NEW YORK (MarketWatch) -- Treasury prices extended gains Wednesday after the government said U.S. retail sales fell last month by the most in three years, resurrecting concern that the economy continues to weaken.
Two-year note yields fell 10 basis points, or 0.10%, to 1.71%. Yields move in the opposite direction of prices.
The Commerce Department said sales declined 1.2% in September. The median forecast of economists surveyed by MarketWatch was for a 0.8% decline. Excluding automobiles, sales fell 0.6%, also more than anticipated. See Economic Report.
Manufacturing activity in the New York area deteriorated sharply in October, as the New York Federal Reserve Bank's Empire State Manufacturing index fell to a record negative 24.6 in October from negative 7.4 in September.
"Any euphoria over the notion that government actions are finally attacking one of the root problems of the crisis is rapidly dissipating as economic data turns south," said William O'Donnell, U.S. government bond strategist at UBS Securities.
A separate report showed producer prices fell 0.4% last month, less than expected.
Ten-year note yields fell 5 basis points to 4.04%.
Treasurys were higher before the reports, as policy makers acknowledged that recent, dramatic government initiatives to support financial institutions won't stem the economic deterioration underway.
"The U.S. economy appears to be in a recession," San Francisco Federal Reserve President Janet Yellen said in a speech delivered late Tuesday.
Rate cut more likely
Futures traders raised bets that a continuing slide in growth will compel the central bank to lower its target interest rate again at the end of the month, after a surprise reduction last week to 1.5%.
The November fed funds futures contract indicated a 62% chance that rates will be cut another half percentage point at the Fed's Oct. 29 policy meeting.
Futures also indicate more investors are anticipating borrowing costs will continue to decline at the December meeting and into 2009.
Federal Reserve Chairman Ben Bernanke will be speaking on the economic outlook and financial markets in a speech at 12:15 p.m. Eastern.
