Investors Rush Into Bonds on Dim Outlook
Worries about the economy sent some investors scrambling for safety Friday, driving long-term government bond yields to six-month lows and fueling a global pullback in stocks.
But the slide in bond yields is pushing mortgage rates lower too, which could be just the right medicine for one ailing economic sector: residential real estate.
The 10-year Treasury note yield, a benchmark for home loans, sank to 4.59% on Friday from 4.64% on Thursday, ending the week at the lowest level since March 1.
On Wall Street, the Dow Jones industrial average slipped 25.13 points, or 0.2%, to 11,508.10, extending the previous session’s 80-point decline.
Investors were jolted Thursday after the Federal Reserve Bank of Philadelphia issued its monthly report on manufacturing in the mid-Atlantic region. The report showed the first decline in business activity since April 2003.
Amid a host of other data in recent weeks that have pointed to a slowing economy, the Philadelphia report suggested that the slowdown might be more pronounced than many experts had forecast.
That is boosting confidence that the next move by Fed policymakers will be to cut short-term interest rates, although probably not until next year, analysts say. The Fed in August stopped raising rates for the first time in two years, and at a meeting Wednesday policymakers again held their key rate at 5.25%.
As Treasury yields fall, “The bond market is saying that the next move by the Fed will be an ease rather than a tightening,” said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati.
Government bonds benefit from a slowing economy for two reasons: One is that investors feel comfortable locking in longer-term yields, expecting all rates to decline further. The other reason is that as growth slows, the relative safety of government securities appeals to investors who worry that the economy could tip into recession, hurting stocks and other riskier securities.
The plunge in energy prices over the last two months also is helping bonds by reducing inflation fears, said Christopher Low, an economist at investment firm FTN Financial in New York. Inflation eats away at fixed-rate returns, so investors tend to demand higher yields when inflation is rising.
“The inflation picture has changed a ton in a short period of time,” Low said, as crude oil has tumbled from a record $77.03 a barrel in July. Near-term futures prices in New York fell $1.04 to $60.55 a barrel Friday. The price hit a six-month low of $60.46 on Wednesday.
But some analysts believe that bond yields have fallen too far relative to the economic outlook.
“We don’t think the economy is going down much at all,” said Drew Matus, an economist at brokerage Lehman Bros. in New York. He expects business activity to pick up in the fourth quarter, in part as falling energy prices give consumers more spending power.
“People keep looking at the cloud instead of the silver lining,” Matus said, referring to recent economic reports.
John Silvia, an economist at Wachovia Corp. in Charlotte, N.C., said he also believed that bond investors had become too pessimistic about the outlook.
“I think yields are too darn low,” he said.
One test of the economy’s resilience will be whether more buyers step up to take advantage of lower mortgage rates and boost sagging home sales.
The average 30-year home loan rate fell to 6.40% this week from 6.43% last week, the eighth decline in nine weeks, according to mortgage company Freddie Mac. The loan rate hit a four-year high of 6.80% in late July.
So far, however, refinancing activity has risen more sharply than new purchases, according to loan indexes tracked by the Mortgage Bankers Assn. Its index of refinancing activity has jumped 26% since late July, while its purchases index is up 2.3%.
As for the stock market, Fort Washington’s Sargen noted that although share prices weakened Thursday and Friday, blue-chip indexes still were close to their multiyear highs reached in May. The market has mostly been moving higher since late July, underpinned by falling bond yields and lower energy prices.
“I think the equity market is more sanguine” than the bond market about the economic outlook, Sargen said.
But he said investors were sure to focus on third-quarter earnings reports, which will begin to roll out in a few weeks, to see how significantly the economy’s deceleration was affecting companies’ bottom lines.
Among the day’s market highlights:
* The Standard & Poor’s 500 index lost 3.25 points, or 0.3%, to 1,314.78. The technology-dominated Nasdaq composite fell 18.82 points, or 0.8%, to 2,218.93.
Smaller stocks were down more sharply than blue chips. The Russell 2,000 small-stock index slid 1.2%.
For the week, the Dow fell 0.5%, the S&P; 500 eased 0.4%, the Nasdaq gave up 0.8% and the Russell index dropped 1.5%.
* Many industrial stocks fell Friday on concerns about the economy. Caterpillar lost $1.77 to $62.77, an eight-month low. Textron dropped $1.98 to $81.61. U.S. Steel was off $1.39 to $55.76.
* Stocks declined in many foreign markets on U.S. growth concerns. The German and Japanese markets both fell 1.3%. The Mexican market lost 0.5%.
Some investors snapped up government bonds in Europe. The 10-year German government bond yield sank to 3.69%, down from 3.75% on Thursday and a six-month low.
