Moving to a ‘Defensive’ Position

U.S. bonds gained for a third day Monday, pushing long-term yields to four-month lows, as a rising dollar and declines in emerging stock markets increased the attraction of Treasury securities.

“The flight to quality is the kicker that’s moving us up,” said David Jallits, who helps oversee about $5.5 billion of global bonds at Strategic Fixed-Income in Arlington, Va. He’s holding some long-term Treasury bonds on the expectation yields will fall to a record low in the months ahead.

The benchmark 30-year Treasury bond rose 13/32, or $4.06 per $1,000 bond, to 104 31/32, pushing its yield down to 5.77% from 5.80% on Friday, its lowest level since Jan. 15.

Investors also rushed into other so-called defensive securities, including high-dividend-yielding utility stocks. The Dow Jones utility stock index jumped 7.16 points, or 2.5%, to a record 291.81.

In currency trading, the dollar climbed to a seven-year high of 139.92 yen, and the yield on Japan’s benchmark bond dropped to a record low amid expectations that Japan’s economy won’t soon recover.

A strengthening dollar boosts the return on dollar-denominated securities when proceeds are converted into their home currencies. The slim 1.165% yield now offered on the benchmark No. 182 Japanese bond due in 2005 is also helping to make U.S. bonds more attractive, traders said.

“Investors will have to buy Treasuries,” said Hiroshi Kawakami, a trader at Hyakujushi Bank Ltd. “The dollar is so strong against the yen, and Japanese bonds offer too low of a yield.”

With yields low, corporations are lining up to sell bonds and lock in low rates on new debt. Tyco International Ltd. and WestPoint Stevens Inc. are each planning bond sales of more than $1 billion, in a week that could see $9 billion in sales, traders said. That would be almost triple last week’s sales.

U.S. bonds have gained in recent days amid expectations that economic turmoil in Asia and Russia will slow the U.S. economy and boost international demand for Treasury securities.

The National Assn. of Purchasing Management’s monthly manufacturing index fell to 51.4 in May from 52.9 a month earlier. The group’s index of prices paid, an inflation gauge, fell to 41.1 from 41.2 in April.

“It looks like the manufacturing side of the economy is weakening a bit,” said Timothy Wilhide, who helps oversee about $54 billion at Hartford Investment Management Co. in Hartford, Conn. “Asia may be presenting more weakness to moderate our economy.”

Expectations for a slowdown in the U.S. and no move soon by the Federal Reserve Board allowed traders to drive yields on two-year notes--among the securities most sensitive to changes in Fed rates--to 5.50%. That’s even with the central bank’s target for overnight lending between banks and a sign few investors expect an increase any time soon. Still, bonds retreated from gains of as much as 17/32 as traders were reluctant to load up after recent price increases.

Some investors who use price charts as a guide took advantage of recent price rises by selling when the 30-year Treasury bond futures contract for September delivery climbed to 122 3/32, just below the previous high of 122 5/32 set April 3.

“The rally is sustainable, but we’re running into some profit-taking,” said Richard Gilhooly, a government bond strategist at Paribas Corp.

Recent gains have helped boost returns on Treasuries. The 30-year bond has handed investors returns of about 4.4% so far this year, when price gains and interest are taken into account. Returns are even greater for investors who bought bonds when yields climbed above 6% in late April.

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A Rush to Safety

Long-term Treasury bond yields slid Monday to their lowest level since mid-January, as investors rushed into “defensive” investments amid worries over global economic turmoil. The 30-year Treasury bond yield, weekly closes and latest:

Monday: 5.77%

Source: Bloomberg News