March 7 (Bloomberg) -- Treasury 10-year notes posted the year’s biggest weekly gain as stocks slid amid concern over the financial system’s stability and a third bailout of American International Group, increasing the refuge appeal of U.S. debt.

Ten-year note yields fell the most since December as the Standard and Poor’s 500 Index tumbled to a 13-year low. Citigroup Inc. fell below $1 and General Electric Co. fell below $6 for the first time since 1991 on concern its finance unit may require more capital.

“The flight to quality trade came back,” said Jonathan Lewis, founding principal of New York-based Samson Capital Advisors LLC, which manages more than $4 billion in fixed income. “The company-specific news that came out all week long made people worry about the fragility of U.S. corporations.”

The benchmark 10-year note’s yield dropped 14 basis points, the most since the five days ending Dec.19, to 2.88 percent, according to BGCantor Market Data. The 2.75 percent security maturing in February 2019 rose 1 5/32, or $11.56 per $1,000 face amount, to 98 28/32. Thirty-year bond yields slipped 15 basis points this week, the most since the five days ended Jan. 16.

“If you buy U.S. Treasuries, then there’s at least a fighting chance that you’ll get your money back,” Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of 16 primary dealers required to bid at Treasury auctions, said on March 5.

‘Tug-of-war’

The Treasury will auction a record $34 billion of three- year notes on March 10, $18 billion in 10-year notes the next day and $11 billion in 30-year bonds March 12. The auctions follow $94 billion of note sales in the last week of February as the nation embarks on the sale of more than $2 trillion in debt to steer the nation out of recession.

A government report yesterday showed the economy shed 651,000 jobs and the jobless rate surged to 8.1 percent, more than forecast and the highest level in over 25 years.

“You have this continuous tug-of-war between economic data that is trying to move the Treasury market higher, and then you have that lingering supply which has been the thorn in the Treasury market’s side,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “The supply overall has been winning.”

U.S. securities will drop in the second quarter, pushing the 10-year yield to 3.25 percent by mid-year, Merrill Lynch economists including David Rosenberg in New York wrote in a note on March 5.

“The impact of the relentless flood of Treasury supply,” will help increase borrowing costs, the report said. Merrill is part of Bank of America Corp., another primary dealer.

Fed Purchases

President Barack Obama’s administration is seeking congressional approval for a budget of $3.55 trillion for the fiscal year beginning in October. His budget for the year that ends Sept. 30 would result in a record $1.75 trillion deficit.

Policy makers have decided for the present time not to expand the range of securities purchased by the Fed to longer- term Treasuries, Federal Reserve President William Dudley said after a speech in New York to the Council on Foreign Relations.

“At this point in time the Fed has judged that buying long-term Treasuries is not the most efficient means of easing financial conditions,” Dudley said.

Bonds rallied March 5 on speculation central banks may increase asset purchases after the Bank of England said it would buy sovereign and corporate debt.

Losses in Treasuries this year have been led by long-term debt as investors have become skeptical about the Fed’s willingness to buy Treasuries. The 30-year Treasury bond has plunged 13 percent since December.

Bonds Versus Stocks

Central bank chairman Ben S. Bernanke first talked about the possibility of Fed purchases of longer-term Treasuries on Dec. 1. At its January meeting, Fed officials decided such purchases would “only modestly improve” credit markets.

Thirty-year Treasuries are returning more than stocks for the first time since Jimmy Carter was president. A three-decade advantage of holding stocks reversed after $36 trillion was erased from equity markets since October 2007.

Treasury 30-year debt enjoyed their best year since at least 1988, giving investors a return of 41.2 percent in 2008, according to Merrill’s indexes. The Standard & Poor’s 500 Index plunged 38 percent, the steepest slide since 1937.

The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, widened to 1.10 percentage points from 91 basis points on Feb. 10. The spread averaged 0.27 percentage point from 2002 through 2006.

Consumer Prices

Inflation expectations are shrinking, yields indicate. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, was 84 basis points yesterday, compared with 137 basis points on Feb. 9. The figure has averaged 225 basis points for the past five years.

Consumer prices were unchanged in the 12 months ended Jan. 31, the Labor Department said Feb. 20, indicating bond investors aren’t losing anything to inflation. The so-called real yield was 2.98 percent, near the highest since 2006.