Sliding yields feed worries for economy

Times Staff Writers

A free fall in yields on Treasury securities in the last few weeks is deepening fears about the financial system’s woes and the outlook for the economy.

As spooked investors rush into Treasuries as a haven -- driving down interest rates on the bonds -- one message is that Wall Street is losing faith in the Federal Reserve’s ability to cure what ails the economy, some analysts say.

“There’s a sense that they’re not on top of the situation,” said Brian Bethune, an economist at Global Insight Inc. in Lexington, Mass.

The latest slide in Treasury yields also gives banks a green light to continue cutting the rates they pay savers on certificates of deposit. But with government bond yields so low now, bank accounts still may be a better choice for savers.


Wall Street’s worries bubbled over once again Monday, after brokerage Goldman, Sachs & Co. told clients to sell shares of Citigroup Inc., warning that the banking giant could face another round of massive mortgage-related losses.

Financial stocks led a broad market decline, with the Dow Jones industrial average tumbling 218.35 points, or 1.7%, to 12,958.44 -- the index’s first close below 13,000 since mid-August.

The Standard & Poor’s 500 index fell for the eighth time in 11 sessions, slashing its year-to-date price gain to a mere 1.1%.

Losers outnumbered winners by nearly 5 to 1 on the New York Stock Exchange.


The Russell 2,000 small-stock index plunged 2.5% to 750.33, crossing its summer low of 751.54, set on Aug. 15. The Dow is 113 points, or 0.9%, above its summer low set Aug. 16.

Wall Street’s anxiety was intensified by another plunge in yields on Treasury securities. The annualized yield on the two-year Treasury note, for example, slumped to 3.15%, down from 3.34% on Friday and the lowest since January 2005.

The two-year T-note rate has dived from 3.95% at the end of October. Bond yields fall as investors bid up the prices of the securities.

“It’s breathtaking,” Scott Gewirtz, head of Treasury trading at Lehman Bros. in New York, said of the recent slide in yields. Investors are pouring money into Treasuries because the securities are viewed as ironclad, at least in terms of their interest payments.


The sharp drop in yields and stock prices Monday also amounted to a rebuff of comments made by two Federal Reserve officials late last week.

On Friday, Fed Gov. Randall Kroszner signaled in a speech that the central bank was leaning against another cut in short-term interest rates to help the economy. He echoed similar remarks that William Poole, president of the St. Louis Fed branch, made Thursday.

“The current stance of monetary policy should help the economy get through the rough patch during the next year,” Kroszner said. Easing credit further, he said, would raise the risk of adding to inflation pressures.

The Fed cut its benchmark short-term rate half a percentage point Sept. 18 and followed that with a quarter-point cut Oct. 31, to 4.50%.


Despite Kroszner’s suggestion that the Fed has done enough, the action in the Treasury market indicates that bond investors fully expect more rate cuts in the next few months. The Fed meets again Dec. 11.

If investors believed that the Fed would hold its key rate at 4.50% indefinitely, they would be unlikely to lock in a 3.15% yield on a two-year T-note -- a yield 1.35 percentage points below the Fed’s rate.

“The markets are concluding that the Fed will have to do more,” said Bethune, the economist. If Fed officials continue to fight that notion, they risk stoking investors’ concerns that the central bank hasn’t acted fast enough to ease credit amid the lending crunch rooted in the housing market’s woes, some analysts say.

Wall Street’s mood was much the same in mid-August. At that time, stock prices were diving and Treasury yields were sinking, even though the Fed, at its Aug. 7 meeting, indicated no overt concern that the housing market’s turmoil would spread in the financial system.


On Aug. 17, the Fed suddenly sprang into action, cutting the rate at which it lends directly to banks by half a point and setting the stage for the mid-September cut in its more important federal funds rate.

Treasury bond investors may see themselves in a similar role now, in effect goading the Fed to act. But if policymakers stand pat, Treasury yields are likely to rebound in the next few months, said Adam Brown, head of government bond trading at Barclays Capital Inc. in New York. He’s advising clients against buying two-year T-notes at current yields.

For savers, the sharp slide in Treasury yields this month will put more downward pressure on bank savings certificate rates, said Ray Montague, who tracks rates at Informa Research Services in Calabasas. Even so, he said, banks “tend to ease into rate cuts,” rather than make large cuts in any one week.

Investors who usually buy Treasury securities should consider savings certificates instead, Montague said. Nationwide, the average yield on two-year bank CDs was 4.06% last week, nearly a point more than the two-year T-note yield on Monday, according to Informa.


Among Monday’s market highlights:

Treasury yields fell across the board as investors snapped up the securities. The 10-year T-note yield slid to 4.07%, down from 4.17% on Friday and the lowest since September 2005.

Citigroup led the financial sector lower after Goldman Sachs’ downgrade. Citigroup fell $2 to $32, Bank of America lost $1.55 to $42.82 and Merrill Lynch dived $2.24 to $53.87.

An index of 15 major home builders’ shares slumped 6.4% to a fresh four-year low after an index of builder sentiment held at a record low in November. KB Home dropped $1.63 to $23.42. Ryland Group fell $1.86 to $24.11.


Industrial and commodity stocks were hit hard on fears of a weakening economy. General Motors plummeted $2.48 to $26.79, U.S. Steel fell $3.16 to $86.42 and Deere was down $3.55 to $141.51.

The Dow transportation index dropped 2.3% to 4,457.97, wiping out the last of its gains for the year. Some analysts say the transports index is one of the best indicators of where the broad economy is headed.