By Daniel Kruger and Dakin Campbell Nov. 20 (Bloomberg) -- Treasury yields declined to record lows, with two-year notes dropping below 1 percent for the first time, as global stocks slumped and a deepening recession drove investors to the safest assets. Yields on two- and five-year notes and 30-year bonds dropped to the least since the Treasury began regular issuance of the securities. Ten-year note yields touched the lowest since 2003 after yesterday’s release of the minutes of last month’s Federal Reserve 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. “Fear is dominating the market place,” said Andrew Richman, who overseas $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal asset management division. “People are seeing their net worth evaporate.” Investors turned to government debt as recessions in the U.S., Europe and Japan hurt corporate earnings and drove 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 19 basis points to 3.14 percent, the lowest level since June 2003, at 9:01 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security due November 2018 rose 1 20/32, or $16.25 per $1,000 face amount, to 105 6/32. The yield on the two-year note fell 8 basis points to 0.99 percent. Longer Maturities The 30-year yield fell 17 basis points to 3.74 percent, the lowest level since regular sales started in 1977. Yields on five-year notes declined to 1.93 percent, not seen since 1954, according to data compiled by Bloomberg and the Fed. First-time claims for U.S. unemployment insurance unexpectedly rose to the highest level since 1992, the Labor Department said today. Initial claims increased by 27,000 to a higher-than-forecast 542,000 in the week ended Nov. 15, from 515,000 the prior week. 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. Bills Soar 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. 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. Consumer Prices “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.” 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 2.16 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 3.92 percentage points. Rate Forecasts 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: Daniel Kruger in New York at dkruger1@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net

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