Most T-Bond Yields Rebound Slightly
Yields on most Treasury bonds rose modestly Thursday after Wednesday’s near-record plunge, but high-quality corporate bond yields continued to slide as investors hunted for better-paying alternatives.
Some investors sold mortgage-backed bonds, fearing that another dive in mortgage rates will boost refinancings and cut returns for mortgage bondholders.
Refinancing concerns also slammed some savings and loan stocks.
Treasury yields plunged Wednesday after the government’s surprise announcement that it will halt new sales of 30-year bonds.
Fearing a scarcity of long-term issues, buyers rushed in Wednesday, driving the yield on the most recently issued 30-year Treasury down to 4.87% from 5.21% Tuesday.
On Thursday, the 30-year yield fell further, ending at 4.80%.
Yields on shorter-term Treasuries also plummeted Wednesday, but they inched up Thursday as some investors sold to take profits. The yield on the 10-year T-note ended at 4.24%, up from 4.23% Wednesday, though it fell as low as 4.12% at midday, a three-year low.
The two-year T-note yield ended at 2.48%, up from 2.37% on Wednesday.
The drop in yields “has been so potent and so massive in the last 24 hours that people thought it was time to take in some profits,” said Anthony Karydakis, financial economist at Banc One Capital Markets in Chicago.
Many corporate bonds, however, saw strong demand as buyers sought higher yields.
Bonds of AOL Time Warner Inc., Conoco Inc. and Lockheed Martin Corp. were among those rising in value for a second day. AOL Time Warner’s 7.63%-coupon bonds due in 2031 rose $9 per $1,000 face value, pushing the yield down to 7.04%, according to Bloomberg data.
Long-term European and Japanese government bonds also attracted buyers, traders said.
Some investors sold mortgage-backed bonds on worries that many existing home loans will be refinanced, cutting bondholders’ returns.
But Bill Gross, bond chief at Pimco Funds in Newport Beach, said he remains a sizable buyer of mortgage securities even though refinancings are driving the yields down. Pimco’s holdings total about $100 billion, including $2 billion to $3 billion purchased over the last two weeks, he said.
The average yield on a package of five-year and 10-year Treasuries is about 3.85%, compared with the 5.8% average return currently available on mortgage securities from agencies that are government sponsored and, in the case of Ginnie Mae, insured, Gross said.
Concerns about refinancing drove shares of major savings and loans lower.
Though the lenders might do more business, their loan portfolios will earn less as rates drop. Washington Mutual Inc. slid $1.63 to $28.56, Golden West Financial Corp. fell $1.34 to $47.26, and Downey Financial Corp. lost $2.16 to $32.98.
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Bloomberg News and Reuters contributed to this report.
