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Treasury Bills Post Biggest Gain in 6 Years as Investors Seek Safe Haven
Treasury Bills Surge as Safety Sought; Bonds Plunge (Update1) (Updates prices and adds other pricing and market information.)
New York, Oct. 8 (Bloomberg) -- U.S. Treasury bills posted the biggest gain in more than six years as investors sought the safest investments amid losses in stocks, longer-term government bonds and corporate debt. ''It's just a flight to safety,'' said Richard Caro, who helps oversee $8 billion at Summit Bank in Princeton, New Jersey. Three-month bills staged the biggest rally since Sept. 4, 1992, driving yields down 20 basis points to 3.91 percent on a bond- equivalent basis. Yields on two-year notes -- the most actively traded Treasuries -- fell 1 basis points to 4.12 percent. ''Everyone's panicking about what's going on in the world and they're putting their money in the bill market,'' said Mike Schreiber, a bill trader at Chase Securities Inc.
Thirty-year bonds, meantime, fell as investors favored shorter-term securities over long-term debt, in part because notes and bills stand to gain the most if the Federal Reserve cuts interest rates again, as many expect. Bonds also fell as the dollar slid against the yen for a third day.
Bellwether 30-year bonds fell 2 10/32 points, or $23.13 per $1,000 bond, driving the yield up 14 basis points to 5.00 percent. The decline in bonds brings three-day losses to 4 24/32 points, or $47.50 per $1,000 bond. ''Something's wildly out of whack,'' said Robert Smith, who manages about $360 million at Sage Advisory Services Ltd.
Financial stocks including J.P. Morgan & Co. and Merrill Lynch & Co. posted late-day gains amid speculation the Federal Reserve policymakers were planning to hold a meeting tonight. Fed spokesman Bob Moore denied there was a meeting planned.
Getting Out
Treasuries rallied in recent months as investors shifted money out of stocks and riskier bonds such as emerging market and high-yield corporate debt.
Today the Dow Jones Industrial Average fell as much as 277 points, or 3.5 percent, before paring the loss to less than 10 points by the close. The Nasdaq Composite Index, at one point down as much as 72, ended 43.49 points lower -- a 2.97 percent decline. Stocks also fell in Japan and across Europe, with declines in some major European indexes topping 4 percent.
Also helping drive gains in Treasury bills are expectations that loss-ridden hedge funds, including Long-Term Capital Management LP, will sell holdings of riskier debt to close out wrong-way bets, traders said. Hedge funds are unregulated investment pools for wealthy individuals and institutions that can invest in all kinds of assets. ''When you see a flight like this, it's people looking to get out -- plain and simple,'' said David Kotok, a partner at Cumberland Advisors in Vineland, New Jersey, which has about $500 million under management.
Differences in yield, or spreads, between investment-grade corporate bonds and Treasuries -- already the widest in at least 10 years and twice the levels of earlier this year -- widened more today.
For example, the difference in yield, or spread, between WorldCom Inc.'s 30-year bonds and Treasuries widened about 10 basis points today to 1.82 percentage points, traders said. The bonds were part of the telecommunications company's record $6.1 billion sale in early August, which was met with strong demand at the time.
More Fed Cuts?
A quarter-point cut in the federal funds rate by the central bank last week bolstered expectations for more cuts as the economy slows and for more gains in shorter-term Treasuries, among the most sensitive to Fed policy.
Optimism for more Fed rate cuts was fostered by Federal Reserve Chairman Alan Greenspan yesterday. He said that the outlook for U.S. economic growth next year had ''weakened measurably,'' and added that concern in U.S. financial markets about a slowing economy and risks in emerging markets isn't over.
For many investors, the remarks suggest that the Fed may be poised to follow up last week's rate cut with more reductions -- perhaps even before Fed officials next meet on Nov. 17. ''The Fed is going to continue to ease'' credit, said Creston King, who manages about $900 million of fixed-income securities at U.S. Global Investors in San Antonio, Texas. King, who currently favors overnight and repurchase agreement investments in his money market fund, predicts the Fed may cut its target for federal funds by a full point by next summer, from 5.25 percent currently.
Today's rally in notes helped stretch the difference in yield, or spread, between two-year notes and 30-year bonds to its widest in almost two years. The spread widened 15.5 basis points to 88 basis points, the biggest since October 1996. It earlier reached about 115 basis points. ''I'm in the business over 22 years and I can't remember ever seeing this curve steepen'' so much so fast, said George Adell, trader at Philadelphia-based Starboard Capital Markets. ''Keep your seat belt on.''
Dollar
Bonds may come under more pressure on any further declines in the dollar, which reduces the appeal of Treasuries to international investors who stand to earn less when they convert the proceeds into other currencies. Bonds suffered their biggest loss in about a year yesterday as the dollar registered its biggest drop in 25 years against the yen.
Today, the dollar briefly plunged below 112 yen -- the lowest since June 1997 -- on expectations a slowing economy will prompt the Federal Reserve to soon cut interest rates. Hedge funds also contributed to the dollar's slump as they bought back yen to repay loans taken out at Japan's low lending rates, which financed investments in emerging markets, many of which are now being unwound.
The dollar has since recouped some of today's losses, and was quoted at 119.25 yen, down from 121.32 yen yesterday.
There's also speculation that some investors are selling bonds and other long-term Treasuries as part of this move. ''The drop in the bond would suggest additional unwinding of yen-carry trades,'' said Mike Ryan, a government bond strategist at PaineWebber Inc.
Some investors said now's a good time to sell bonds, since 30-year yields aren't likely to fall much further, after reaching a more than 30-year low of 4.69 percent earlier this week.
Kotok at Cumberland said his firm sold all of its Treasury holdings -- about $100 million -- at the start of the week, when the yield on the 30-year bond was about 4.72 percent. ''We've had a wonderful ride,'' Kotok said.
Treasury Prices, Volume
At today's yield of 4.58 percent, U.S. 10-year notes yield 376 basis points more than the 0.82 percent yield on the benchmark 10-year Japanese bond, about 21 basis points more than a week ago. U.S. debt now yields 48 basis points more than the 4.10 percent yield on 10-year German bonds, 3 basis points less than a week ago.
About $75.4 billion of bills, notes and bonds traded through most of the major bond brokers by 3 p.m. Eastern time, about 15.9 percent less than the average Thursday in the third quarter of 1997 and 8.6 percent less than the average Thursday in the past month, according to GovPx Inc., a bond pricing service.
The basis, which reflects the difference between the current 30-year bond and the September futures contract adjusted for a conversion factor, was 26/32 lower at 458/32, or 14 5/32 points.
The five-year note fell 15/32 to 104 1/8, a yield of 4.29 percent. |
