Bond Yields Drop as Investors Seek Safety

U.S. Treasuries rallied again Friday, pushing two-year note yields to the lowest level in almost half a century, as Tuesday’s terrorist attacks drove investors to the safety of the most actively traded government securities.

Yields on two-year T-notes, which account for as much as 40% of trading by primary dealers, tumbled to 2.87% Friday from 2.98% Thursday.

Shorter- and longer-term yields also dived.

“This is a natural flight to Treasuries,” said David Kotok, president of Cumberland Advisors Inc. in Vineland, N.J. “Americans certainly consider them the safest securities. A better part of the world considers them to be so as well.”

The rally left two-year yields at their lowest level since 1958.

Trading had resumed in Treasuries on Thursday, after a two-day suspension in the wake of Tuesday’s terrorist attacks.

The Federal Reserve, which already has reduced its target for overnight bank loans, or federal funds, seven times this year to keep the economy out of recession, is expected to cut again soon.

“The U.S. economy alone, before this terrible tragedy,” was weak enough to “require the Fed to cut rates, perhaps a quarter-point, in between meetings,” said David Jones, chief economist at Aubrey G. Lanston & Co. He now expects the central bank to lower its key rate 1 percentage point, to 2.5%, by the end of the year.

Bond trading closed early, at 2 p.m. EDT, on the recommendation of the Bond Market Assn., an industry trade group. An abbreviated session also was recommended for Monday.

Garban Inter-capital, an inter-dealer broker that was in 1 World Trade Center, probably will be running from a backup site Monday, employees said. Prebon-Yamane (USA) Inc., a competing broker, has offered the company space in its New Jersey offices.

Garban, which handles Treasury trades between primary dealers and customers, hasn’t been able to operate out of London because its ability to conduct and settle trades relies on its U.S. division, traders said.

It wasn’t clear how much trading was being done by Cantor Fitzgerald, a firm devastated in the attacks Tuesday. The firm said Thursday it was up and running from other offices.

Though most bond mutual funds won’t be traded until Monday, transactions appeared to go smoothly at those fund firms that allowed trading Friday.

At Charles Schwab, volume was light for the 81 bond and money market funds being traded Friday, said spokesman Morrison Shafroth. It was the first time since the market closure that some of the firm’s bond funds were traded, although like many companies Schwab allowed money market fund trades starting Thursday. The seven Schwab brand bond funds and several funds from Federated Investors were among those available for redemption or purchase, Shafroth said.

At Fidelity Investments, an update on the firm’s Web site noted that 20 of its retail government bond funds were available for trading Friday. Those include the Spartan Government Income Fund, Fidelity Ginnie Mae Fund, Fidelity Government Income Fund and Fidelity Intermediate Government Income Fund.

Fidelity also resumed trading 14 foreign stock funds.

Most firms, including Pimco Funds in Newport Beach, whose $47-billion Pimco Total Return is the world’s largest bond fund, have been taking orders for bond funds but reminding customers that the transactions will not be carried out until a net asset value is calculated at the next close of the New York Stock Exchange (which is expected to be Monday).

Bond mutual fund trading generally is linked to the NYSE because the portfolios may hold various types of securities and because investors may wish to make exchanges between bond funds and stock funds, according to the Investment Company Institute, the fund industry’s main trade group.