July 24 (Bloomberg) -- The benchmark 10-year Treasury yield fell to the lowest in more than seven weeks as concerns about riskier credit markets lend support to U.S. debt.

Treasuries added to gains as a decline in stocks accelerated. Countrywide Financial Corp., the biggest U.S. mortgage lender, reported declining earnings and reduced its 2007 forecast, suggesting further housing weakness. Investors cited concerns tighter lending standards may block companies seeking buyout financing.

``It's a subprime to corporate debt type of phenomena that's freezing buyers and making for an extreme backup in terms of supply,'' Bill Gross, manager of the world's largest bond fund, said in an interview. ``That has significant implications for the existing deals that have been predicated on cheap financing.'' He manages Newport Beach, California-based Pacific Investment Management Co.'s $102 billion Total Return Bond Fund.

The yield on the 10-year note fell almost 5 basis points, or 0.05 percentage point, to 4.90 percent at 5:23 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent note due May 2017 rose 11/32, or $3.44 per $1,000 face value, to 96 7/8. The yield is the lowest since June 1.

The two-year note's yield fell 5 basis points to 4.73 percent. Prices move inversely to yields.

The gap between yields on two-year Treasuries and 10-year notes was little changed at 17 basis points. It had been as wide as 22 basis points on June 22, the most since October 2005.

`Weighing on Stocks'

``The collapse of leveraged loans is weighing on stocks,'' said Andrew Brenner, co-head of structured products and emerging markets in New York at Man Securities Inc. That's ``leading to a flight to quality in the Treasury market.''

Yields on 10-year securities were below 5 percent for a third day. The difference between yields on 10-year Treasuries and interest-rate swaps widened to 70.5 basis points, the most in more than five years. Wider swap spreads are associated with concern over higher borrowing costs for companies.

In an interest-rate swap, borrowers exchange cash flows derived from fixed- and floating-rate obligations to hedge risk.

Investors are concerned diminished access to leveraged loans may endanger Cerberus Capital Management LP's $18 billion bid for DaimlerChrysler AG's Chrysler unit. ``The Chrysler deal may fail,'' Brenner said. The loan market may not collapse, ``but it's going to get ugly.''

Junk Bonds

The perceived risk of owning U.S. junk bonds surged today to the highest since May 2005, according to credit-default swap traders who bet on corporate creditworthiness.

The CDX North America High-Yield Index of 100 companies with non-investment grade ratings dropped as much as 0.5 to 92.75 earlier today, according to broker Phoenix Partners Group in New York. A decline in the index signals deterioration in investor confidence in junk bonds.

``The market's had to trade on emotion without any major macro data,'' said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. ``Everything else is subordinate to concerns about credit.''

Fed funds futures contract prices suggest traders see a 9 percent chance the Federal Reserve will cut its overnight lending rate between banks a quarter-percentage point to 5 percent at its Sept. 18 meeting.

Treasury Auction

The Treasury Department sold $6 billion in 20-year inflation-protected securities, or TIPS, at a yield of 2.6 percent, lower than the 2.64 percent forecast in a Bloomberg News survey before the auction. The yield on the securities fell to 2.57 percent in post-auction trading.

Direct bidders bought $924 million, or 15 percent of the sale compared with a more typical 1.1 percent, said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, one of 21 primary dealers required to bid on Treasury auctions.

``Someone really wanted to get TIPS exposure,'' said George Goncalves, chief Treasury and agency strategist with Morgan Stanley, also a primary dealer. ``This definitely displays there's a stealth concern for long-term inflation.''

The auction was a reopening, meaning that the debt pays interest at the same rate and matures on the same date as $8 billion of 20-year securities sold in January.

`Subprime Concerns'

Overseas investors may view ``the subprime concerns as a reason to switch from U.S. credit to U.S. Treasuries as a safe haven,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., another primary dealer.

For every dollar sold there were $2.23 in bids, compared with $2.24 at the reopening in July 2006. The January auction drew $2.05 in bids per dollar sold.

Indirect bidders, the class of investors that includes foreign central banks, bought 62 percent of the sale compared with 55.5 percent in the six sales before today.

The government will auction $18 billion of two-year notes tomorrow and $13 billion of five-year notes on July 26.

The two-year note may yield 4.93 percent by Dec. 31, according to the median forecast of economists surveyed by Bloomberg. The most recent predictions are given heavier weightings.

The Standard & Poor's 500 Index dropped 30.53, or 2 percent, to 1511.04. The Dow Jones Industrial Average fell 226.47, or 1.6 percent, to 13,716.95. The Nasdaq Composite Index declined 50.72, or 1.9 percent, to 2639.86.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

Last Updated: July 24, 2007 17:27 EDT