With Assist From Federal Reserve Chief, Bonds Soar
Keep flailing away with that jawbone, Mr. Greenspan! Bond investors everywhere are thanking you.
The Federal Reserve chairman’s comments to Congress on Wednesday that long-term bond yields “have a good way to go down”--assuming inflation is licked--helped fuel a terrific bond rally Wednesday and Thursday.
The yield on 30-year Treasury bonds, virtually the longest-term investment you can make, fell from 7.66% Tuesday to 7.61% Wednesday, then finished Thursday at 7.53%--the lowest yield since early January.
Yields go down, of course, when so many investors rush to buy bonds that sellers can demand more money to let their bonds go. If you already own bonds, yours are becoming more valuable each day that market yields slide.
It’s not as if Greenspan told the market anything new: Some Wall Streeters have been arguing all year that stubbornly high long-term interest rates would eventually follow short-term rates lower.
But Greenspan’s comments seemed to erode the last bit of apprehension that many bond investors have harbored about locking up money for the long haul. Fears that interest rates may suddenly pop higher soon--offering better returns to bond buyers who wait--are fast disappearing. Some investors now figure that 7.5% yields are the best they’ll see in a long time:
* At discount brokerage Jack White & Co. in San Diego, bond trader Jim Phillips says he’s selling 20- to 30-year Treasury bonds this month at the fastest pace in 18 months. “It’s really the last seven to 10 days,” he says. “We’re seeing a lot of investment advisers put their (clients) into long-term bonds now.”
* San Francisco-based Charles Schwab & Co., the nation’s largest discount broker, says long-term bond sales have surged 30% this month over normal monthly sales. “Bonds maturing in 10 years and up is where the big part of the pickup has been,” says spokesman Mark Thompson.
* The Vanguard Group of mutual funds, which prides itself on serving some of the nation’s most sophisticated small investors, says its long-term U.S. Treasury bond fund has suddenly attracted $4 million in new money in 10 days. During June, in contrast, the fund experienced a net outflow of $800,000.
Could these buyers be dead wrong? It’s worth noting that the bond rally is occurring just three weeks before the federal government dumps a huge new supply of bonds on the market: The Treasury’s quarterly “refunding” auction of three-, 10- and 30-year bonds will occur the week of Aug. 10.
Salomon Bros. estimates that Uncle Sam will try to raise $37 billion in that quarterly auction, a hefty chunk of change. If investors don’t feel as good about buying bonds three weeks from now as they do today, yields may have to rise on the new issues to attract buyers.
But maybe not. Bond investors this week aren’t reacting just to Greenspan’s comments. He got help from another batch of economic reports suggesting that the recovery remains anemic at best. The number of new claims for unemployment benefits is rising again nationwide, while an ABC/Money magazine “consumer comfort” index has plunged in recent weeks and now is almost to the all-time low it reached in January.
What’s more, even the White House now is conceding that economic growth isn’t meeting expectations. President Bush’s economic advisers predicted Thursday that the economy would grow only modestly by Election Day, and they naturally blamed congressional Democrats for the holdup.
The point is, many investors are studying the horizon, and they can’t find any hint of smoke suggesting that too-fast economic growth and/or inflation lurks ahead.
That means that short-term interest rates of 3% to 4% may go lower. Which leaves the 7%-plus yields on long-term Treasury bonds and corporate bonds looking more attractive than ever.
If you’ve been waiting to invest at least some portion of your assets in longer-term bonds, many of your peer investors are already taking the plunge--egged on by Greenspan.
If you’re still feeling skittish about making the move, do it this way: Put in a small amount of money now, then wait until just before and just after the big August T-bond sale to add to your investment, in case the market suffers from indigestion and yields jump back up temporarily.
