nytimes.com
November 17, 2001
Interest Rates on Treasuries Return to Pre-Sept. 11
Levels
By JONATHAN FUERBRINGER
nterest rates on Treasury securities shot sharply higher
this week, in one of their biggest weekly moves in
recent history.
Rates, both long term and short, are now near or above
where they were Sept. 10, the day before the terrorist
attacks.
The surge, which continued yesterday despite positive
news on consumer inflation, frustrates the Federal
Reserve, which has aggressively tried to push rates
lower to help the economy, and the Bush administration,
which wants economic as well as military successes.
The yield on the Treasury's 10-year note, which plays a
crucial role in the economy because of its influence on
home mortgage rates, jumped to 4.85 percent yesterday,
from 4.78 percent Thursday and 4.31 percent a week ago,
the largest weekly move in percentage terms since these
notes were first regularly issued 25 years ago. Mortgage
rates, which had fallen to 30-year lows in recent weeks,
rose slightly this week.
While the jump in interest rates signals that many
investors think the economic outlook may be better than
thought, the rise could actually slow a recovery from
the recession. Treasury interest rates are a benchmark
for rates ranging from those on mortgages and bank loans
to corporate debt. So when Treasury rates rise others
follow.
"The economy is weak but not as damaged as people
thought," said Robert V. DiClemente, chief United States
economist at Salomon Smith Barney, taking a positive
view of the rise in interest rates. "This is a good old-
fashioned correction to the pessimism that became
entrenched after Sept. 11."
Some economists, however, are baffled by the surge in
interest rates because they think the economy is still
sinking and do not expect a recovery until the spring.
Inflation is very low, which is usually positive for the
bond market. Consumer prices declined 0.3 percent in
October, the government reported yesterday, and oil
prices have dropped sharply, with the price of a barrel
off almost 20 percent in just the last week. In
addition, some investors are worried that the return of
budget deficits as the government cuts taxes and
increases spending to stimulate the economy and fight
the war will push interest rates higher.
But reports this week that retail sales surged 7.1
percent in October and initial unemployment claims have
slowed seemed to have convinced many investors that a
recovery may come faster than expected. The decline in
oil prices can provide a boost to consumers that could
be stronger than a tax cut. A recent rise in raw
industrial commodity prices from 15-year lows could be a
signal that demand for them is picking up and that
production may have hit bottom.
All this new data has led many to believe that the Fed
is finished cutting short-term interest rates. When
investors have thought that a long cycle of Fed rate-
cutting is at its end, they have always sold bonds and
pushed yields, which move in the opposite direction,
higher.
After the central bank sliced its benchmark short-term
interest rate half a percentage point, to 2 percent on
Nov. 2, investors still expected a quarter-point cut at
its next meeting, Dec. 11. But based on the performance
of securities that predict Fed rate moves such a cut is
now seen as a long shot.
Although stock prices slipped yesterday as investors
took a breather, they have recently rallied sharply,
which some investors and analysts see as an indicator of
a recovery ahead. The Nasdaq composite index is up 8.6
percent in the last two weeks while the Dow Jones
industrial average climbed 5.8 percent.
Yesterday the Nasdaq inched down 1.99 points, or 0.1
percent, to 1,898.58, while the Dow fell 5.40 points, or
0.05 percent, to 9,866.99. The Standard & Poor's 500
index dropped 3.59 points, or 0.3 percent, to 1,138.65.
"After some extremely pessimistic numbers, you have had
some that provided a glimmer of hope about the economy,"
said Louis Crandall, chief economist at Wrightson
Associates.
Still, it is too early to tell how much weight to give
the latest economic data, said William C. Dudley, chief
United States economist at Goldman, Sachs. He does not
think that new data has been good enough to
have "motivated this change in the mood" in the bond
market. "You don't know what October means until you see
November," he said. Retail sales, he warned, "could
bounce right back down again."
Beyond the positive economic data, there are several
technical reasons the bond market has sold off so
sharply, sending interest rates higher. One has been a
flood of new corporate bonds sold recently as companies
sought to take advantage of lower interest rates. These
bonds, which offer investors higher rates than Treasury
securities, pulled a lot of buyers out of Treasuries.
There were $80.7 billion in new corporate bonds sold in
the last four weeks, compared with $29.8 billion in the
period a year ago, according to Thomson Financial.
In addition, the surprise announcement by the Treasury
on Oct. 31 that it would end the issuance of new 30-
year bonds helped send interest rates sharply lower over
the following weeks. But that rate decline may have been
more a result of the surprise than of longer range
fundamentals. At the time, many analysts said that the
government made the change in an effort to push interest
rates lower by shrinking the supply of 30-year bonds.
The yield on the Treasury's 30-year bond and 10-year
note are now higher than they were before the
announcement.
The bond market, like other markets, also has a tendency
to go to extremes, at times seeing only the bad news, as
was the case recently, and at other times, only the good
news. When the extreme pessimism or optimism comes into
question, the market moves sharply in the opposite
direction. Mr. DiClemente of Salomon Smith Barney still
predicts that the economy will decline about 2 percent
this quarter and show no growth until the spring of next
year. But the bond market, he argued, had been thinking
that "we're never going to get off our backsides here."
In late trading yesterday, the yield on the Treasury's
30-year bond was at 5.28 percent, up from 5.24 percent
Thursday and 4.88 percent a week ago. The yield on the
30-year bond was 5.44 percent on Sept. 10 and 5.20
percent on Oct. 30, the day before the surprise
announcement about the elimination of new issuance.
The yield on the Treasury's two- year note, another
barometer of expectations about Fed interest rate moves,
was at 3.02 percent, up from 3.00 percent Thursday and
2.44 percent a week ago. Its yield was 3.49 percent on
Sept. 10.
The yield on the 10-year note, 4.85 percent, was above
the 4.84 percent on Sept. 10 and the 4.41 percent on
Oct. 30.
Robert J. Barbera, chief economist at Hoenig & Company,
thinks that the economy has still further to fall and
will not recover until next year. Yet he acknowledges
that the "bond market is saying that this is the boom
quarter, this is when the economy turns around and
everyone gets caught with their pants down."
He added, "If you want to believe that the economy is
turning with a vengeance, now you have some data to
support that view." |
