U.S. Bonds Drop as Stocks Rally, Traders Balk at Lowest Yields in Decades
U.S. Bonds Fall; Stock Rally Saps Treasuries' Allure (Update1) (Updates prices and adds other market information.)
New York, Sept. 1 (Bloomberg) -- U.S. bonds posted the biggest loss in 2 1/2 months as stocks soared and investors balked at the lowest Treasury yields in decades.
The 30-year U.S. bond fell 1 3/32, or $10.94 per $1,000 bond, snapping a six-day rally and registering the biggest loss since June 17. Yields rose 7 basis points to 5.34 percent. Ten- year note yields rose 8 basis points to 5.06 percent.
Bonds surged in recent weeks as turbulence in financial markets around the world sent investors rushing to Treasuries as a haven. Yesterday, yields on U.S. 30-year bonds fell as low as 5.23 percent -- the lowest since the U.S. started regular sales of the securities in 1977 -- after the Dow Jones Industrial Average plunged 6.4 percent. ''The emotion in the stock market is dictating what goes on in bonds,'' said Sam Paddison, who oversees $11 billion at First Capital Group in Philadelphia and said his firm sold some bonds in recent days.
Today, bonds fell as the Dow industrial index surged 288.36, or 3.82 percent, to 7827.43. Bonds are ''trading right off of stocks,'' said Carl Ericson, who oversees some $6 billion at Colonial Management Associates in Boston.
Fed Watch
Some investors also question whether bonds can rally much more with yields so low. Already, 30-year government bonds have handed investors returns of 12.6 percent so far this year when price gains and interest are taken into account -- a performance that may be hard to match in the months ahead, they said.
Treasuries of all maturities yield less than the Fed's 5.5 percent target for the federal funds rate, the rate charged on overnight loans between banks. Two-year notes, at 4.87 percent, yield 63 basis points less than the fed funds target.
The drop in yields already reflects expectations for a Federal Reserve interest rate cut -- if not more than one, some investors said. The low yields also indicate that investors foresee slower U.S. growth, if not a recession, as well as more problems overseas, where currency devaluations in Russia and Asia during the past year threw economies into turmoil. ''The market's priced in about everything you can price in,'' said Paddison at First Capital.
The Fed last changed rates in March 1997, raising the fed funds target by a quarter point. The Fed's policy-setting committee next meets Sept. 29. The Fed may be reluctant to cut rates without more signs of an economic slowdown at home.
On Friday, a government report will probably show that the economy added 377,000 jobs in August, according to the average forecast of analysts surveyed by Bloomberg News. That would suggest the strong jobs market -- a concern for Fed Chairman Alan Greenspan and other central bankers -- hasn't weakened. ''Right here, right now I don't think the Fed would do anything,'' in terms of cutting rates, said Robert Giordano, who manages about $1 billion of fixed-income investments at Bank Leumi Trust Co.
Slowing Economy
Yet Giordano and other investors did say the Fed may choose to cut rates if stocks post more big losses. Bond bulls also point to signs that the economy may be losing some steam.
A report on nationwide manufacturing today indicated that the growth is slowing and inflation is subdued. The National Association of Purchasing Management's index of factory activity rose to 49.4 in August from 49.1 in July. A reading below 50 indicates manufacturing activity may be contracting. At the same time, its index of prices paid, an inflation gauge, was 38.4, near the 15-year low of 38 reached in July.
David Kotok, portfolio manager at Cumberland Advisors in Vineland, New Jersey, with $400 million of fixed-income securities under management, predicts yields on 30-year bonds may fall to 4.90 percent in the months ahead as the economy slows and the Fed cuts rates. ''This is a great opportunity to buy bonds -- it has been and it still is,'' Kotok said. ''Interest rates are going lower.''
Treasury Prices, Volume
At today's yield of 5.06 percent, U.S. 10-year notes yield 371 basis points more than the 1.35 percent yield on the benchmark 10-year Japanese bond, 8 basis points less than a week ago. U.S. debt now yields 73 basis points more than the 4.32 percent yield on 10-year German bonds.
About $88.1 billion of bills, notes and bonds traded through most of the major bond brokers by 3 p.m. Eastern time, about 27.2 percent more than the average Tuesday in the third quarter of 1997 and 21 percent higher than the average Tuesday 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 9/32 lower at 368/32, or 11 1/2 points.
The three-month bill's yield was 3 basis points higher at 4.90 percent, calculated on a bond-equivalent basis. The six-month bill's yield was 3 basis points higher at 4.97 percent, while the one-year bill's yield was unchanged at 4.85 percent.
The three-year note fell 7/32 to 102 1/32, a yield of 4.80 percent. The five-year note fell 1/2 to 101 14/32, a yield of 4.91 percent. |
