Treasury 5-Year Note Yield Drops to Record as Retail Sales Fall

Treasury five-year note yields fell to record lows as an unexpected decline in retail sales for a third straight month raised concern the economic recovery is stalling and drove investors to the refuge of government debt.

Investors seeking the safest assets amid concern global growth is faltering and Europe’s sovereign-debt crisis is worsening also drove yields to all-time lows in the U.K., Canada, France, Germany and the Netherlands. Treasuries gained earlier after Germany’s top court said it will take more than eight weeks to rule on the euro-area’s bailout fund. Federal Reserve Chairman Ben S. Bernanke is scheduled to testify in Washington tomorrow amid speculation he will call for more economic stimulus.

“We’ve had very disappointing economic data in the U.S. of late, and the weak retail sales number underscores this,” said Jay Mueller, who manages about $3 billion of bonds at Wells Capital Management in Milwaukee. “Add in the fact that Europe continues to struggle with the sovereign-debt problem and recession, and that is a lot of drag on the global economy and support for Treasuries.”

The five-year note yield fell two basis points, or 0.02 percentage point, to 0.60 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 0.577 percent, less than the old mark of 0.5884 percent set June 1.

The benchmark U.S. 10-year yield fell two basis points to 1.47 percent, touching 1.4403 percent. The yield on the 30-year bond declined two basis points to 2.56 percent after reaching 2.52 percent. Both set record lows on June 1, 1.4387 percent for the 10-year and 2.5089 percent for the long bond.

‘Continued Weakness’

The 0.5 percent drop in retail sales followed a 0.2 percent decrease in May, Commerce Department figures showed today in Washington. The decline was worse than the most-pessimistic forecast in a Bloomberg News survey in which the median projection called for a 0.2 percent rise. The June decrease was broad-based, including car dealers, department stores and gasoline stations.

The Fed Bank of New York’s general economic index rose to 7.4 from 2.3 in June, another report showed, with the median forecast of 51 economists surveyed by Bloomberg News calling for an increase to 4.0. Readings greater than zero signal expansion in the so-called Empire State Index that covers New York, northern New Jersey and southern Connecticut. The last negative reading was in October.

“Everything is going to hit a record, except for the two- year note,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the Fed. “If you don’t have the consumer continuing to spend, the likelihood of continued weakness in the economy goes up. It’s not a surprise we’re rallying.”

Germany, Bernanke

The 10-year note will drop to 1.25 percent and the 30-year bond will drop to 2.25 percent over the next two months, Jersey forecast.

The Federal Constitutional Court in Karlsruhe will issue a ruling on bids to halt Germany’s participation in the European Stability Mechanism and the fiscal treaty on Sept. 12, it said today in an e-mailed statement. That’s more than two months after it held a hearing on the measures on July 10.

The delay may compound efforts to resolve the 2 1/2-year- old crisis as European leaders disagree over the details of bailout conditions, bank rescues and burden-sharing.

Bernanke is scheduled to testify before the Senate Banking Committee tomorrow, discussing the outlook for the economy and monetary policy, and he will speak before the House Financial Services Committee the following day.

‘Wrong Direction’

The Fed under Bernanke bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 to stimulate the economy under qualitative easing.

The central bank decided in June to extend a policy known as Operation Twist, where it sells short-term securities and uses the proceeds to buy longer-term debt, to $667 billion from $400 billion. The Fed purchased $1.843 billion of Treasuries maturing from August 2022 to February 2031 today as part of the operation.

“Yields are coming down as the economy is headed in the wrong direction faster than the market had anticipated” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, a primary dealer. “The market is increasingly pricing the Fed switching from Operation Twist to outright quantitative easing.”

Ten-year notes yields will fall to as low as 1.25 percent, and will close the year at 1.5 percent, according to Barclays, which previously expected the security to close out the year at 2 percent.

Vanguard’s View

Vanguard Group Inc., whose $148.2 billion of Treasuries makes it the largest private owner of U.S. debt, says the nation has until 2016 to contain its borrowings before bond investors revolt and drive up interest rates.

“In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say ‘enough is enough,’” said Robert Auwaerter, head of the Valley Forge, Pennsylvania-based Vanguard’s fixed-income group since 2003 and who this year was inducted into the Fixed Income Analysts Society Inc.’s Hall of Fame.

The U.S. has avoided the turbulence rocking Europe, where five nations have sought bailouts as their borrowing costs soared because investors boycotted their bonds. Instead, they have sought U.S. assets as a haven because of the dollar’s status as the world’s primary reserve currency, pushing note yields to record lows even though the amount of public debt outstanding has grown to $15.9 trillion from less than $9 trillion in 2007.

“There’s continued weakness in the economy,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, a primary dealer. “People still need to buy Treasuries -- there’s still demand there.”

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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