Budget deficit, Merrill and housing

Treasuries fell on speculation Merrill Lynch & Co.'s sale of securities linked to mortgages may signal that losses at banks and brokers are reaching a peak, reducing the haven appeal of government debt.

U.S. debt rallied yesterday as stocks slid and the International Monetary Fund said there's no end in sight to the U.S. housing slump. Two-year note yields fell 14 basis points, the most since July 14, to 2.57 percent. Treasuries underperformed European bonds and emerging market bonds as investors demanded higher yields on U.S. notes to compensate for the prospect of increased debt issuance.

The U.S. budget deficit will grow to a record $482 billion next year, the Bush administration said yesterday. Government borrowing needs will rise to $171 billion in the three months to Sept. 30, $59 billion more than predicted in April, the Treasury said in a statement in Washington yesterday. The budget shortfall reflects dwindling tax receipts because of the economic slowdown, the cost of a $168 billion stimulus package and spending on the wars in Iraq and Afghanistan.