By Lukanyo Mnyanda and Wes Goodman Oct. 15 (Bloomberg) -- Treasuries rose, sending 10-year yields lower for the first time in seven days, after stocks dropped and Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. may already be in recession. The yield on the 10-year note dropped from the highest level in more than two months before reports economists say will show retail sales and producer prices declined, adding to evidence the world's largest economy is contracting. Yields surged in the past week as governments approved as much as $3 trillion of bank-rescue plans and cut interest rates in an attempt to calm financial turmoil. ``As long as the uncertainty and recession concerns persist, there won't be many people moving from Treasuries,'' said Glen Marci, a fixed-income strategist in Frankfurt at DZ Bank AG, Germany's biggest cooperative lender. ``After the dust settles, the focus will shift more toward the economy.'' The yield on the 10-year note fell 7 basis points, or 0.07 percentage point, to 4.01 percent as of 7 a.m. in New York, according to data compiled by Bloomberg. The 4 percent security due August 2018 rose 19/32, or $5.94 per $1,000 face amount, to 99 30/32. The two-year yield declined 6 basis points to 1.76 percent. The rally may continue in the next three months, pushing the yield on the two-year note to 1.6 percent and that on the 10-year security to 3.5 percent, Marci said. The yields may end 2008 at 1.72 percent and 3.64 percent, according to analysts and strategists' forecasts compiled by Bloomberg. Stocks Drop The MSCI Asia Pacific Index of regional shares fell 1.2 percent, dropping for the first time this week, while Europe's Dow Jones Stoxx 600 Index declined 2.5 percent. U.S. stock futures also slipped. Investors sought the safest assets as the cost of protecting corporate bonds from default rose. Credit-default swaps on the Markit iTraxx Europe index increased 2 basis points to 127, according to JPMorgan Chase & Co. prices. In Tokyo, Japan's benchmark credit-risk index rose 6 basis points to 184, Morgan Stanley prices show. Before today the yield on the 10-year note had risen about 44 basis points since Oct. 8 as traders fled government debt on concern the U.S. will issue more securities to pay for the rescue of the financial system, driving prices lower. ``Virtually every major sector of the economy has been hit by the financial shock'' in the U.S., Yellen said late yesterday in the text of a speech in Palo Alto, California. ``The U.S. economy appears to be in a recession,'' she said. Bernanke, Kohn Fed Chairman Ben S. Bernanke and Vice Chairman Donald Kohn, who both vote on the central bank's policy committee, are scheduled to speak today. Fed Bank of Boston President Eric Rosengren is also due to make remarks. Rosengren and Yellen don't vote this year. Economists at BNP Paribas SA, led by Paul Mortimer-Lee in London, said falling U.S. home prices are still threatening the global financial system, even after the U.S. joined the U.K., Germany and France in offering to buy stakes in banks. ``Without wishing to be a party pooper, the recession -- with all that usually means for earnings and corporate defaults -- has only just begun,'' they wrote in a report today. U.S. retail sales fell 0.7 percent in September, the most in 15 months, after dropping 0.3 percent in August, according to the median estimate in a Bloomberg News survey of economists. The Commerce Department will release the figures at 8:30 a.m. in Washington. Prices paid to manufacturers declined 0.4 percent in September after a 0.9 percent drop the prior month, the Labor Department may say, according to a separate survey. Slowing Growth The U.S. economy will shrink 0.3 percent in the fourth quarter, contracting for the first time in a year, according to a Bloomberg survey of banks and securities companies. Traders have increased bets the central bank will cut its target rate for overnight lending between banks on Oct. 29. Futures on the Chicago Board of Trade show a 96 percent chance the Fed will reduce its 1.5 percent target rate by a quarter percentage point. The odds were 82 percent a week ago. The slowing economy and a 47 percent slump in oil for a record on July 11 have reduced inflation expectations among traders to the lowest level in almost 10 years, Treasury yields indicate. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional securities was 1.01 percentage point. It fell as low as 0.87 percentage point on Oct. 10, a level not seen since January 1999. The spread represents traders' outlook for inflation over the next decade. Extra Dollars The Bank of Japan said today it will offer lenders as many dollars as they want, joining the attempt by the Fed and European counterparts to lower borrowing costs in money markets and free up credit worldwide. The freeze in money markets may be thawing after the unprecedented action by central banks and governments to revive lending. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans fell today for a third day, its longest sequence of declines in more than seven weeks, according to the British Bankers' Association. It slid 9 basis points to 4.55 percent. Asian and euro rates also decreased. A gauge that measures the scarcity of cash eased. The difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate, the so-called Libor-OIS spread, narrowed to 3.33 percentage points from 3.66 points at the end of last week. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, shrank to 4.2 percentage points from 4.64 percentage points on Oct. 10, the most since Bloomberg began tracking the data in 1984. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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