A trader on the telephone at the Frankfurt Stock Exchange. European stocks dropped to a 10-month low, United States futures fell and US Treasury yields reached their lowest point this year on signs US growth is slowing. Hannelore Foerster / Bloomberg

NEW YORK - Treasury yields on debt maturing in 10 years and less fell to all-time lows as the United States Federal Reserve said economic growth was "considerably slower" than forecast and it would keep borrowing costs on hold until mid-2013.

The Treasury sold $72 billion of notes and bonds last week, with yields on three- and 10-year notes at record auction lows. The 10-year yield touched 2 percent, an all-time low, amid concern the risk of recession is rising after Standard & Poor's downgraded the United States credit rating to AA+ and as the European sovereign debt problems showed signs of spreading. Annual consumer inflation slowed in July, a report may show on Aug 18.

"What we're witnessing is a reassessment of the health of the economy," said James Collins, an interest-rate strategist in the futures group at Citigroup Inc's Global Markets unit in Chicago. "We could take another run toward 2 percent."

US 10-year note yields fell 30 basis points to 2.26 percent from 2.56 percent on Aug 5, according to Bloomberg Bond Trader prices, the biggest drop on an intraday basis since December 2008. The 2.125 percent securities maturing in August 2021 finished the week at 98 27/32. It sold at a yield of 2.14 percent at the Aug 10 auction.

The two-year Treasury yield dropped 10 basis points to 0.19 percent. The yield reached a record low of 0.1568 percent on Aug 9.

Auction yields

The Treasury Department paid an average yield of 2.13 percent on the three-, 10- and 30-year securities, less than the previous refunding auctions in May of 3 percent and below the former record of 2.59 percent in February 2009, according to data compiled by Bloomberg. The government began selling 30-year bonds on a regular schedule in 1977 as part of its so-called quarterly refunding.

Treasury 30-year bonds tumbled on Aug 11, pushing yields up the most since 2008, as speculation Fed policies would stoke inflation sapped demand at the $16 billion offering of the securities. The sale drew the lowest level of demand since February 2009. Thirty-year bonds yields fell 12 basis points to 3.73 percent on Friday from 3.85 percent on Aug 5.

Volatility Treasuries trading has picked up. Merrill Lynch & Co's MOVE index, which measures price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, touched 117.8 basis points on Aug 8, compared with the 89.4 average since the start of the year.

More trade

The volume of Treasuries trading rose last week, averaging $420.32 billion per day, compared with the $317 billion daily average this year, according to ICAP PLC, the world's largest interdealer broker.

Hedge-fund managers and other large speculators reversed from a net-short position to a net-long position in 10-year note futures in the week ending on Aug 9, according to US Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 9,814 contracts on the Chicago Board of Trade. The previous week, traders were net-short 72,946 contracts.

The median third quarter forecast for the yield on the 10-year note declined to 2.75 percent, according to a Bloomberg News survey on Aug 10, down from 3.29 percent in a survey on Aug 2. The security will end 2012 at 2.96 percent, from a previous forecast of 3.5 percent, the survey found.

"Treasury yields are too low for all but the most pessimistic economic environments," Brett Rose, interest-rate strategist at Citigroup Global Markets in New York, wrote in a note to clients. "The Treasury market is pricing in a far too pessimistic outcome for the US economy and we would expect that 10-year Treasury yields will be 50 basis point higher in the medium term."

New York Fed President William Dudley said on Friday policy makers gave a "sober assessment" of the US economy after their Aug 9 policy meeting.

"Economic growth so far in 2011 has been quite a bit slower than we expected earlier in the year," Dudley said in the text of remarks given at the bank's New York headquarters. "In the last few months conditions in the labor market have deteriorated again and the unemployment rate edged up. Household spending has flattened out and the housing sector is depressed."

Fed officials "discussed the range of policy tools" available to boost growth and are "prepared to employ those tools as appropriate", the Fed said.

Bloomberg News