U.S. Treasury bonds rallied on Wednesday after a sharp pullback in retail sales and continued worries about the banking sector sent stocks into a dizzying plunge. Retail sales slumped by more than twice analysts' already depressed forecasts, with results outside diving a record 3.1 percent. In Europe, a profit warning from Deutsche Bank and a prediction that HSBC might need fresh capital sent shockwaves through an already brittle financial sector. The global situation was becoming so dire that Federal Reserve policy-makers were considering outright purchases of government bonds, the Philadelphia Fed's Charles Plosser said. All these factors were keeping company shares under pressure, and giving bonds a solid bid. Benchmark 10-year notes jumped 28/32 in price and were offering a yield of 2.20 percent, down 10 basis points from Tuesday's close. "The poor economic data are going to overwhelm other factors that would be bond negatives, such as supply," said Jim DeMasi, chief fixed-income strategist at Stifel Nicolaus. "The economy is staring at a very steep, downward trajectory." This spiral had already sent the Dow Jones industrial average down 275 points or 3.25 percent. Other data out on Wednesday showed prices for imports into the United States also fell sharply due in part to the rapid recent retreat in oil markets, a further boon to bonds. Bond yields touched 50-year lows last month before concerns about rising government borrowing and a concomitant need for new issuance began to pressure Treasuries. The market was caught between the expectation of a supply glut and of further economic deterioration, and the retail figures shifted sentiment toward the latter. "Consumers and households are responding to the massive loss in wealth that is unprecedented," said Kevin Logan, senior U.S. economist at Dresdner Kleinwort. Against that grim backdrop, the 30-year bond surged 1-31/32 for a yield of 2.91 percent, down from 3.00 percent. Five-year notes rose 6/32 to yield 1.38 percent.

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