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The U.K. pledged 781.2 billion euros ($1.1 trillion) to restore confidence in its lenders, the most of any of the 27 EU members, according to a May 26 document prepared by officials from the European Commission, the European Central Bank and member states and obtained by Bloomberg News. Denmark, where 13 of the country’s 140 banks were bailed out by the central bank or bought by rivals last year, committed 593.9 billion euros.

The measures, designed to save banks and revive economic growth, surpass Germany’s $3.3 trillion economy, the region’s biggest. They also helped to widen the Euro area’s budget deficit to the most in three years in 2008. The commission, the EU’s executive arm, is seeking to create the first EU-wide agencies with rule-making powers to monitor risk in the economy after the crisis led to $460 billion of losses and writedowns across the continent, according to data compiled by Bloomberg.

Principal is coming due on the so-called partial interest- only loans as an 18-month-old recession saps demand for commercial real estate. About $179 billion of such loans were written between 2005 and 2007 and bundled into bonds, according to data from Bank of America Merrill Lynch.

With soaring vacancies and falling rents, some cash- strapped borrowers will fail to cover the higher costs, said Andy Day, a commercial mortgage-backed securities analyst at Morgan Stanley in New York. About 87 percent of mortgages sold as securities in 2007 allowed owners to put off paying principal for several years or until maturity, compared with 48 percent in 2004, Morgan Stanley data show.

“The worst is yet to come,” MetLife Inc. Chief Investment Officer Steven Kandarian said yesterday in a Bloomberg Television interview. “Typically there’s a lag between when the economy softens and when the defaults actually occur.”

Investors have already seen prices on top-rated senior debt drop below 70 cents on the dollar from 95 cents a year ago, according to Aaron Bryson, a commercial mortgage-backed securities analyst at Barclays Capital in New York.

Just a Stopgap

Interest-only mortgages were designed as a stopgap to allow owners to do renovations and absorb other costs. Owners delay paying principal for the first several years, lowering their initial monthly expenses. Partial interest-only loans allow for postponement of principal payments for a portion of the term. Full-term interest-only deals require the principal at maturity.

Loans that postpone principal payments had become the norm by the time the commercial-mortgage bond market peaked two years ago, said Frank Innaurato, managing director of analytical services at Realpoint LLC, a Horsham, Pennsylvania-based credit- rating service.

“The proliferation of interest-only loans was symptomatic of the loose underwriting standards of that time,” Innaurato said. “Borrowers were taking advantage of the best terms possible.”

“Treasuries have backed up enough that they offer respectable value,” said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc., the world’s largest broker of exchange-traded futures.

The bonds drew a yield of 4.72 percent at the auction, the highest since August 2007. Benchmark 10-year note yields reached 4 percent earlier for the first time since October on concern the budget deficit and a falling dollar will prompt investors to reduce holdings of U.S. debt.

The yield on the 10-year note fell nine basis points, or 0.09 percentage point, to 3.86 percent, after climbing as high as 4.0038 percent, at 1:03 p.m. in New York, according to BGCantor Market Data. The yield last touched 4 percent on Oct. 16. The 3.125 percent security maturing in May 2019 rose 23/32, or $7.19 per $1,000 face amount, to 93 31/32.

Eight bond-trading firms surveyed by Bloomberg News had forecast a yield of 4.80 percent. The sale is a reopening of the $14 billion 30-year bond auction on May 7, which drew a yield of 4.288 percent.

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Treasuries tumbled 6.5 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion and raising the risk of inflation. Ten-year notes rose as the highest yields in seven months lured investors.

“Clearly the supply issue is having a far-reaching impact,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “Virtually all can be attributed to the supply issue. The economic data has not been that bond bearish.”

Borrowing Costs

The rise in yields is undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing costs and pull the economy out of the worst recession in five decades.

Ten-year yields have risen over 140 basis points since the Fed announced its $300 billion, six-month Treasury purchase program on March 18. The average 30-year mortgage rate jumped to 5.59 percent from 5.29 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The 15-year rate averaged 5.06 percent.

Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds were at 5.07 percent, according to data compiled by Bloomberg. That’s the highest since Nov. 24, the day before the U.S. central bank announced its plans to buy home-loan bonds, and up from 3.94 percent on May 20.

Policy makers “now need to accept that they can’t control the back end and need to focus on the front end,” said Dominic Konstam, head of interest-rate strategy in New York at Credit Suisse Group AG, another primary dealer.

Big Leagues

Russia and Brazil announced plans yesterday to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said.

“They’re saying they are part of the big leagues,” Alberto Ramos, an economist in New York at primary Goldman Sachs Group Inc.. “They’re not buying IMF bonds to diversify reserves. They want to be seen as having a large voice” in global markets, he said.

The health ministry said the United Nations agency was raising its pandemic flu alert to the top phase 6 on a six-point scale, indicating the first influenza pandemic since 1968 is under way.

“Today… the Minister for Elderly Care and Public Health Maria Larsson has called a press conference following a decision by the WHO to raise the pandemic level to six for the influenza A H1N1 virus,” the ministry said in a statement.

WHO Director-General Dr Margaret Chan was due to give a news conference on the influenza (A) H1N1 pandemic at 1600 GMT, following a meeting of the WHO’s emergency committee of flu experts, and WHO spokesmen declined to comment before that.

The move will trigger heightened health measures in the WHO’s 193 member states as authorities brace for the worldwide spread of the virus that has so far caused mainly mild illness.

The move to phase 6 reflects the fact that the disease, widely known as swine flu, was spreading geographically, but not necessarily indicate how virulent it is.

“Phase 6, if we call a phase 6, doesn’t mean anything concerning severity, it is concerning geographic spread … Pandemic means global, but it doesn’t have any connotation of severity or mildness,” WHO spokesman Gregory Hartl said.

Concerns about the growth of government borrowing forced the US Treasury to give investors in an auction of $19bn in 10-year notes a yield of 3.99 per cent – 4 basis points higher than the yield available before the auction. That constituted the biggest yield markup since a 10-year auction in May 2003, said Morgan Stanley. Yields on the 10-year note, the benchmark rate for US mortgages, hit a high of 4 per cent during the day, up from 3.6 per cent a week ago.

A preliminary report last month had said gross domestic product declined at a 15.2 percent pace.

The slight improvement in the revision released Thursday does nothing to change the reality that Japan’s economy is in its steepest recession since the end of World War II.

Exports have plunged, companies have slashed production and families are spending less. The economy has contracted for four straight quarters, including a revised 13.5 percent in the October-December period.

The first quarter revision stemmed from less severe declines in capital expenditures, the government said. Business investment in factories and equipment fell a revised 8.9 percent from the previous quarter, while consumer spending slipped 1.1 percent.

Japan’s first quarter results are also markedly worse than those of other major economies, including an annualized 5.7 percent contraction in the U.S.

Still, there is burgeoning room for optimism. Analysts generally agree that Japan’s economy probably hit bottom in the first quarter, and recent signs point to a GDP rebound in the April-June period. The decline in exports is slowing, and industrial production surged in April.

Japanese manufacturers in particular are benefiting from expanding demand from China. The impact of government stimulus measures, including cash handouts and consumer incentives to buy “green” products, are also starting to give the economy a boost.

Toyota Motor Corp. said last month that it is revving up production of its hit Prius to meet better-than-expected demand for the latest version of the world’s top-selling hybrid.

But data Wednesday on April machinery orders suggests that overall, companies remain cautious when it comes to spending.

Japan’s core machinery orders, a closely watched indicator of corporate capital spending, fell 5.4 percent from March to 688.8 billion yen ($7.1 billion). The result marked the lowest value since April 1987 and could mean that a recovery may be some time off.

Japan has been pummeled by the unprecedented collapse in global demand triggered by the U.S. financial crisis. Its exports plummeted a record 26 percent in the first quarter from the fourth quarter, the government said, unchanged from its preliminary report.

Major exporters such as Toyota and Sony Corp. have reacted by reducing shifts, suspending factory lines and slashing workers. The jobless rate jumped to 5 percent in April, the highest in six years.

Underscoring the severity of California’s cash crisis, Controller John Chiang, who has previously warned the state’s government risks running out of cash without a budget deal, said revenues in May fell by $1.14 billon, or 17.7 percent, from a year earlier.

Additionally, the revenues of the government of the most populous U.S. state fell short of estimates in Schwarzenegger’s budget plan by $827 million, Chiang said.

He warned California’s state government is speeding toward a financial disaster unless officials act urgently to balance its books.

“Without immediate solutions from the governor and legislature, we are less than 50 days away from a meltdown of state government,” Chiang said in a statement.

California’s revenues have been on a dramatic slide as a result of recession, rising unemployment and its lengthy housing downturn.

The state’s revenues from personal income taxes tumbled by 39.3 percent in May from a year earlier while revenues from corporate taxes fell by 52.1 percent and revenues from sales taxes sagged by 7.6 percent, according to a report released by Chiang’s office.

“A truly balanced budget is the only responsible way out of the worst cash crisis since the Great Depression,” Chiang, a Democrat, said.

DUELING BUDGET CONCEPTS

Schwarzenegger, a Republican, has proposed filling the state’s budget gap with deep spending cuts, borrowing from local governments and by scrapping some state programs, including its welfare program.