Treasuries gained, poised for a weekly increase, as traders pared bets the Federal Reserve will raise interest rates this year amid signs stress is returning to the financial sector. The cost of protecting corporate bonds from default rose to the highest in two months. Lehman Brothers Holdings Inc. forecast that Fannie Mae and Freddie Mac, the two largest sources of U.S. home loans, may lose money in the second quarter as the housing market deteriorates, and Merrill Lynch & Co. said regional bank stocks are in ``capitulation mode.'' Oil rose after the New York Times reported an Israeli military exercise last month appeared to be a rehearsal for an attack on Iran's nuclear facilities.
Traders see a 90 percent chance the Fed will leave its 2 percent target rate for overnight lending between banks unchanged at its meeting on June 25, up from 78 percent a week ago, futures on the Chicago Board of Trade show. The rest of the bets are for a quarter-percentage point increase.
U.S. stocks fell, extending a third straight weekly drop for the Standard & Poor's 500 Index, which declined 1.3 percent, after analysts said worsening credit losses will reduce earnings at financial companies. Europe's Dow Jones Stoxx 50 Index lost 1.2 percent.
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