Treasury 5-Year Note Yield At Record Low

(Bloomberg News) Treasury five-year note yields fell to record lows as an unexpected decline in retail sales for a third straight month raised concern the economic recovery is stalling and drove investors to the refuge of government debt.

Investors seeking the safest assets amid concern global growth is faltering and Europe's sovereign-debt crisis also drove yields to all-time lows in the U.K., Canada, France, Germany and the Netherlands. Treasuries gained earlier after Germany's top court said it will take more than eight weeks to rule on the euro-area's bailout fund, holding up crisis- resolution efforts.

"It was a pretty horrific number," said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Federal Reserve. "There's continued weakness in the economy, they've been open to more stimulus. People still need to buy Treasuries -- there's still demand there."

The five-year note yield fell four basis points, or 0.04 percentage point, to 0.58 percent at 9:26 a.m. in New York, according to Bloomberg Bond Trader prices. It touched 0.5849 percent, lower than the previous record of 0.5884 percent on June 1. The benchmark U.S. 10-year yield fell four basis points to 1.45 percent, touching 1.4470 percent. It set a record low of 1.4387 percent also on June 1.

The drop in retail sales followed a 0.2 percent decrease in May, Commerce Department figures showed today in Washington. The decline was worse than the most-pessimistic forecast in a Bloomberg News survey in which the median projection called for a 0.2 percent rise. The June decrease was broad-based, including car dealers, department stores and gasoline stations.

The Federal Reserve Bank of New York's general economic index rose to 7.4 from 2.3 in June, another report showed, with the median forecast of 51 economists surveyed by Bloomberg News calling for an increase to 4.0. Readings greater than zero signal expansion in the so-called Empire State Index that covers New York, northern New Jersey and southern Connecticut. The last negative reading was in October.

"Everything is going to hit a record, except for the two- year note," said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, a primary dealer. "If you don't have the consumer continuing to spend, the likelihood of continued weakness in the economy goes up. It's not a surprise we're rallying."

The 10-year note will drop to 1.25 percent and the 30-year bond will drop to 2.25 percent over the next two months, Jersey forecasted.

The Federal Constitutional Court in Karlsruhe will issue a ruling on bids to halt Germany's participation in the European Stability Mechanism and the fiscal treaty on Sept. 12, it said today in an e-mailed statement. That's more than two months after it held a hearing on the measures on July 10.

The delay may compound efforts to resolve the 2 1/2-year- old crisis as European leaders disagree over the details of bailout conditions, bank rescues and burden-sharing.

Fed Chairman Ben S. Bernanke is scheduled to testify before the Senate Banking Committee tomorrow, discussing the outlook for the economy and monetary policy. He will speak before the House Financial Services Committee the following day.

"There's a flight to quality," said Kevin Yang, head of bond investment in Taipei at Hontai Life Insurance Co., which has $6 billion in assets. "The Fed will maintain a low- interest-rate environment."

The Fed under Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to stimulate the economy. The central bank decided in June to extend a policy known as Operation Twist, where it sells short-term securities and uses the proceeds to buy longer-term debt, to $667 billion from $400 billion.

The Fed is scheduled to buy as much as $2 billion of Treasuries maturing from August 2022 to February 2031 today as part of the plan, according to the Fed Bank of New York's website. Bernanke has also pledged to keep the central bank's target for overnight bank lending at almost zero through at least late 2014.

Vanguard Group Inc., whose $148.2 billion of Treasuries makes it the largest private owner of U.S. debt, says the nation has until 2016 to contain its borrowings before bond investors revolt and drive up interest rates.

"In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say 'enough is enough,'" said Robert Auwaerter, head of the Valley Forge, Pennsylvania-based Vanguard's fixed-income group since 2003 and who this year was inducted into the Fixed Income Analysts Society Inc.'s Hall of Fame.

The U.S. has avoided the turbulence rocking Europe, where five nations have sought bailouts as their borrowing costs soared because investors boycotted their bonds. Instead, they have sought U.S. assets as a haven because of the dollar's status as the world's primary reserve currency, pushing note yields to record lows even though the amount of public debt outstanding has grown to $15.9 trillion from less than $9 trillion in 2007.