Where's all the money going? Into bonds, of course. This morning's stock market selloff has lifted bond prices by nearly a full point, sending long-term interest rates plummeting to some of their all-time lows.
Bonds were also spurred by the dollar's rise above the high it reached before the June 17 joint intervention by the U.S. and Japan to bolster the yen. The benchmark 30-year Treasury was lately up 24/32 at 107 29/32, dropping its yield to 5.57%.
That matches the its best-ever closing yield, reached on
July 6. Earlier in the day, however, the long bond traded as high, in price terms, as 5.55%.
Expectations as reported by Reuters
Bonds are hanging onto their gains despite a negative surprise on the economic front. The
report on second-quarter
productivity and unit labor costs
, out at 10 a.m. EDT, found weaker-than-expected productivity and higher-than-expected unit labor costs. Productivity slipped 0.2% at a seasonally adjusted annual rate during the quarter, its first drop since the third quarter of 1996. It had been forecast to rise 0.7% by economists surveyed by
. Meanwhile, inflation-adjusted compensation posted another gain, rising 1.8%. Unit labor costs, which represent labor costs adjusted for productivity gains, rose 4.1%, the highest rate since the first quarter of 1995.
A number of that magnitude would normally "cause concern at the Fed,"
First Chicago Capital Markets
senior government trader Tom O'Connell said. Instead, the bad news on productivity, if it's contributing to the stock market's weakness, seems to be helping bonds "in a perverse way," he said.
While rising unit labor costs can forecast higher inflation, O'Connell added, "if this stock market turmoil continues, both domestically and internationally, people will start talking about a Fed ease. I haven't heard it yet, but if it continues I'm pretty sure we will."
The big move complicates the picture for this afternoon's start of the Treasury Department's quarterly refunding, a series of auctions of long-maturity notes and 30-year bonds. On the block today: $16 billion of five-year notes.
"Nobody's even had time to think about the auction," Patrick Dimick, Treasury market analyst at
Warburg Dillon Read
, said. Its fate, he said, is "all a stock market call." If the
futures are down 25 when bids are due at 1 p.m., "there will be a great bid for U.S. Treasury paper." But if they're only down 5, "there's going to be no bid at all." The S&P futures were down 18.50 at 11:20 a.m.
Said Dimick: "The success or failure of the five-year auction is pretty closely tied to the success or failure of stocks between now and 1 o'clock."