Bonds Rally, Dollar Slides as Stocks Fall

This week’s bond market rally accelerated Thursday as U.S. technology stocks sank to new lows and blue-chip shares fell sharply, sending jittery stock investors into the haven of government debt.

A spike in weekly jobless claims to the highest level in two years and a report showing Chicago-area manufacturing activity shrank by its widest margin in nearly a decade highlighted a cascade of evidence that the economy is slowing.

“The equity markets are not painting a very pretty picture, and in addition, the data today pointed to a significant amount of weakening,” said Hussein Malik, Treasuries strategist at J.P. Morgan & Co.

The two-year Treasury note yield fell to 5.66% on Thursday from 5.72% on Wednesday. The benchmark 10-year note was yielding 5.46%, down from Wednesday’s close of 5.51%.

Sagging stock markets have fanned concerns that what has been welcomed as an orderly economic slowdown could spiral into a slump, pushing the Fed to roll back some of its six interest rate increases from June 1999 to May 2000.

Yields on most U.S. Treasuries have now fallen to levels seen only before the Fed began to tighten credit. The two-year T-note yield now is nearly a full percentage point below the Fed’s 6.50% federal funds rate, its key short-term interest rate. That is a dramatic signal that the market is betting official Fed rates will fall sooner than later, traders say.

Economists at Goldman, Sachs & Co. noted earlier this week that further substantial gains in jobless claims would be a good indicator that the risks were mounting of an early end to the decade-long record U.S. economic expansion.