Treasury Yields Continue to Drop on Signs of Slowing Economy

A good year for Treasury bond owners just keeps getting better.

Yields on longer-term Treasury issues fell again Tuesday, reaching new 52-week lows, amid more signs of a slowing U.S. economy.

That may be bad news for investors trying to lock in decent yields now. But for investors who have owned Treasury issues all year, falling market yields continue to boost the principal value of their older bonds, producing hefty “total” returns.

On Tuesday, the yield on the five-year Treasury note slid to 5.56% from 5.62% on Monday. The note’s yield hasn’t been this low since July 1999.

The 10-year note’s yield fell to 5.59% on Tuesday from 5.63% on Monday, and the 2-year note slid to 5.80% from 5.86%. Those yields also are the lowest since summer 1999.

For the year to date, the 10-year note has produced an 11.7% total return, meaning interest earned plus principal appreciation.

By contrast, the Nasdaq composite stock index has plunged 32.8% this year.

Investors snapped up Treasuries on Tuesday after the government said orders to U.S. manufacturers for durable goods fell 5.5% in October, a much bigger drop than expected. Also, the Conference Board reported that consumer confidence unexpectedly fell in November to its lowest level in more than a year.

“The evidence continues to come in that shows the economy is slowing and that should make” yields on Treasury notes fall even more, said Jay Mueller, an economist who also helps manage $45 billion at Strong Capital Management in Menomonee Falls, Wis.

Bond investors are betting that the Federal Reserve will begin cutting interest rates in 2001, analysts say.

But the Treasury bond market also benefits from a “flight to safety” by nervous investors as the stock market continues to sink.

The Treasury’s ongoing buybacks of its debt are boosting demand for notes and bonds as well.

The upshot is that, just as the stock market is a split market--with higher-risk tech stocks collapsing while many blue-chip issues are holding up well--so the bond market remains severely split.

Though Treasury yields continue to slide, yields on high-risk corporate junk bonds have soared to their highest levels since the early 1990s as investors shy away from the securities amid rising default rates by troubled borrowers.

The yield on the KDP Investment Advisors index of 100 junk bonds rose to 12.09% Tuesday from 11.99% on Monday. The index hasn’t been above 12% since 1992.

As junk yields soar, the value of existing bonds plummets. For junk bond mutual fund owners, that is translating into negative total returns this year. The Invesco High Yield bond fund, for example, has a negative total return of more than 11% in the year to date.

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ECCONOMIC SLOWDOWN

U.S. seems to be braking harder than anticipated. A1

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Hot Bonds

The five-year U.S. Treasury note yield fell to a new 52-week low Tuesday as investors rushed to lock in yields amid more signs of a slowing economy.

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Monthly closes and latest for 5-year T-note yield

Tuesday: 5.56%

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Source: Bloomberg News