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Bond Rally Making History

The bond rally reached some big milestones Tuesday.
Author:

NEW YORK (

TheStreet

) -- The rally in U.S. government bonds hit some important milestones Tuesday as a sluggish U.S. recovery and fears about global growth continued to drive trading.

Yields on the two-year Treasury, which reached their lowest level in decades on Monday, continued to push lower Tuesday to touch 0.59% as yields on the 10-year note dropped below 3% for the first time since late April 2009.

The flight into Treasuries came as

investors dumped stocks

across the board.

Citigroup

(C) - Get Report

Ford Motor Co.

(F) - Get Report

,

Alcoa

(AA) - Get Report

,

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Boeing

(BA) - Get Report

and

Caterpillar

(CAT) - Get Report

all saw shares fall by more than 6% in intraday trading, though some of those names recovered slightly before the close.

While fear is part of the trade, investors are also being driven into bonds by confidence that inflation poses little threat, and that the Federal Reserve is unlikely to hike short-term interest rates for the forseeable future, says Dan Greenhaus, Chief Economic Strategist at Miller Tabak + Co.

Retail investors nervous about the environment simply have to continue increasing their allocation to fixed income, Greenhaus says.

"It's easy to dismiss the Treasury market as being in a bubble or an unwise investment,

but there is safety of principal, and as a retail investor that may find the economic or equity landscape not to your liking, one or two percent over a couple of years and the guarantee that you're going to get your money back is tough for a lot of people to pass up."

The low yields come despite the fact that the U.S. has a more than $13 trillion national deficit. Investors are willing to lend money to the U.S. because they believe it has stronger long-term growth prospects than most European countries, as measured by debt to GDP.

The best hope of luring investors back into stocks is the coming earnings season, Greenhaus says.

"This is arguably the most important earnings season we've had in 100 years."

--

Written by Dan Freed in New York

.