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May 17 (Bloomberg) -- Treasury 10-year yields fell to almost the record low reached in September as reports suggested the U.S. economic recovery is faltering and as investors sought a haven from Europe’s worsening debt crisis.

Yields on the benchmark security dropped to as low as 1.6886 percent, the least since touching 1.6714 percent on Sept. 23. Spanish banks face credit-ratings downgrades by Moody’s Investors Service as the government denied there was a run on deposits at Bankia SA, the ailing lender it’s taking over. The U.S. sold $13 billion of 10-year Treasury Inflation-Protected Securities a record negative yield.

“It’s return of capital versus return on capital; this is the environment,” said Richard Schlanger, a money manager at Pioneer Investments in Boston, which invests $20 billion in fixed income. “The news continues to get more and more dire out of Europe. Some of the economic numbers this morning were disappointing.”

The 10-year yield fell six basis points, or 0.06 percentage point, to 1.70 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due May 2022 gained 18/32, or $5.63 per $1,000 face amount, to 100 15/32.

U.S. 10-year yields traded at the least since Sept. 23, when it reached a record low after a Group of 20 finance chiefs failed to ease concern the global economy was on the brink of another recession.

The 30-year yield fell 11 basis points to 2.79 percent, and reached 2.78 percent, the lowest since Dec. 19.

’Strong Demand’

“There seems to be strong demand for flight-to-quality assets in the Treasury market as evidenced by the surge lower in longer-dated yields,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The Federal Reserve bought $1.84 billion in bonds due from February 2036 to November 2041 today as part of a program known as Operation Twist. The purchases are part of the central bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to hold down borrowing costs.

The Treasury said it would sell $99 billion in coupon debt next week, including $35 billion of two-year and five-year securities and $29 billion of seven-year notes.

The 10-year TIPS sale drew a yield of negative 0.391 percent, compared with a forecast of negative 0.329 percent, according to a Bloomberg News survey of nine of the Fed’s 21 primary dealers. The previous record was negative 0.089 percent on March 22.

Inflation Measure

The difference between yields on 10-year notes and similar-maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, reached 2.04 percentage points, the least since Jan. 23. The average during the past decade is 2.15 percentage points.

The Fed’s preferred measure of gauging the outlook for inflation has declined from the almost-seven-month high it reached in March as U.S. economic data began to cool and Europe’s debt problems began to worsen. The five-year, five-year forward break-even rate, which projects the pace of consumer price increases starting in 2017, fell yesterday to a two-month low of 2.50 percent, down from 2.78 percent on March 19.

A measure of the U.S. cost of living was unchanged in April, restrained by a drop in energy prices and supporting the view of some Fed policy makers that inflation will ease. Last month’s consumer-price index matched the median forecast of economists surveyed by Bloomberg News and followed three straight gains that included a 0.3 percent rise in March, the Labor Department said May 15.

Economic Data

The Conference Board’s gauge of the outlook for the next three to six months decreased 0.1 percent after a 0.3 percent gain in March, the New York-based group said today. Economists projected the gauge would rise by 0.1 percent, according to the median of 49 estimates in a Bloomberg News survey.

The Fed Bank of Philadelphia’s general economic index fell to minus 5.8 this month, the lowest reading since September, from 8.5 in the previous month. Economists forecast the gauge would rise to 10, according to the median estimate in a Bloomberg News survey. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Moody’s is expected to make a statement on downgrades for Spanish banks this evening after 9 p.m. in Madrid, said two people with knowledge of the situation, who asked not to be identified because the decision hasn’t been announced. Moody’s declined to comment.

Spain’s Debt

Doubts about the health of Spain’s banking system have helped drive up the country’s borrowing costs on concern about its ability to cover losses caused by a real estate collapse that threatens to force some lenders to seek state aid. The yield on 10-year Spanish government debt climbed 2 basis points to 6.26 percent today as the spread over German bunds widened to 4.90 percentage points from 3 percentage points on March 1. Credit default swaps risen to 540 from 355 in that period.

Credit-default swaps on Spain have surged to a record 541 basis points May 14 from 355 on March 1 amid heightened concern over the nation’s bank capital crisis.

Investors should avoid highly rated shorter-maturity debt because the potential returns are too low, according to DoubleLine Capital LP’s Jeffrey Gundlach.

“There is absolutely no reason to own any investment-grade bonds inside of three years for sure,” Gundlach, chief executive officer of Los Angeles-based DoubleLine, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “And maybe even five years is getting to that category because it has no yield.”

To contact the reporter on this story: Daniel Kruger in New York at; Cordell Eddings in New York at

To contact the editor responsible for this story: Dave Liedtka at

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