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Bond Yields Tumble to 30-Year Lows

Treasuries: The 10-year T-note drops below 4% as investors seek safety. Home mortgage rates could decline further.

September 04, 2002|From Reuters

NEW YORK — Another rush of money into long-term Treasury bonds drove yields to new lows Tuesday, defying bond market pros who say returns on government securities already are absurdly low.

The news could be good for home buyers and those who want to refinance, because mortgage rates are likely to decline with Treasury yields, analysts said.

The global sell-off in stocks fueled the Treasury rally, sending the yield on the benchmark 10-year T-note to 3.96%, down from 4.13% on Friday.

Tuesday's close was the lowest in more than 30 years. The previous low was 4.09% on Aug. 13.

Among the horde of bond buyers were fund managers and insurers bailing out of equities, bond mutual fund managers hedging prepayment risk on mortgage-backed bonds and foreigners seeking safety, traders said.

The overriding factor was concern that the global economy may continue to falter, perhaps triggering new interest rate cuts by central banks, analysts said.

"We believe yields will continue to decline ... and not just here but globally," said Charles Van Vleet, director of fixed income at Credit Suisse Asset Management. "Slow growth is a worldwide problem."

Investors were again toying with the notion of a U.S. rate cut even though top officials from the Federal Reserve recently played down the idea. The central bank's key short-term rate has been at a 40-year low of 1.75% all year.

"The Fed seems ready to grin and bear the pain for now in the hope things get better. Well, we think the pain will only get worse and they'll have to cut in the end," Van Vleet said.

The yield on the two-year T-note, the most sensitive to market expectations for official interest rates, slid to 1.98% on Tuesday from 2.15% on Friday and is nearing the low of 1.89% set last month.

Bonds were helped by data from the Institute for Supply Management's August survey of U.S. manufacturing. Analysts had looked for some recovery after an alarming deterioration in July, but the ISM's index remained at 50.5, suggesting sluggish growth at best.

Even more worrying, the new orders index, a leading indicator of activity, fell to a nine-month low.

The data "show business sentiment is extremely fragile," said Laura Rhame, senior economist at Brown Bros. Harriman & Co.

"The Fed is hoping everything balances to the good, so they don't have to move again ... and this tips us to the bad," she added.

Analysts suspect the scales could tip further when the August employment report is released Friday. Average estimates are for payrolls to rise just 37,000 after a paltry 6,000 gain in July. Many analysts see the unemployment rate continuing to rise.

Higher unemployment could hurt consumer sentiment, eat into incomes and curb consumption.

But lower mortgage rates could help offset those negatives, analysts noted. The average rate on 30-year home loans fell to 6.22% last week, matching the record low set the week of Aug. 16, mortgage firm Freddie Mac said.

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