Yields Plunge, Pointing the Way to Rate Cut
Many investors who were panicked out of stocks Wednesday fled to the usual safe haven: Treasury bonds. Yields on government securities plunged to two-year lows, all but demanding that the Federal Reserve make a significant cut in its key interest rate Tuesday.
Gold, once a safe haven itself, fell despite stocks’ slide.
In the bond market, the yield on the six-month T-bill tumbled to 4.47% from 4.57% on Tuesday, while the two-year T-note yield fell to 4.30% from 4.45%. The 10-year T-note dropped to 4.82% from 4.93%.
All those yields are the lowest since early 1999.
Amid growing fear of a global financial crisis due to Japan’s banking and economic woes and sinking stock prices worldwide, many investors believe Treasury securities are the only smart alternative for their funds.
Stocks’ woes are “prompting a preference for quality, safety and liquidity,” said Bill Sullivan, analyst at Morgan Stanley Dean Witter. “Also, the erosion in equities is raising the prospect of more aggressive rate-cutting action by the Fed.”
Brad Stone, a bond strategist at Goldman, Sachs & Co., said many traders now believe the Fed will cut its key short-term rate, currently 5.50%, by 0.75 point Tuesday. Until this week, expectations had centered on a 0.50-point cut.
Bill Gross, who oversees $250 billion in bonds at Pacific Investment Management Co. in Newport Beach, joined the chorus calling for deeper rate cuts. Fed Chairman Alan Greenspan, Gross said on CNBC, “needs to . . . lower interest rates by 75 basis points [0.75 point] next week and 75 basis points the month thereafter.”
If the Fed follows that advice, bond yields could sink further--boosting the value of older bonds in funds such as those managed by Gross. Year to date, Gross’ Pimco Total Return bond fund is up nearly 3%, while the Standard & Poor’s 500 stock index is down 11.6%.
Meanwhile, in other markets:
* Near-term gold futures fell $4.30 to $262.50 an ounce in New York. Gold, which had bounced higher in recent weeks as Wall Street slid, was hurt Wednesday as a bullion auction by the Bank of England fetched only $266 an ounce, below expectations.
* April crude oil futures fell $1.18 to $26.41 a barrel, the biggest drop in three months, on expectations that supply will be ample even after the Organization of Petroleum Exporting Countries follows through this weekend on planned output cuts.
