Treasury Bonds

As the U.S. Treasury gets set to issue an additional $66 billion in notes and bonds this week, Pimco bond guru Bill Gross has a message for potential buyers: Stay away. Gross, who manages the $236-billion Pimco Total Return bond fund in Newport Beach, in February sold the last of the mammoth portfolio's Treasury bonds after saying interest rates were too low to justify holding Uncle Sam's debt. Now he has gone a step further, actively betting that the government securities will lose value.

Federal Reserve Chairman Ben S. Bernanke defended the central bank's continued efforts to stimulate the economy, even as he acknowledged a strengthening recovery and gave a slightly more upbeat assessment of the nation's employment situation. In his first appearance before the House Budget Committee since Republicans took control, Bernanke on Wednesday downplayed the threat of inflation in the U.S., despite sharply higher oil and food prices that have pinched emerging economies such as China's and contributed to the wave of protests in the Middle East.

Wall Street went back to feeling better about the economy Thursday, and that dashed hopes for a sustained drop in mortgage rates. Treasury bond yields jumped on some surprisingly upbeat economic reports -- including the first decline since January in the number of Americans drawing unemployment benefits, and a bigger-than-expected rise in May in the index of leading economic indicators.

With another big drop in U.S. stocks, the rush to safety has reached new levels. The desire to shift money in the traditional haven of Treasury bonds Thursday led investors to accept the lowest-ever rate on a 10-year government bond. The yield briefly fell below the once unthinkable level of just below 2%. At the end of the day it was 2.06%, down from 2.17% a day earlier. Gold, another favorite of anxious investors, continued to climb to new highs, trading at $1,824 an ounce, 48% higher than a year ago. The shifts into gold and Treasury bonds came after the stock market snapped three calm days with a sharp drop for major U.S. indexes.

Federal Reserve policymakers said Tuesday that the economy appeared to be "on firmer footing" than at their last meeting in late January, but they nonetheless pledged to stick with their program of buying Treasury bonds to underpin growth. The Fed's post-meeting statement was more upbeat than the January statement, while reiterating that the central bank expected to keep its benchmark short-term interest rate at "exceptionally low levels ? for an extended period. " "Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually," the Fed said.

Economists love 'em. The Treasury Department loves 'em. But investors in the first auctions of inflation-indexed Treasury securities earlier this year probably would not use "love" to describe their feelings for the bonds. Because their bonds' prices have dropped sharply in market trading, initial investors are sitting on paper losses of about $25 per $1,000 bond. Had they purchased regular 10-year Treasury bonds instead of the inflation-protection kind, the investors would have a $19.

The dollar plunged Monday to its lowest level against the German mark since October, 1992, and hit a new post-World War II low against the Japanese yen, after the United States and its allies failed to devise a plan to stabilize the greenback. Meanwhile, Treasury bond yields rose across the board, amid expectations that economic reports due out this week will show faster growth and rising inflation--leading to another Federal Reserve Board rate hike.

Risk and reward usually go hand in hand. But bond mutual fund investors learned last year that sometimes you get rewarded for playing it safe. For the second year in a row, long-term government bond fund investors earned double-digit returns on their money, ending the year up an average of 14.3%, according to Chicago fund tracker Morningstar Inc.

Long-term Treasury bond yields jumped Wednesday to just under 8%--their highest level since May, 1992--raising grave new worries about the economy's strength and what the Federal Reserve Board might do about it. In the latest sign that the economy remains on a roll, the government said Wednesday that factory orders rose in August at the fastest pace since 1992.

The U.S. Treasury is investigating suspicious trading in the 30-year bond Wednesday after an investment consultant said he told clients the department was about to announce that it would no longer issue the securities. Pete Davis said he provided clients with details of the decision based on a news briefing he attended before the release of the news sparked the biggest rally in the bond in 14 years. "Did the Treasury make a mistake?