Yields on most
Treasury securities fell to new lows for the year as bond and note prices rose in response to falling
Falling stock prices suggest that investors expect economic growth to slow, and when growth slows, interest rates normally decline, causing bond prices to rise.
"It's just continued declines in the Nasdaq and mounting evidence of weaker economic growth,"
Treasury market strategist Mark Mahoney said, explaining today's price action. "You've got a lot of people talking hard landing now," he added, referring to the possibility that the U.S. economy will experience a period of below-trend growth.
The benchmark 10-year
Treasury note rose 14/32 to 101 21/32, lowering its yield 6.5 basis points to 5.526%, the lowest since May 1999. Shorter-maturity issues fared even better, as they typically do when investors believe the
Fed will cut interest rates to stimulate the economy. The five-year note rose 14/32, dropping its yield 7.8 basis points to 5.484%, also the lowest since May 1999. The two-year note rose 4/32, lowering its yield 7.9 basis points to 5.716%, the lowest since October 1999.
Demand was strong at today's monthly auction of two-year notes. The Treasury Department sold $10 billion of new two-year notes at a yield of 5.695%. The auction produced a
bid-to-cover ratio of 3.14, the highest since June 1998. Strong demand for the issue reflects optimism that the Fed will cut interest rates, Mahoney said.
Treasury bond rose 14/32 to 108 19/32, dropping its yield 3 basis points to 5.647%.
Chicago Board of Trade
, the March
Treasury futures contract rose 8/32 to 101 25/32.
today revised lower its estimate of how quickly the economy grew during the third quarter, but as relatively old news, that elicited little response from the Treasury market.
Rather, bond traders focused on the implications of lower stock prices for future growth. Those include the possibility that consumer spending will slow because people feel less wealthy as their investments drop in value.
The Nasdaq's latest decline "is spurring demand for Treasury bonds out of the expectation that the U.S. economy will slow by enough to elicit a rate cut by the end of the first quarter,"
Moody's Investors Service
chief economist John Lonski said, referring to the possibility that the Fed will lower the
fed funds rate, a move that probably would lead market interest rates lower and bond prices higher.
Lonski thinks it's premature to draw that conclusion. "Given the still-high levels of consumer confidence and the surprisingly brisk start to the holiday shopping season, the Treasury market might again be guilty of getting ahead of itself," he said. And, as Treasury yields continue to fall, so should mortgage interest rates, giving a boost to the housing sector that could help consumer spending rebound, Lonski said.
Still, investors might want to think twice before betting against the Treasury market, which has continued to defy predictions that it couldn't keep going up. "It's been a tough battle the last few weeks for the market to go up, but it keeps inching higher," said Walter Burke, chief technical analyst at
Some of the demand for Treasuries is rooted in fear that stock prices will continue to fall, Lonski said. "Even at these comparably low yields, Treasury bonds represent a possibly valuable form of insurance against a possible nosedive by equity prices," he said.
The government revised its estimate of third-quarter
gross domestic product growth to 2.4% from 2.7%. That is the slowest rate since the third quarter of 1996, but not as slow as economists were expecting. Economists polled by
forecast a revision to 2.2%, on average.
In other economic news, the weekly
Mortgage Applications Survey
) detected a decline in refinancing activity and no change in new mortgage activity. The Refinancing Index fell to 576.4 from 602.7. The Purchase Index was unchanged at 307.
Currency and Commodities
The dollar rose against the yen and fell against the euro. It lately was worth 111.24 yen, up from 110.13. The euro was worth $0.8570, up from $0.8564. For more on currencies, see
Crude oil for January delivery at the
New York Mercantile Exchange
rose to $34.63 a barrel from $34.22.
Bridge Commodity Research Bureau Index
fell to 228.07 from 229.04.
Gold for February delivery at the
fell to $269.60 an ounce from $272.60.