T-Bonds Are Recast as 'Anti-Stocks' in Market Pros' New Trading Game


The 30-year U.S. Treasury bond, often cast as the "big sister" or "best friend" among investments--reassuring, dependable and faintly boring--is starring in a new, sexier role this season: the "anti-stock."

Yes, the stodgy old T-bond has emerged as the perfect vehicle for "momentum" players who want to trade against the badly wounded stock market.

The very qualities that make T-bonds the No. 1 destination when investors seek safety--the bonds are highly liquid and super-safe--are also attracting flocks of fast-twitch traders who couldn't imagine holding an investment for 30 days, let alone 30 years.

And lately, if you want to trade Treasuries like these big boys, just watch what the Standard & Poor's 500-stock index does--and do the opposite.

Stocks up? Sell T-bonds. Stocks down? Buy T-bonds. As H. Ross Perot says, it's just that simple.

You don't think so? Consider this. Last Tuesday, as Wall Street returned to work after the Labor Day weekend, one piece of news had taken center stage: After the close of trading the previous Friday, Federal Reserve Board Chairman Alan Greenspan had signaled that the Fed's next move with interest rates might be a cut.

Got that? Interest rates might well be coming down. The Horse's Mouth had just said so. Falling rates are good for bonds. And this was against a backdrop of spreading financial crisis in foreign markets from Russia to Japan to Brazil. If ever there was a setup for a rally in Treasuries, this was it.

But if you played it that way you got burned. The Treasury market ignored Greenspan and watched the stock ticker instead. The Dow industrials surged a record 380 points. The S&P; 500 jumped 5.1%.


"Bond traders are rational," Bianco said. "They are trading off the most important economic indicator."

How so? Total stock market capitalization when the S&P; 500 hit its peak was 140% of U.S. gross domestic product, Bianco noted. So when the market heads south now, it takes a huge amount of wealth with it.

Although the existence of the "wealth effect"--the notion that consumer confidence and spending are pegged to the ups and downs of the stock market--remains in debate among economists, bond buyers are believers, Bianco said.

They also believe that the wealth effect is far more significant when the market is slumping than when it's rising. As Bianco put it: "As a tail wind, it's like a breeze, but as a head wind, it's gale-force."

So if you believe, as many traders now do, that falling stocks will mean a far weaker economy, the answer is to buy T-bonds.

It's been a great trade thus far: Since July 17, the S&P; 500, including reinvested dividends, has lost 13%, while 30-year Treasuries have returned 7.9% (counting interest earned and price gain).

To be more precise, if you'd invested $10,000 in the S&P; 500 on July 17, you'd have $8,702 now. But if you'd put the money in 30-year T-bonds, you'd now have $10,786.

That's a disparity of $2,084, or more than 20%, in eight weeks. Talk about your wealth effect!

And who has been buying T-bonds as anti-stocks? Perhaps surprisingly, demand appears to be home-grown. Much of the T-bond rally seems to boil down to Americans buying from Asians.

Remember the alarm that was sounded a few years ago when somebody noticed that more than one-third of all Treasuries were in foreign hands? We no longer control our destiny, pundits cried.

The fear was intensified by the fact that among the biggest holders of U.S. bonds outside this country were our chief economic rivals, such as the Japanese. What if they ever decided to sell, people asked. The bond market would collapse, the dollar would implode and our economy would be toast.

Alas, another perfectly good scare story bites the dust.

In fact, the Japanese have been selling T-bonds. In the year ended June 30--the most recent period with official statistics--the Japanese became net sellers of Treasuries for the first time in six years. Other Asian investors also were net sellers.

And guess what? All that Japanese selling corresponded with one of the all-time great bond rallies, one that brought the 30-year T-bond to a record-low closing yield of 5.20% by last Thursday.

We also can assume that the lion's share of buyers are American because during that same period, net purchases of Treasuries by all overseas buyers dropped to $110 billion from $250 billion the year before, according to Bianco.

This doesn't mean that ordinary investors have completely overcome their aversion to bonds. Individuals by and large have spurned Treasuries since the early 1990s in favor of stocks and higher-yielding bonds.

The swooning stock market and fears of a recession have changed many small investors' minds, of course, but analysts say the bond rally so far has mainly been led by hedge funds and other pros.

How long the zig-for-zag daily trading pattern between stocks and T-bonds can continue is anybody's guess, but some analysts say it's hard to imagine it will last much longer. After all, when was the last time you were handed a foolproof formula to make money on Wall Street?


Their Separate Ways

Since mid-July, big daily declines in the stock market have coincided with big rallies in the Treasury bond market, while bond prices have mostly fallen on days when stocks have rallied. Changes in the Dow Jones industrial average and the Benham Target 2025 bond fund (which owns long-term government bonds) on key dates:


Dow Jones Benham Target 2025 Date daily change fund price change July 23 Down 195.93 (--2.1%) +0.7% Aug. 4 Down 299.43 (--3.4%) +0.7 Aug. 17 Up 149.85 (+1.8%) --0.3 Aug. 27 Down 357.36 (--4.2%) +0.9 Aug. 31 Down 512.61 (--6.4%) +1.7 Sept. 1 Up 288.36 (+3.8%) --1.2 Sept. 8 Up 380.53 (+5.0%) --1.4 Sept. 10 Down 249.48 (--3.2%) +1.4 Sept.11 Up 179.96 (+2.4%) --1.7


Note: The Benham Target 2025 fund owns zero-coupon bonds, which in effectpay all of their interest at maturity. That makes the bonds' prices extremely sensitive to daily market interest rate swings.

Source: Times research

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