TREASURIES-Bonds rise as retail sales stoke recession fears

(Adds economist quote, updates prices)

By Chris Reese

NEW YORK Jan 15 (Reuters) - U.S. Treasury debt prices rose on Tuesday, pushing benchmark yields to an almost four-year low, as a decline in retail sales stoked worries that the housing and credit crisis is now crimping the consumer and pushing the economy into recession.

The unexpected dip in retail sales in December also bolstered expectations the Federal Reserve will aggressively cut interest rates at its next policy meeting late in January.

"From the Fed's point of view, this report confirms (Fed Chairman Ben) Bernanke's concern for the economy and justifies aggressive easing," said Christopher Low, chief economist at FTN Financial in New York.

Benchmark 10-year notes US10YT=RR were trading 14/32 higher in price for a yield of 3.72 percent from 3.77 percent late on Monday. Benchmark yields reached as low as 4.71 percent, the lowest level since March 2004.

Sales at U.S. retailers fell 0.4 percent in December, and November sales were revised lower, according to the Commerce Department. The agency said retail sales for all of 2007 posted their smallest gain in five years. For details see [ID:nN15499138].

"The report raises concerns about the health of consumer spending and increases the likelihood that the U.S. may slip into recession," said Omer Esiner, market analyst with Ruesch International in Washington. "That in turn increases the chances of aggressive rate cuts."

U.S. short-term interest rate futures jumped immediately after the data's release, showing as much as a 56 percent chance the Fed will slash rates by 75 basis points, compared with a 44 percent chance late on Monday. Futures fully price a rate cut of 50 basis points by the Fed at the Jan. 29-30 meeting.

While investors have been concerned that rising inflation could crimp the Fed's ability to cut rates, producer price data released on Tuesday was interpreted as benign enough to allow the central bank to continue loosening monetary policy.

U.S. producer prices declined unexpectedly by 0.1 percent in December while core inflation at the producers level, which excludes food and energy costs, rose by 0.2 percent as forecast.

Bonds extended gains after the data. Earlier in the day, they gained support from lower stock futures after Citigroup Inc (C.N) reported its first quarterly loss -- $9.83 billion -- since its creation in 1998 and said it was taking an $18.1 billion write-down due to subprime mortgage debt. [ID:nN15468107]

The Citibank announcement fueled concerns that the worst of the impact on financial companies from the global credit crisis may be far from over.

Investors often switch money between stocks and bonds depending on the level of risk they are willing to accept, with Treasuries seen as a lower-risk asset because they are backed by the U.S. government.

Fears over the spreading impact of the credit crisis, which began in the subprime mortgage sector, were little eased by news that Merrill Lynch MER.N, which analysts see taking a hit from subprime problems, would issue $6.6 billion in preferred shares in an effort to shore up its capital base. [ID:nT370724]

Two-year Treasury notes US2YT=RR were trading flat in price for a yield of 2.55 percent, while five-year notes US5YT=RR were 5/32 higher in price for a yield of 3.02 percent from 3.05 percent late on Monday.

Thirty-year bonds US30YT=RR were trading 1-1/32 higher in price for a yield of 4.30 percent from 4.36 percent. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)