Long-Term Bond Yields Fall Again

Long-term Treasury bond yields continued to decline Tuesday, driven in part by expectations that proposed corporate pension changes could boost demand for debt securities maturing in 10 years or more.

The stock market edged up, while the dollar rose against the yen but halted its advance against the euro.

In the bond market, the yield on the 10-year T-note slid to 4.02% from 4.05% on Monday, reaching the lowest level since Oct. 26.

The 10-year T-note is a benchmark for mortgages and other long-term loans.

The yield on the longest-term Treasury issue, a bond maturing in 26 years, ended at 4.37%, down from 4.42% on Monday and the lowest since June 2003.

The slide in long-term bond yields in recent months has surprised many Wall Street pros, because it has occurred at a time when the Federal Reserve has been raising short-term rates.

Some big investors are buying bonds because they believe the Fed’s credit-tightening campaign could end by midyear, analysts say. Speculative buying by “momentum” traders also is driving yields lower, they say.

On Monday and Tuesday, another factor was fueling bond buying: The Bush administration included a provision in its proposed fiscal 2006 federal budget calling for changes in how corporate pension funds calculate their future liabilities. The net result could be that more funds would have to lock in yields on long-term bonds to assure a certain rate of asset growth.

The goal would be to lower the possibility of pension funds ending up insolvent and becoming a burden on the federal Pension Benefit Guaranty Corp., the administration said.

Some bond traders and investors are loading up on long-term bonds, betting on greater future demand from pension funds, analysts said.

“The pension fund reform is leading” the demand for the longest-term Treasuries, said Jay Mueller, a senior portfolio manager at Wells Capital Management in Milwaukee.

Foreign pension funds also have become more aggressive buyers of long-term bonds, as they attempt to better match up their assets with their long-term liabilities, some bond market pros say.

Demand was reasonably strong Tuesday at the Treasury’s auction of $22 billion of new three-year notes, traders said. The notes were sold at a yield of 3.47%.

Indirect bidders, which include foreign central banks, bought 44% of the securities, down from 53.6% at the previous auction in November but still a decent showing, traders said.

The nation’s huge budget and trade deficits mean the United States is heavily dependent on foreign capital.

Foreign demand will be tested again today as the Treasury sells $15 billion in five-year notes. On Thursday it will sell $14 billion in 10-year notes.

In currency trading, the dollar rose to a three-month high of 105.66 yen from 104.84 on Monday, while the euro was flat at $1.278. The dollar has rallied briskly in recent weeks, in part as Wall Street has grown more confident that foreign money will continue to flow here.

The stock market had a relatively sleepy session. The Dow Jones industrial average added 8.87 points, or 0.1%, to 10,724.63.

The Standard & Poor’s 500 index was up 0.58 point, or less than 0.1%, to 1,202.30 and the technology-heavy Nasdaq composite gained 4.65 points, or 0.2%, to 2,086.68.

Rising stocks outnumbered losers by narrow margins on the New York Stock Exchange and on Nasdaq.

Among the day’s highlights:

* Many home builders’ shares hit record highs, helped by expectations of lower mortgage rates as bond yields fall. The national average rate on 30-year mortgages was 5.63% last week, the lowest since April, according to mortgage giant Freddie Mac.

Among builders, Toll Bros. jumped $3.47 to $86, KB Home surged $2.20 to $118.03 and Standard Pacific rose $1.59 to $77.46.

* On the downside, mortgage financier Fannie Mae slumped $2.59 to $61.86, a 52-week low. Congress continues to look into the company’s accounting.

* Semiconductor stocks rallied after an analyst with SG Cowen said the inventory buildups that have plagued chip makers abated in the fourth quarter. Intel rose 50 cents to $23.41, International Rectifier jumped $1.15 to $42.45 and National Semiconductor gained 74 cents to $18.72.

* The Standard & Poor’s 600 index, a measure of smaller stocks, rose 0.4% to a record high of 330.69. Many smaller issues have bounced back after a spate of profit-taking early in January.

* Stun-gun maker Taser International tumbled $1.94 to $15.22. The company said its fourth-quarter profit jumped 77%, but the results were shy of Wall Street estimates.