By Deborah Lynn Blumberg Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Treasury yields fell to fresh record lows Friday as fears about the length and depth of the U.S. recession persisted, though the rally was tempered by renewed hopes for an auto industry rescue. The 10-year yield fell as low as 2.47%, a 45-year low, though it had moved back up to 2.58% in late trade. Bond yields move inversely to price. The two-year yield plummeted to a fresh low of 0.66%, though it had managed to rise back up to 0.76% late in the day Friday. In what was a bouncy session for Treasurys, the market got off to a strong start early Friday after the Senate shot down the $14 billion auto sector bailout bill, knocking stocks down. Subsequent soothing words from the government though that it is considering tapping the $700 billion financial market rescue package to help the auto makers then dragged bond prices lower. Ultimately however, prices shot up following the first sovereign default in the credit crisis. Ecuador President Rafael Correa said Friday that Ecuador's government won't make an interest payment due on the country's 2012 Global bonds, triggering a default on the country's outstanding $3.9 billion of global bonds. That news helped drive prices higher "in an illiquid market," said Robert Allen, managing director and head of the government trading desk at Banc of America Securities. "Liquidity is rather light," he said, "so any movements right now, especially on a holiday season Friday, seems to be exaggerated a little." Still though, Allen expects bond yields to stay well-bid heading into year end as fears about the economy persist amid year-end buying. Meanwhile on Friday, the market was faced with a slew of top-tier data, most of which was better than expected, but the government bond market paid them little heed. U.S. retail sales fell 1.8% last month, according to the Commerce Department, but the drop was milder than the 2.2% fall market participants had expected. Alongside the sales release came the latest signs of inflation relief. U.S. producer prices fell for a fourth straight month in November, the Labor Department said. PPI for finished goods slid 2.2% on a seasonally adjusted basis, extending a record 2.8% drop in October. Consumers are clearly welcoming the impact of such declines - particularly in gasoline prices - on their personal finances. The latest survey by Reuters/University of Michigan reported an increase in the index measuring consumer sentiment, to 59.1 this month from 55.3 in November. Market participants are now gearing up for the last Federal Reserve meeting of 2008, with the Fed scheduled to meet Monday and Tuesday. Policymakers will announce their rate decision around 2:15 p.m. EST on Tuesday. Expectations are for at least a 50-basis-point cut to the fed funds target rate, which is already at a low 1%. A cut to 0.50% would take the rate to levels not seen in decades. As rates approach zero though, Treasury market investors are more interested in any word from the Fed about other efforts in the works to help heal the economy and battered credit markets, so-called "quantitative easing" approaches. The Fed has already tiptoed in that direction by buying agency debt, and Fed Chairman Ben Bernanke said in a speech that the Fed could purchase longer-term Treasury or agency securities on the open market in large quantities. Another reference to such a move could serve to further energize the government bond market.

   Mortgage Bonds Wider
  Meanwhile, agency mortgage-backed securities were about three basis points wider to Treasurys Friday afternoon. "There is apathy relative to Treasurys," said Walt Schmidt at FTN Financial. "Volume was spotty. By the afternoon, people turned it in for the weekend." Of late, MBS have been volatile on a day-to-day basis, market participants say.
  Swap spreads were tighter, with the two-year spread at 104.50 basis points compared to 104.75 basis points Thursday, and the 10-year spread was at 19.50 basis points compared to 20.50 basis points Thursday. Swap rates were at 1.808% and 2.780%, respectively.
   COUPON   ISSUE   PRICE     CHANGE    YIELD   CHANGE
   1 1/4%   2-year  100 30/32 up 2/32   0.76%   -3.8 BP
   1 1/8%   3-year  100 8/32  up 7/32   1.04%   -7.9 BP
   2%       5-year  102 8/32  up 5/32   1.53%   -3.3 BP
   3 3/4%   10-year 110 4/32  up 18/32  2.58%   -6.4 BP
   4 1/2%   30-year 127 29/32 up 26/32  3.06%   -3.6 BP
   2-10-Yr Yield Spread: +182 BPS Vs +181 BPS
   Source: TradeWeb

-By Deborah Lynn Blumberg, Dow Jones Newswires; 201-938-2018; deborah.blumberg@dowjones.com (Anusha Shrivastava and Emily Barrett contributed to this report) Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=H3p6tBa69Yk8W%2B7WLYSeeQ%3D%3D. You can use this link on the day this article is published and the following day. -0- Copyright (c) 2008 Dow Jones & Company, Inc.