Updated from 3:16 p.m. EDT
Investors rotated out of bonds and into stocks Tuesday, as equities soared for a fourth straight session.
The 10-year note closed down 1 26/32 at 102 31/32, lifting its yield to 4%, while the 30-year bond closed down 2 18/32 at 106 4/32, raising its yield to 4.97%.
A rumor that Warren Buffett had unloaded his bond portfolio made its way around Wall Street, although no one was able to confirm it. Meantime, traders speculated about asset reallocation into stocks.
"There are signs of asset-reallocation programs, the most obvious one being stocks jumping while bonds are getting toasted," said Michael Cartine, a treasury analyst at IFR/Thomson Financial, adding that the sale of 5,000 December bond futures contracts was another indication of an asset switch.
Typically, asset-reallocation programs are triggered by market calls from top strategists. While there were no major ones Tuesday, Banc of America's chief strategist, Tom McManus, upped his recommended equity weighting to 70% from 65% and reduced his bond weighting to 20% from 25% on Monday.
Technical factors also could be behind the move out of Treasuries and into equities, Cartine said. Among them, stocks now are trading above their 50-day moving average, a bullish sign for prices. Furthermore, October usually begins a six-month buying period for stocks.
The selloff in government bonds comes as the
Dow Jones Industrial Average
has surged almost 1000 points since hitting a five-year low last Wednesday and the
has gained nearly 100 points. A positive earnings report from
as well as better-than-expected news from
fueled stock gains on Tuesday.
In addition to bonds, investors were bailing from other safe-haven groups. The
Philadelphia Stock Exchange Gold and Silver Index
was down 3.5%, while the
Dow Jones Medical Products Index
was off 0.7% and the
Dow Jones Restaurant Index
was behind 0.2%.
Elsewhere, corporate bonds, which have done horribly this year as a result of balance-sheet turmoil at various corporations, were improving along with stocks on Tuesday. Spreads on Citigroup paper were lately narrowing 15 to 20 basis points, while spreads on GM paper were narrowing 40 to 60 basis points.
Nevertheless, Kevin Flanagan, a bond strategist at Morgan Stanley, said, "There has been a lot of chatter that the stock market has hit bottom. But we've been down this path before. There are still hurdles to overcome."
While recent stock news has been solid, the fundamental outlook is far from stellar. "We are still dealing with an uneven recovery," said Flanagan. "And the threat of war in Iraq hangs over us."
Over the past year, government bond investments have easily outperformed stock purchases. According to Chicago-based mutual fund research firm Morningstar, the average long government bond fund is higher by 10.68% year-to-date, while the average large-cap value stock fund is lower by 24%.