Rebound Has a Down Side: Mortgages Likely to Jump

By TOM PETRUNO

July 30, 2002 12 AM PT

TIMES STAFF WRITER

Wall Street’s rebound Monday was broad and deep, adding to many analysts’ confidence that stocks have reached at least a temporary bottom.

Shares of smaller companies and technology issues posted some of the day’s best gains, catching up to blue chips, which had sparked the market’s turnaround last Wednesday.

But what was good for stocks was bad for Treasury bonds and gold, as some investors yanked money from those traditional safe havens in favor of equities.

Experts warn potential home buyers and homeowners hoping to refinance that if Treasury bond yields continue to resurge, mortgage rates are almost certain to rise as well. Average 30-year home loan rates fell to 6.34% last week, the lowest in a generation.

On Monday the 10-year T-note yield, a benchmark for mortgages, jumped to 4.55% from Friday’s 4.38%, as some investors cashed out of bonds.

Shorter-term Treasury yields, which on Friday traded at their lowest levels since at least the 1970s, also rocketed. The 2-year T-note yield jumped to 2.39% Monday from 2.22% Friday.

Treasury yields have plunged over the last 10 weeks as the stock market has dived. Government securities were viewed by many investors as the safest place to stash cash as shares crumbled.

But bond pros have warned that Treasury yields had gotten so low they were at risk of serious whiplash if and when the stock market began to recover and fear levels receded.

A buyer of a five-year T-note on Friday locked in an annualized yield of just 3.39%. By Monday’s close, the yield on newly purchased bonds had soared to 3.58%.

“Anybody who bought a five-year Treasury note as a long-term investment last week had to have a few screws loose,” said John Lonski, economist at Moody’s Investors Service in New York.

Though some of the buying of recent weeks may have been from long-term investors, the Treasury market also has been riled by short-term traders riding the rally as far as it would go, analysts say.

Also, the stock market’s woes have left many companies unable to issue bonds. With a dearth of supply in the corporate bond arena, Treasuries attracted money that might otherwise have been earmarked for corporate issues.

But if the slide in stock prices has been halted, more money is likely to exit the Treasury market in search of higher-return options, Lonski and others say.

“If the equity market continues to recover, bond yields are going to move higher,” he said.

He estimated that the 10-year T-note yield could rise back above 5% for the first time since June 10, if the Standard & Poor’s 500 stock index rebounds another 10% to 15%.

James Glassman, economist at J.P.Morgan Chase Securities New York, noted that the drop in Treasury yields as stocks have tumbled has cushioned the economy by bolstering the housing market.

But if equity prices rebound, he said, the economy won’t need as much help from housing.

“If stocks’ losses are going to be recovered, then we don’t need interest rates this low,” Glassman said.

Of course, the key question is whether the stock market can sustain its turnaround. Trading volume Monday was below recent peaks, which disappointed some analysts who were looking for a tidal wave of buying interest.

But laggard sections of the market picked up steam, indicating that investors were looking far and wide for bargains.

The Standard & Poor’s 600 small-stock index jumped 5.6% Monday, a slightly better gain than the blue-chip S&P; 500’s 5.4% advance.

And many beaten-down technology stocks soared. The Nasdaq 100 index, home to the some of the nation’s biggest tech names, jumped 6.5%.

It still trails the gains that blue-chip indexes have racked up since July 23, when most indexes hit their lows in the latest sell-off.

Analysts have been encouraged by the rebound in the dollar over the last week. On Monday the dollar jumped to 119.79 yen from 118.85 on Friday, and now is the highest since July 5.

The dollar also gained against the euro, which fell to 98.1 cents Monday from 98.8 cents Friday.

A strengthening dollar suggests that foreign investors are moving capital back into U.S. equities. The dollar’s weakness since April has been attributed in part to concerns that foreign investors were losing faith in U.S. assets.

Glassman said the dollar got a boost from the U.S. House of Representatives’ vote on Saturday to give President Bush authority to negotiate broad new trade agreements.

“Outsiders felt the U.S. was heading down a protectionist path,” Glassman said. But that view may have changed with the House vote, he said.

Gold prices eased Monday, reflecting falling fear levels. Near-term gold futures slid 90 cents to $302.40 an ounce in New York.

Among Monday’s market highlights:

* Blue chips leading the Dow’s 447.49-point, 5.4% gain, to 8,711.88, included General Electric, up $2.65 to $30.45; Honeywell, up $2.47 to $33.12; 3M, up $5.81 to $126.66; and Procter & Gamble, up $3.02 to $87.22.

* Bank stocks were strong. Citigroup jumped $2.57 to $33.31 and J.P. Morgan gained $2.85 to $25.10.

* In the tech sector IBM rose $4.78 to $71.18, Intel added $1.08 to $18.89 and Brocade Communications was up $2.13 to $18.67.

* Among retail shares, Sears rose $2.58 to $49.75, Target gained $2.29 to $35.29 and Best Buy was up $3.19 to $32.35.

* Home builders soared despite the risk that mortgage rates may increase. Lennar surged $3.73 to $52.45 and KB Home rose $4.17 to $47.80.

* Falling gold prices failed to scare some investors away from gold mining stocks. Barrick Gold jumped 84 cents to $14.75 and Agnico Eagle leaped $1.23 to $11.34.

Tracking Major Stock Funds

Monday’s rally lifted all 15 of the nation’s biggest equity funds, although most of them still are sitting on double-digit losses so far this year.

Assets Pctg. change:

Fund (billions) Mon. YTD

Fidelity Magellan $65.9 +5.8% -21.7%

Vanguard 500 Index 63.9 +5.4 -21.1

American: Invest. Co. of Amer. 51.4 +4.0 -14.9

American: Washington Mutual 48.3 +4.9 -13.9

American: Growth Fund of Amer. 33.3 +4.7 -22.9

Fidelity Contrafund 31.2 +4.1 -8.2

Fidelity Growth & Income 30.2 +4.3 -16.6

American: EuroPacific Growth 26.5 +3.7 -11.8