Treasurys Rally on Weak Holiday Sales

NEW YORK — Treasury prices rallied Tuesday after disconcerting news that consumers reduced their retail spending in December, the month when stores should get a strong boost from holiday shopping.

The Commerce Department Tuesday said retail sales dropped 0.4 percent last month. Although the result was in line with economists' predictions, it rattled markets because it suggests the consumer, one of the stalwarts of a faltering economy, is flagging.

"December's was the worst showing for any December since at least 1991 and retail sales for the year were the worst year since 2002," said Tony Crescenzi, chief fixed-income analyst at Miller Tabak. "The weakness sharply boosts the likelihood that the U.S. economy entered recession in the fourth quarter, and it is almost indisputable now, the idea that the economy contracted in December."

Treasurys benefited from the news because they carry a safety premium and generally perform well when the economy is in danger and other assets seem risky. The report also contributed to a selloff in stocks, sharp declines for the dollar and higher gold prices.

The news sent yields, which move inversely to prices, near their lowest levels in three years for the 2-year and 10-year notes. The lower yields are a classic signal that investors think the Federal Reserve will cut rates soon.

The benchmark 10-year Treasury note shot up 14/32 to 104 8/32 with a yield of 3.73 percent, close to its weakest point in three years and down from 3.77 percent late Monday.

The 30-year long bond gained 25/32 to 111 12/32 with a 4.31 percent yield, down from 4.36 percent late Monday.

The 2-year note was unchanged at 101 9/32 with a yield of 2.55 percent, matching its late Monday level.

The Fed's monetary policy committee's next meeting is Jan. 29-30. Fed Chairman Ben Bernanke has dropped heavy hints that a rate cut is quite likely. The worrisome fall in retail sales was seen as building a case for the Fed to cut rates by at least 0.50 percentage point.

Separately, the New York Federal Reserve's Empire State survey of regional manufacturing showed a drop to 9.03 this month from 9.80 in December.

However, there was some relief for the bond market in the form of inflation news. The bond market abhors inflation because it eats into the value of fixed income.

Producer prices fell 0.1 percent, according to the Labor Department. The result was smaller than the 0.2 percent drop expected by economists, but all declines in price pressure are generally good news. Excluding food and energy, producer prices gained 0.2 percent, matching expectations.

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