June 16 (Bloomberg) -- Treasury 10-year note yields fell to within a quarter-percentage point of the record low reached two weeks ago as investors sought safety amid Europe’s debt crisis and signs U.S. economic growth is slowing.

U.S. government securities rallied as drops in industrial production and consumer prices boosted bets the Federal Reserve will add more stimulus to sustain economic growth. Volatility climbed to the highest since December as investors await the Greek election tomorrow amid speculation central banks will take steps to provide liquidity to financial markets.

“Europe is still a mess, there has been relatively disappointing U.S. data and there is increasing chatter about the possibility of the Fed doing some sort of further easing,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo & Co. in Milwaukee. “There are a lot of wild cards and a lot of uncertainty domestically and abroad, and until something changes, Treasuries can stay near these levels.”

The benchmark 10-year note yield decreased six basis points, or 0.06 percentage point, to 1.58 percent yesterday in New York, from 1.64 percent a week earlier, according to Bloomberg Bond Trader data. It fell to a record 1.44 percent on June 1. The 1.75 percent security due in May 2022 rose 17/32, or $5.31 per $1,000 face amount, to 101 18/32.

Thirty-year yields dropped six basis points to 2.68 percent, from 2.75 percent on June 8. They touched a record low 2.51 percent on June 1.

Treasuries returned 3.3 percent this quarter through yesterday, Bank of America Merrill Lynch’s Treasury Master index showed. The MSCI World Index of stocks lost 7.1 percent including reinvested dividends.

Rising Volatility

Volatility increased yesterday to 95.4 basis points, the highest since Dec. 12, according to Bank of America Merrill Lynch’s MOVE index. The gauge measures Treasury price swings based on options. The one-year average is 88.2 basis points.

Treasuries fell last week, pushing 10-year yields up the most in almost three months, as speculation European leaders would make progress stemming their debt crisis damped haven demand. Bonds dropped on June 14 as traders speculated whether global central banks would coordinate assistance if the Greek election increases financial-market turmoil.

“The market’s on eggshells here,” Brian Edmonds, New York- based head of interest rates at Cantor Fitzgerald LP, said on June 14. “It doesn’t take much to move the market either way.” The firm is one of 21 primary dealers that trade with the Fed.

Production, Sales

Ten-year yields fell to the lowest in a week yesterday, 1.5620 percent, as Fed data showed U.S. industrial production unexpectedly fell last month, declining 0.1 percent after a revised 1 percent gain in April, according to Fed data. A Commerce Department report on June 13 showed retail sales fell in May for a second month, prompting economists to cut forecasts for economic growth.

The consumer price index declined 0.3 percent in May, the biggest drop since December 2008, Labor Department data showed on June 14. With inflation cooling, Fed policy makers have more flexibility to take further action to bolster economic growth.

The gap in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the debt, touched 2.09 percentage points, down from a 2012 high of 2.45 percentage points in March.

The Fed opens a two-day policy meeting on June 19. The central bank purchased $2.3 trillion of bonds from December 2008 to June 2011 in two rounds of a tactic called quantitative easing to stimulate the economy. It has kept its benchmark interest rate at zero to 0.25 percent since December 2008.

Record Lows

The Treasury sold $66 billion of notes and bonds this week, drawing record low yields at auctions of 10- and 30-year debt. A $21 billion sale of 10-year notes on June 13 yielded 1.622 percent, and a $13 billion offering of long bonds the next day yielded 2.720 percent.

“The relentless purchasing of Treasuries astounds me,” Paul Montaquila, head of fixed-income trading at Bank of The West in San Ramon, California, said on June 14. “The uncertainty in Europe is an ever-lingering backdrop.”

Greece’s election will turn on whether voters in the nation, which is in a fifth year of recession, accept open-ended austerity to stay in the euro or reject the conditions of a bailout and risk the turmoil of becoming the first to exit the 17-member currency.

Central banks intensified warnings that Europe’s failure to tame its sovereign-debt crisis threatens to roil the world’s financial markets. Monetary policy makers from the U.K. to Japan and Canada sounded the alert about potential fallout. They spoke as Group of 20 leaders prepare for a summit in Mexico next week amid the weakest international economy since the 2009 recession

Investors Disappointed

Major central banks are preparing for coordinated action to increase liquidity in financial markets if needed, Reuters reported on June 14, citing officials linked to the G-20.

“Investors are disappointed with what they are seeing out of Europe, and because of that we have low rates,” said Wilmer Stith, a portfolio manager at Wilmington Trust Investment Managers in Baltimore. “We are not talking about weeks, we are talking about years without anyone making any of the long-term changes that need to be made to get them out of the situation they are in.”

The U.K. and France each increased their holdings of Treasuries by more than 26 percent in April amid the euro bloc’s crisis. Britain’s holdings rose 26.5 percent to $154.2 billion, while France’s increased 29.4 percent to $59.4 billion, the Treasury Department said yesterday.

China remained the largest international buyer of Treasuries, with its holdings rising $1.5 billion to $1.15 trillion, the data showed.

--Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net