The Standard & Poor's 500 Index of stocks declined 0.8 percent after dropping as much as 3 percent.

"Yellen probably calmed the markets," said Margaret Kerins, the Chicago-based head of fixed-income strategy at Bank of Montreal, one of 22 primary dealer that trade with the central bank. "She gives the message that everything is data dependent. The moves will be more volatile, especially with the Fed extracting themselves as one of the main buyers of Treasuries."

Hedge-fund managers and other large speculators as of Oct. 7 had increased bearish bets on 10-year note futures to the most since July, U.S. Commodity Futures Trading Commission (CFTC) data show. The number of net-short positions reached 92,329 contracts, an increase of 79,824 from the week before.

The 30-year bond rose more than four points and the yield fell as much as 28 basis points to 2.67 percent, touching the lowest level since September 2012, before trading at 2.92 percent.

Treasury trading volume reached the highest on record as about $924.3 billion in U.S. government debt changed hands, according to ICAP Plc, the world's largest interdealer broker. That exceeds the $662.2 billion traded on May 22, 2013, when former Fed Chairman Ben S. Bernanke mentioned the possibility of slowing bond purchases.

'Massive Capitulation'

"We are seeing massive capitulation," said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. "Given the weakness in the data, the continued geopolitical risk, the turn in consumer sentiment and consumption, everything is coming together to ignite the safe-haven trade. Volatility in risk markets is providing more fuel for the rally."

Yellen told the Group of 30 that the economy looked to be on track to achieve growth of around 3 percent going forward, according to two people familiar with her comments who asked not to be named because the meeting was private. She also saw inflation eventually rising back up to the Fed's 2 percent target as unemployment falls further, according to the people.

Rates on federal fund futures show the chances for an increase in December 2015 were 60 percent, making it the first instance for a likely central bank move. The Fed has expanded its balance sheet assets to $4.5 trillion from less than $1 trillion in 2008 in an effort to stimulate growth after the global financial crisis.

A measure of Treasury volatility increased for a third day yesterday to the highest level in more than nine months. Bank of America Merrill Lynch's MOVE Index, which measures price swings based on options, climbed to 74.6 basis points, the most since Jan. 8.

"There are a lot of crowded trades that are on," said Michael Materasso, co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York. The firm oversees $347.5 billion of bonds. "With volatility like this, especially when we haven't had a lot of volatility, it shakes positions loose."

In fiscal 2014, the budget deficit in the U.S. shrank to the lowest level, as a share of the economy, since 2007 as faster growth and falling unemployment boosted tax receipts, the Treasury Department said.

The shortfall was $483.4 billion in the 12 months to Sept. 30, compared with $680.2 billion a year earlier, the Treasury said today in Washington. That's about a third of the record $1.4 trillion deficit reached in 2009. Revenue jumped 8.9 percent and spending gained 1.4 percent, the figures showed.

A market gauge of inflation expectations fell to the lowest in 15 months while crude oil tumbled in a bear market.

The 10-year break-even rate, derived from the difference between yields on Treasuries and inflation-linked debt of similar maturities, shrank to 1.86 percentage points, the least since June 2013.

Data this week has shown German investor confidence slid to the weakest level in almost two years, U.K. inflation unexpectedly stalled and China's consumer-price gains declined to the lowest in five months.

Fischer View

Fed Vice Chairman Stanley Fischer in an Oct. 11 speech noted concern the global economy is slowing, fueling speculation the central bank will push back the timing for raising interest rates.

"If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise," Fischer said in a speech at the International Monetary Fund's annual meetings in Washington.

West Texas Intermediate crude headed to $80 a barrel for the first time in 27 months as rising U.S. production increased supplies. Brent extended its biggest one-day decline in three years.

Both grades have collapsed into a bear market as shale supplies boost U.S. output to the most in almost 30 years and global demand growth weakens. The largest OPEC producers are responding by cutting prices, sparking speculation that they will compete for market share rather than reduce supply.

Retail sales declined 0.3 percent after a 0.6 percent August gain that was the biggest in four months, Commerce Department figures showed. The median forecast of 81 economists surveyed by Bloomberg called for a 0.1 percent decline.

"These are crazy, out of control moves in the market," said Andrew Brenner, the head of international fixed income for National Alliance Capital Markets. "Almost everyone was looking for higher rates, and when you have everyone looking one way and things start unraveling, they unravel big."

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