets. ``I don't think there's any value'' in Treasuries.

Swap Spreads

UBS will seek another 15 billion francs ($14.9 billion) in capital. Lehman, the fourth-largest U.S. securities firm, raised $4 billion from a share sale to quell speculation it's short of capital. Lehman rose 10 percent.

``The ability to raise capital is a huge positive,'' said Ken Anderson, a fixed-income analyst at Evergreen Investment Management Co. in Charlotte, North Carolina, who helps manage $13 billion in debt. ``It doesn't mean there won't be difficulties, but most of the bad news is out. As we see that fear go away, Treasuries start to back up.''

The difference in yield between 10-year interest-rate swaps and Treasuries fell a third straight day, to 64.5 basis points, and is down from 91 basis points on March 6. Narrowing swap spreads suggest investors' aversion to credit risk is declining. In a swap, two parties agree to exchange fixed for variable-rate payments over a set period.

The Federal Reserve has cut interest rates from 5.25 percent since September, eased access to funds for investment banks and arranged the sale of Bear Stearns Cos. to ease turmoil in financial markets and revive lending.

Japan's Fiscal Year

Traders raised bets the central bank will lower its benchmark by a quarter-percentage point on April 30 instead of a larger half-point cut. Fed funds futures on the Chicago Board of Trade show a 68 percent chance the Fed will cut rates to 2 percent, up from 48 percent yesterday. The rest of the bets are for a reduction to 1.75 percent.

Treasuries also fell today on speculation Japanese investors allocating funds for the new fiscal year starting today will avoid U.S. government debt because of a sliding dollar and declining yields. The dollar has tumbled about 10 percent this year to 100.80 yen. A Bloomberg survey of analysts forecasts that it will remain at that level this quarter.

``There sure doesn't seem to be a great deal of value in Treasuries,'' said Zane Brown, director of fixed income at Lord Abbett & Co., a mutual-fund manager that oversees $116 billion in assets, in an interview on Bloomberg Radio. ``There's got to be better value in bonds elsewhere.''

U.S. two-year notes yield about 1.2 percentage points more than similar-maturity Japanese debt, about a third of the extra yield the notes offered in October.