``All of a sudden these things are starting to get pretty cheap,'' said Wayne Wilbanks, who oversees $1.3 billion as chief investment officer of Wilbanks Smith & Thomas Asset Management LLC in Norfolk, Virginia. ``That's what was important about today. This was a good sign.'' Nov. 8 (Bloomberg) -- Treasury notes touched the highest since 2005 as Federal Reserve Chairman Ben S. Bernanke told Congress he expects the U.S. economy to ``slow noticeably.'' Traders increased bets that the Fed will cut borrowing costs a third time this year at its meeting next month. The government's $5 billion auction of 30-year Treasury bonds attracted the highest level of demand from a class of investors including foreign central banks since February. ``At this stage of the game, fear trumps everything -- fundamentals, technicals, it doesn't matter,'' said Stewart Taylor, who trades Treasuries in Boston at Eaton Vance Management, which oversees about $4 billion of taxable bonds. ``There's just a lot to be afraid of right now.'' The two-year note's yield fell 5 basis points, or 0.05 percentage point, to 3.49 percent at 4:09 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It touched 3.41 percent, the lowest since February 2005. The price of the 3 5/8 percent securities due in October 2009 rose 3/32, or 94 cents per $1,000 face amount, to 100 1/4. Interest-rate futures on the Chicago Board of Trade show a 90 percent chance that the Fed will lower its target rate for overnight lending an additional quarter-percentage point to 4.25 percent on Dec. 11. The odds were 70 percent yesterday. Bernanke said in remarks to the congressional Joint Economic Committee that the world's largest economy will lose momentum while high commodity prices and a weaker dollar may stoke inflation ``for a time.'' Oct. 31 Meeting He said the Federal Open Market Committee, which sets the benchmark U.S. interest rate, saw risks to both growth and prices at its Oct. 31 meeting, when policy makers reduced the rate by a quarter-percentage point to 4.5 percent. While FOMC members expected growth to improve later next year, ``the committee also saw downside risks to this projection'' if the housing recession spilled into consumer spending and business investment, he said. U.S. notes pared gains as stocks trimmed losses. The Standard & Poor's 500 Index fell 0.1 percent. The yield on the 10-year note decreased 3 basis points to 4.30 percent after touching 4.27 percent, the lowest since September 2005. The benchmark note yielded 81 basis points more than the two-year note, the biggest difference since March 2005. The steepening of the so-called yield curve suggests investors are favoring shorter-maturity U.S. debt in anticipation of lower interest rates. `Behind the Curve' ``The market thinks the Fed is behind the curve and will need to ease more aggressively,'' said David Glocke, who manages $32 billion worth of Treasuries in Valley Forge, Pennsylvania, at Vanguard Group Inc. The two-year note's yield is 101 basis points lower than the federal funds rate. The last time the difference was wider was on Sept. 17, the day before the Fed cut the benchmark interest rate a half-percentage point. The nine-day relative-strength index for the futures contract on the two-year Treasury note, a gauge of momentum, rose today to 74 from 45 on the day of the Fed's October meeting. A level above 70 suggests the futures contract price will fall, indicating higher yields, while a level below 30 denotes lower yields. The two-year note's yield has decreased more than 70 basis points since Oct. 12, when the relative- strength index of the contract on the note reached 29. Bank Writedowns The world's biggest banks have written down at least $40 billion as prices of mortgage-related assets plummeted because of record foreclosures, leading investors to seek the safety of government debt. Morgan Stanley, the second-biggest U.S. securities firm by market value after Goldman Sachs Group Inc., said it lost $3.7 billion in the two months through Oct. 31. ``You're not quite sure when and how much the next write- off will be,'' said Laurie Carroll, bond index manager in Pitt*****urgh at Standish Mellon Asset Management, which manages $167 billion in assets. The government's auction of 30-year bonds drew a yield of 4.666 percent, the lowest since February 2006. The average forecast of nine bond-trading firms surveyed by Bloomberg News was 4.67 percent. Indirect bidders, the class of investors that includes foreign central banks, bought 31.6 percent of the bonds, compared with 12.1 percent in August. For every $1 sold, there was $2.98 of bids, the most since August 2000. The auction was a reopening, meaning the securities sold pay interest at the same rate and mature on the same date as the 30-year bonds sold in the last sale, making them identical. The 30-year bond pared its losses after the auction before retreating, with the yield rising 3 basis points to 4.67 percent. It touched 4.57 percent on Nov. 5, the lowest since December 2006.
