Time for investors to lock in longer-term interest rates?
Yields on Treasury securities plunged Friday, after a downbeat May employment report bolstered expectations that the Federal Reserve is nearing the end of its two-year string of interest rate hikes.
That could be good news for borrowers, who have seen rates on mortgages and other loans rise sharply since mid-2004.
It also could be a signal for investors and savers who benefit from higher interest payments on bonds, savings certificates and other fixed-income securities to grab the best returns they can find, if they fear that rates have peaked.
But some financial professionals were advising caution Friday, noting that over the last year Wall Street often believed that interest rates had topped out, only to see them rise further.
"My gut tells me that the 10-year [T-note] yield is going to go up again," said Joseph LaVorgna, fixed-income economist at Deutsche Bank Securities in New York. He expects the yield to hit 5.5% by year's end, given continuing worries about inflation and rising rates abroad.
Investors, he said, would be better off keeping their savings in short-term accounts for now. The average yield on money market mutual funds, for example, is 4.4%, according to IMoneyNet of Westborough, Mass. The yield on six-month T-bills is 5%.
Tony Crescenzi, bond market strategist at brokerage Miller Tabak & Co. in New York, said he was surprised by how aggressively investors snapped up longer-term bonds after the employment data were reported.
The yield on the 10-year Treasury note, a benchmark for mortgages, tumbled to a six-week low of 4.99% from 5.1% on Thursday. The two-year T-note yield slid to 4.91% from 5.02%.
Bond yields fall as the prices of the securities rise.
Crescenzi noted that, at 4.99%, the 10-year T-note yield was below the Fed's key short-term rate of 5%.
Normally, yields on longer-term securities are higher than yields on short-term securities to compensate investors for the risk of tying up their money.
Historically, investors have pushed the 10-year T-note yield below the Fed's rate "only when there's the utmost confidence that the economy will slow," eventually leading to lower rates across the board, Crescenzi said.
