By Dakin Campbell and Kim-Mai Cutler Nov. 20 (Bloomberg) -- Treasuries rose after global stocks slumped, consumer prices tumbled in October and a deepening recession drove investors to the safest assets. Gains sent two-year note yields to 1.043 percent, a level not seen since Federal Reserve data on the security began in 1976. Five-year note yields slid to the least since 1954 after yesterday’s release of the minutes of last month’s central bank meeting showed policy makers expect the economy to contract through the middle of 2009 and more interest-rate cuts may be needed to counter deflation. “You have the cloak of a declining inflationary environment,” said Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment- banking arm of Canada’s biggest lender. “People are denying it, but we are mirroring the whole Japanese situation and if that’s the case interest rates are going to go a lot lower.” Investors turned to government debt as recessions in the U.S., Europe and Japan hurt corporate earnings and drive prices of shares, commodities and real estate lower. Stocks declined worldwide, with the MSCI World Index losing 2.12 percent. The 10-year yield dropped 7 basis points to 3.26 percent, near the lowest level since June 2003, at 8:03 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security due November 2018 rose 19/32, or $5.94 per $1,000 face amount, to 104 6/32. The yield on the two-year note fell 1 basis point to 1.06 percent. Longer Maturities The 30-year yield fell nine basis points to 3.83 percent, the lowest level since regular sales started in 1977. Yields on five-year notes declined to 2.03 percent, touching 1.996 percent, not seen since 1954, according to data compiled by Bloomberg and the Fed. Treasuries are also attracting investors on speculation the Fed will cut interest rates next month. Two-year notes are seen as among the most secure assets and are also sensitive to changes in borrowing costs because of their short maturity. Two-year notes returned 6.5 percent in 2008, compared with 7.5 percent last year, according to indexes compiled by Merrill Lynch & Co. The yield declined from 3.11 percent on June 13, the highest level this year. Demand for government debt increased as the Fed cut its target rate for overnight lending between banks by 4.25 percentage points in the past 14 months to prop up the economy, the world’s biggest. Reports this month showed retail sales fell the most on record in October and the number of Americans collecting unemployment benefits was the highest in 25 years. Bills Soar Yields on three-month bills were little changed at 0.06 percent. They touched 0.02 percent on Sept. 17, the lowest since the start of World War II. Some Fed policy makers said they were prepared to cut interest rates further as “more aggressive easing should reduce the odds of a deflationary outcome,” according to minutes of the Oct. 28-29 meeting released yesterday. Fed officials lowered their economic-growth estimates to zero to 0.3 percent for 2008, from 1 percent to 1.6 percent previously, the median forecast of Fed governors and district- bank presidents showed. The predictions for GDP next year ranged from a contraction of 0.2 percent to growth of 1.1 percent. The jobless rate is projected to be 7.1 percent to 7.6 percent. “Once again the capacity of governments to act as stabilizing forces is being tested,” Ciaran O’Hagan, a fixed- income strategist in Paris at Societe Generale, wrote in a note to clients. “Even the potential for action by large governments has its limits, markets are realizing. That is leading to further falls in confidence.” Consumer Prices Longer-maturity bonds, which are more sensitive to inflation expectations, rallied on speculation that the economic slump may trigger deflation, or a prolonged decline in prices. Consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, a Labor Department report showed yesterday. The difference in yield between two-year and 10-year notes narrowed a fifth day to 2.21 percentage points. Breakeven rates, which show the difference in yields between inflation-linked and nominal bonds, suggest traders are betting the U.S. economy may face deflation over the next two years. The two-year U.S. breakeven rate was minus 3.76 percentage points. Futures on the Chicago Board of Trade show a 64 percent chance the central bank will reduce its 1 percent target rate by 50 basis points at its Dec. 16 meeting. The rest of the bets are for a 75-basis-point reduction. The rally in U.S. Treasuries may be coming to an end, based on a Bloomberg News survey of banks and securities companies. Two-year yields will rise to 1.37 percent by Dec. 31 and to 2.08 percent by the end of 2009, the survey shows. To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net.

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