TREASURIES-Yields hit record lows in safe-haven buying

* Benchmark yields touch record low of 1.394 percent
* Evidence of US economic slowdown adds to bullish tone
* Two-year notes auction brings record low yield

By Chris Reese
NEW YORK, July 24 (Reuters) - U.S. Treasury debt yields
dipped to record lows on Tuesday as fears over the outcome of
Europe's debt crisis fueled steady buying of U.S. government
debt.
Worries that Spain will require a massive financial bailout
on top of an already approved rescue deal for its banks pushed
the country's debt yields to new highs, while Italy's benchmark
stock market dropped to the lowest level since the launch of the
euro zone.
After Moody's on Monday changed its outlook on Germany's
sovereign debt rating to negative, that left investors with even
fewer avenues for lower-risk assets. U.S. stocks fell by about 1
percent and Treasuries benefited.
"The Treasury market continues its powerful and relentless
bid as investors flock to safer investments," said Justin
Lederer, interest rate strategist at Cantor Fitzgerald in New
York.
Benchmark 10-year Treasury notes traded 11/32
higher in price to yield 1.403 percent after hitting a record
low of 1.394 percent. Benchmark yields were traded at 1.438
percent late Monday.
Disappointing economic data reinforced negative sentiment,
as investors increased bets that the Federal Reserve will launch
new stimulus to try to offset the economic slowdown.
The Federal Reserve Bank of Richmond's manufacturing index
declined to its lowest level since April 2009, with a large drop
in manufacturing shipments and new orders.
Data earlier in the day showed U.S. manufacturing this month
expanded at the slowest pace since late 2010.
"Markets don't really care about good economic data, but
they do care about bad economic data because it reinforces the
pessimism that you are seeing in the sovereign markets in
Europe," said Eric Green, chief economist and head of interest
rate strategy at TD Securities in New York.
Moody's Investors Service late on Monday changed its outlook
for Germany, the Netherlands and Luxembourg to negative from
stable as fallout from Europe's debt crisis cast a shadow over
the euro zone's top-rated countries.
The rating agency cited an increased chance that Greece
could leave the euro zone, which "would set off a chain of
financial sector shocks ... that policymakers could only contain
at a very high cost."
It also warned that Germany and other countries rated Aaa
might have to increase support for troubled states such as Spain
and Italy that are struggling to finance their deficits.

Safe-haven demand meant the Treasury on Tuesday sold $35
billion of two-year notes at a record low yield.
The Treasury will auction $35 billion in five-year notes on
Wednesday and $29 billion in seven-year debt on Thursday.
Ahead of the Wednesday's auction, five-year notes
on Tuesday traded 2/32 higher in price to yield 0.552 percent
from 0.564 percent late Monday. Five-year yields hit a record
low on Tuesday of 0.541 percent.