Renewed Selling Spree Clobbers Bond Market : Interest rates: Analysts wonder what it will take to lure buyers back into market, as securities continue to plummet.
Another wave of selling swept the bond market Monday, sending long-term yields to 15-month highs and raising fears of even higher rates ahead, as the badly pummeled market searches desperately for buyers.
The yield on 30-year Treasury bonds, which had rocketed from 7.08% last Thursday to 7.26% on Friday on news of a surge in March employment, zoomed to 7.40% by Monday’s close--its highest since 7.47% on Jan. 13, 1993.
The mood among bond traders and analysts around the country was one of stunned disbelief, as many of them wondered aloud what it would take to lure buyers back to fixed-income securities.
Worse, many pros fear a new round of selling today, as millions of bond mutual fund investors see the biggest one-day losses in years in their fund shares. Fund prices Monday reflected not only Monday’s trading but also accumulated losses from Friday’s slump in bond values. Mutual funds did not officially trade Friday, even though bonds were traded among some investors.
“This is one of the sharpest selloffs I’ve ever experienced,” said Gerald Guild, a veteran bond trader at Advest Group in New York, reflecting on the market’s ongoing massacre. Potential buyers, he said, “have their hands in their pockets,” and most refuse to step up and bid for bonds of any type. As bond prices drop, their yields soar.
Just three months ago, the T-bond yield was at 6.35%, and most bond traders did not expect that yield to hit even 7% until later this year.
But the rebounding economy and rising inflation fears began to drive yields up in January. That turnaround has become violent over the past month, as massive numbers of speculators who expected yields to slide in 1994 have attempted to sell bonds all at once--only to find few takers.
Ironically, some bond traders had hoped that the stock market would plummet Monday morning, and that selling stock investors would reinvest in bonds, helping to pull yields lower.
But the Dow industrial average held its loss to 42.61 points Monday, closing at 3,593.35, even as bond yields surged. “A lot of bond managers thought the stock market would bail us out, but it didn’t happen,” said David Rosenberg, manager of the Oppenheimer U.S. Government Trust bond fund.
Bond traders’ gloom was worsened by the market’s inability to key off any good news. A plunge in most commodities Monday, which should have lessened inflation worries and allowed interest rates to fall back, failed to help bonds.
The Commodity Research Bureau index of key commodities traded at a two-month low of 225.32 before closing off 1.65 points, or 0.7%, at 226.02.
While gold led commodities’ slide, falling $5.50 to $386.30 an ounce, bond investors paid more attention to the continuing rebound in crude oil prices. Oil futures jumped $1 to a two-month high of $15.79 a barrel on the New York Merc. Reports of unrest in Algeria helped spur the gain.
The bond market also was fixated on an afternoon report from the Center for International Business Cycle Research at Columbia University. The Center’s inflation index rose to 107.1 in March from 106.7 in February, refueling fears that prices of goods and services are rising with the economy.
That report overshadowed the National Assn. of Purchasing Management’s monthly business survey, which showed that while the economy continued to expand in March, its pace cooled somewhat.
Bond traders say the reluctance of buyers to come forward in part reflects uncertainty about the strength of the economy and the potential for higher inflation.
But they also say that the speed with which interest rates have risen this year has surprised so many investors that they are too afraid to take a chance and buy bonds--because the risk appears too great that yields will simply continue to rise in the short run.
Worse, Wall Street brokerages are increasingly unwilling to buy bonds from mutual funds and other sellers, because the brokers have already lost so much money on the bonds still in their inventories.
One fund manager said that in soliciting bond bids from five brokerages Monday, two said outright that they wouldn’t even name a price for the bonds.
What is unclear now is whether bond mutual funds have adequate cash on hand to meet further potential redemptions by conservative shareholders, more of whom may decide they are losing too much of their principal as market interest rates rise and older fixed-rate bonds plunge in value.
Long-term bond fund shares lost 1.5% to 2.5% of their value Monday. Some of the funds have lost as much as 10% since last fall.
“The biggest concern I have is that (other) funds still don’t have enough cash” to meet exit requests, said one fund manager. If that’s the case, rising redemptions could force fund managers to dump more bonds in the market, potentially sending interest rates even higher.
At some point buyers will return to the market, analysts say, but most have become unwilling to project how high yields will have to go in the interim. It didn’t help Monday that well-known Wall Street economist Henry Kaufman suggested that bond yields might eventually reach 9% or 10%, though he said there would be a rally before that.
In other markets Monday:
* U.S. stocks finished broadly lower once again, though up from their worst levels of the day, as investors reacted to surging interest rates and to growing fears that stocks have entered a bear market.
The Standard & Poor’s 500 index slumped 6.85 points, or 1.5%, to 438.92. The Nasdaq composite of mostly smaller stocks tumbled 16.05 points, or 2.2%, to 727.41. The S&P; now is off 8.9% from its peak; the Nasdaq index is off 9.5%.
Losing issues swamped winners 21 to 4 on the Big Board, on heavy volume of 344 million shares.
* Latin American stocks dove, reflecting Wall Street’s woes and rising interest rates. In Mexico City, the Bolsa index plummeted 144.89 points, or 6%, to 2,265.49. Argentina’s market was off 8.4% and Brazil’s key index lost 10.6%.
* MAIN STORY: A1
Big Losses in Bond Funds
Shares of bond mutual funds posted some of their largest one-day losses in years on Monday, as soaring market interest rates devalued older bonds. How some major bond funds fared (NAV is net asset value per share):
52-week Mon. NAV Mon. NAV Bond fund high NAV and chng. pct. drop Sierra Cal. Muni $11.66 $10.27, -0.25 -2.4% United Municipal $7.97 $6.85, -0.16 -2.3 Kemper Municipal $11.12 $9.71, -0.19 -1.9 Putnam U.S. Gov. B $13.82 $12.56, -0.24 -1.9 Vanguard GNMA $10.57 $9.80, -0.18 -1.8 SteinRoe Intermed. $9.39 $8.51, -0.14 -1.6 Bond Fund of Amer. $15.13 $13.45, -0.21 -1.5 Kemper Tax-Fr. Cal. $8.17 $7.13, -0.10 -1.4 Prudential Hi-Yld. B $8.82 $8.30, -0.07 -0.8
