Yields on U.S. government bonds plunged, with the rate on the 10-year benchmark note dipping below 2% for the first time since June 2013, as anxiety over global growth intensified.
 
Investors have been snapping up ultrasafe governments bonds in recent days. The rush turned into a stampede on Wednesday morning, following two disappointing readings on the U.S. economy.
 
Trading was frenetic early in the session, with the yield tumbling 0.14 percentage point within 10 minutes of the start of volatile trading in U.S. stocks. That slide is on par with intraday moves seen during the eurozone’s debt crisis in 2011.
 
The 10-year Treasury yield fell as low as 1.873%, its lowest level in intraday trading since May 2013, according to Tradeweb. Recently, the yield was at 2.039%. When bond yields fall, prices rise.
 
One factor fueling the rush to buy bonds on Wednesday, traders said: Hedge funds and other short-term bond investors who scrambled to cover soured wagers that bond yields would rise and prices fall.
 
“It was confusion, chaos and fear,’’ said Russ Certo, managing director of rates trading at Brean Capital LLC in New York. “It is emotional capitulation going through the bond market as bears unwound their short bets. It is frenetic.”
 
Shopping at a Wal-Mart store in Arkansas. A decline in U.S. retail sales last month added to concerns about U.S. growth. Associated Press
            

Some bond traders expressed shock over the tumble in yields. The record low for the 10-year Treasury yield is 1.38%, reached in July 2012 at the height of jitters over Europe’s sovereign-debt burden.

“I am speechless and stunned,’’ said David Coard, head of fixed-income trading in New York at Williams Capital Group. “The U.S. has been in the best employment situation for years. Right now there is just a lot of emotion going through the bond market.”

U.S. retail sales in September declined by a bigger-than-expected 0.3%, and a reading of the business outlook for the New York region slowed sharply. Meanwhile, the producer-price index, a gauge of wholesale inflation, fell by 0.1% in September amid a slide in energy prices. The data amplified worries about the U.S.’s ability to withstand economic slowdowns elsewhere and came as deflation fears have taken hold in Europe, spurring a global flight to safety that has upended markets from stocks to bonds to oil.
 
“It just seems everywhere one looks, none of the news is good news and as such there is little else to buy other than Treasurys,” said Anthony Cronin, a Treasury bond trader at Société Générale SA.
 
Trading volume climbed as investors piled in. About $445 billion worth of Treasury bonds had changed hands as of 10 a.m., the most for that time period since May 2 and compared with an average of $144 billion in the past month, according to Adrian Miller, director of fixed-income strategies at GMP Securities LLC.
 
Other financial assets that are considered safer also drew buyers Wednesday. The 10-year German government bond’s yield fell to a record low of 0.754%, according to Tradeweb. The 10-year U.K. government bond’s yield dropped to 1.975%. The Japanese yen was recently trading up by more than 1% versus the dollar, according to CQG.
 
Wednesday’s gains extended this year’s rally in relatively safe government bonds, a trend that had caught many money managers and strategists by surprise, coming even as the U.S. Federal Reserve has cut back its bond purchases.
 
But signs of weak global economic growth have sent gauges of inflation expectations into free fall, sending ripples through financial markets. The Dow Jones Industrial Average recently was down more than 400 points, or 2.5%, heading toward its fifth-straight day of losses.
 
Falling bond yields could be a boon for U.S. consumers and businesses. The 10-year note’s yield is a benchmark to set long-term borrowing costs in the U.S. economy. Companies have also been locking in low interest rates as they sell long-term bonds this year. The Mortgage Bankers Association reported Wednesday that the rate on the average 30-year fixed-rate loan fell to 4.2% last week, from 4.3% the week before. Rates stood as high as 4.72% at the beginning of the year.
 
Bond traders and investors have dialed back expectations for the timing of the first interest rate increases from the U.S. and U.K. central banks amid signs of weak demand in Europe and Asia, and persistent geopolitical risks. Many investors now believe policy makers may wait until the second half of 2015—if not longer—to raise short-term interest rates.
 
Fed officials flagged weaker growth in Europe at last month’s monetary-policy meeting as one reason to be patient in raising interest rates. U.S. central bankers have also become more concerned about the impact of a strengthening U.S. dollar on the domestic economy, according to minutes of the Fed’s September policy meeting released last week. The stronger U.S. dollar, by reducing the cost of imported goods and services, could help hold U.S. inflation below the Fed’s 2% objective. Fed staff reduced their projection for medium-term growth in part because of these concerns.
 
Few investors expect the U.S. to slip into deflation, a cycle in which falling consumer prices lead to spending reductions and declining economic activity. Even in Europe, officials say the risks of deflation remain limited.
 
But an inflation gauge closely watched by European Central Bank President Mario Draghi fell Wednesday to the lowest in at least a decade. The five-year/five-year inflation swap rate, which measures investors’ expectations for inflation in the eurozone over the course of five years starting five years from now, fell to 1.744% Wednesday, according David Keeble, global head of interest-rates strategy at Crédit Agricole in New York.
 
In the U.S., the yield spread between a 10-year Treasury inflation-protected security and a 10-year Treasury note, fell nearly 0.07 percentage point to 1.840 percentage points. That suggests investors expect the U.S. inflation rate will average 1.840% within a decade. That so-called break-even rate was 2.242 percentage points at the end of 2013.
 
Lower inflation expectations encourage investors to buy bonds because the risk diminishes of higher consumer prices eating away bonds’ value. In a deflationary environment, bonds actually get a boost in purchasing power.