Yields Soar in Retreat From Bonds
Easing worries about the economy sent Treasury bond yields rocketing again Thursday, as last week’s panic buying of fixed-income securities gave way to panic selling.
Some of the money fleeing bonds found its way into the stock market, pushing key indexes modestly higher. The Dow Jones industrial average added 48.78 points, or 0.5%, to 9,872.39.
Though the continuing rebound in Treasury yields suggests rising optimism about the economy in 2002, it spells bad news for Americans who have waited to refinance their mortgages: Loan rates are climbing again.
In the bond market, the yield on two-year Treasury notes soared to 2.98% from 2.72% on Wednesday, and now is the highest since Sept. 13.
The 10-year T-note, a benchmark for mortgage rates, jumped to 4.77% from 4.53%. It’s now at its highest level since Sept. 11, the day of the terrorist attacks.
“This is unbelievably dramatic,” Mario DeRose, fixed-income strategist at brokerage Edward Jones in St. Louis, said of the turnaround in rates.
Indeed, just a week ago yields on some Treasury issues were at 40-year lows as investors rushed to lock in safe returns, fearing the economy would continue to deteriorate, driving interest rates ever lower. The 10-year T-note fell to 4.18% last week.
But even as yields dived many analysts warned that short-term speculators were helping to drive the market, and that they might flee as quickly as they poured in, producing a whiplash in rates.
That whiplash began earlier this week as some economic data began to suggest that the outlook isn’t as dire as many investors had feared.
The bond market was caught off-guard Wednesday by a report of a huge jump in October retail sales. Though the 7.1% surge was propelled largely by zero-interest auto financing, it nonetheless depicted consumers as willing to spend.
On Thursday, the government reported that initial jobless benefit claims fell to 444,000 last week, from 452,000 the week before. Tom Atteberry, Los Angeles-based bond analyst and co-manager of FPA New Income Fund, said some of the bond sell-off represents the unwinding of unrealistically pessimistic bets on the economy. “People said, ‘Do I really want the 10-year Treasury at a 4.2% yield? Probably not,”’ Atteberry said.
As investors sold bonds Thursday, driving prices lower and yields higher, short-term speculators saw their losses mount, so they, too, fled the market.
“Traders got stung, and when they get stung it becomes a piling-on effect,” said Dennis Hynes, a Treasury market expert at R.W. Pressprich & Co. in New York.
Optimism about the economy also has been boosted by the rapid turn of events in Afghanistan, analysts said.
“There was this post-Sept. 11 pessimism that the world had changed and that life wasn’t good anymore,” said Tad Rivelle, a fixed-income portfolio manager at Metropolitan West Asset Management in Los Angeles. “As we get further away from the event, we get a more balanced perspective.”
Even as bond yields have jumped, stock prices have advanced--a sign that more investors are shifting from “safe” bonds to riskier stocks, which would be expected to fare better than bonds if growth resumes.
Still, stocks’ gains Thursday were limited compared with recent sessions. Though the blue-chip Standard & Poor’s 500 index inched up 0.1%, losers topped winners by 16 to 15 on the New York Stock Exchange and by 19 to 17 on Nasdaq.
The Nasdaq composite index eased 2.62 points to 1,900.57. It had zoomed 75 points Monday through Wednesday.
Among Thursday’s stock market winners were many travel-related stocks. On the downside, shares of home builders tumbled on concerns about mortgage rates.
For 30-year fixed-rate home loans of as much as $275,000, interest rates bottomed out at an average 6.38% last week, with an upfront fee of 0.66 points (0.66% of the loan amount), according to HSH Associates in Butler, N.J., a data firm that surveys 2,000 lenders.
By late afternoon Thursday, the average rate had risen to 6.64%, with 0.47 points for a similar loan, HSH Vice President Keith Gumbinger said.
Rates rose an average of 0.08 points Thursday and probably will continue rising today as the effects of the “very ugly day” in the bond market continue to work their way down to mortgage lenders, Gumbinger said.
Rising rates haven’t yet choked off business, said Steve Majerus, senior vice president at E-Loan Inc., an online loan site.
Higher rates “certainly will drive some people who were on the cusp,” so they won’t qualify for the loans they want, Majerus said. But he said the number of mortgages originated at E-Loan “is still setting records.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Rates Resurge
Yields on Treasury securities have rebounded dramatically in the last week from what had been the lowest levels in 40 years on some issues.
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Treasury Annualized yield: term Nov. 7 Thurs. 3-month 1.79% 1.89% 6-month 1.73 1.98 2-year 2.29 2.98 5-year 3.47 4.11 10-year 4.18 4.77 30-year 4.79 5.24
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Source: Bloomberg News *
Times staff writer E. Scott Reckard contributed to this report.
Market Roundup, C6-C7
