Bond Yields Tumble After Election Ruling, Retail Slowdown Report

The U.S. bond market rallied strongly Wednesday after a report showing a drop in November retail sales reinforced expectations that a slowing economy will prompt the Federal Reserve to soon cut interest rates.

U.S. Treasuries quickly reversed modest losses suffered overnight after the U.S. Supreme Court, in a narrow ruling late Tuesday, dealt a devastating blow to Democrat Al Gore’s hopes of winning the disputed presidency.

Fixed-income investors, weary after five weeks of political and legal wrangling, turned their attention back to economic fundamentals, which remain very supportive of bonds.

“People were stuck on this political scenario where the inevitability of a Bush win would be bullish for stocks and bearish for bonds,” said Sadakichi Robbins, head of global fixed-income trading at Bank Julius Baer in New York.

The yield on the benchmark 10-year Treasury note tumbled from Tuesday’s close of 5.35% to 5.25%, its lowest level since mid-1999. Yields on other maturities also fell.

The U.S. Commerce Department said retail sales fell 0.4% last month, compared with a flat reading in October. Economists in a recent Reuters poll had expected 0.1% growth in November.

Conventional wisdom on Wall Street is that Bush’s proposed $1.3- trillion tax cut over 10 years would stimulate the economy--helping boost sagging stock prices--but eat into government coffers.

That, in turn, could jeopardize a program of fiscal restraint in Washington, which Gore had vowed to continue and which has propped up Treasury prices for most of this year.

“That’s been dealt with . . . and it’s a secondary factor. The fundamentals are very tough on stocks right now and very bullish for bonds,” Robbins said. “And it’s not just domestic. It’s global.”

The Fed raised interest rates six times between June 1999 and May to the federal funds overnight bank lending level of 6.50%, in an attempt to prevent economic growth from overheating. Many bond market players are now betting economic growth has slowed enough to prompt the Fed to cut rates early next year.

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Rates Fall

Bond yields continued their recent decline Wednesday as further evidence of a slowing U.S. economy led fixed-income investors to bet that the Federal Reserve may soon lower interest rates.

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Yield on the 10-year U.S. Treasury note, weekly and latest

Wednesday: 5.25%

Source: Bloomberg News