Investors Take To T-Bonds Amid Uncertainty

Melinda Peer, 11.18.08, 03:52 AM EST  
Monday's gloomy economic data drove safe-haven seekers into Treasuries. Recession fears mounted on Monday, pushing down yields on long- and short-term Treasuries, as investors fled the uncertain equity market in favor of the U.S. government bond market.

American investors worried about the outlook fortheir own country after economic data released Monday showed that Japan, the second-largest economy, slipped into a recession as its economy shrank 0.1% in the third quarter, for an annualized contraction of 0.4%. (See "G20 Speeches Fail To Convince Asian Investors.")

Meanwhile, data from the Federal Reserve Bank of Philadelphia indicated the United States may be headed in the same direction. According to the Philly Fed's Survey of Professional Forecasters, the U.S. economy has been in a recession since last spring, and the downturn is expected to last 14 months, economists surveyed said. The survey forecast a sharp contraction in the fourth quarter, with gross domestic product expected to shrink by 2.9%, compared with previous projections for growth of 0.7%.

Adding to Monday's gloom was the Empire State Manufacturing Survey, conducted by the Federal Reserve Bank of New York, showing that business conditions in the state fell the lowest level--negative 25.43--since the index started in 2001.

Also spurring investors' flight to safe-haven investments was an announcement from Chief Executive Vikram Pandit of Citigroup that 53,000 jobs would be cut by the end of 2009's first quarter. (See "Another Ax Swings At Citi.") The company has been reducing its workforce to cut costs amid a global credit crisis that has forced Citi to post four consecutive quarterly losses with a combined deficit of more than $20.0 billion. (See "The Global Financial Crisis.")

Yields fell across the maturity spectrum as money tumbled into the market, some of it apparently fleeing declining stocks. (See "Red Finish For Sagging Street.") The yield on the bellwether 10- year note was down to 3.65% at Monday's close, from 3.75% late on Friday, and the 30-year bond's yield slipped to 4.18%, from 4.23%. Among shorter-dated maturities, the two-year note was returning 1.20%, down from 1.24%, and the three-month bill offered just 0.10%, down from 0.14%.

At the exchange-traded funds that track the bond market, the iShares Lehman 1-3 Year Treasury fund (nyse: SHY - news - people ) gained 15 cents, or 0.2%, to close Monday's 
trading session at $84.40 and the longer-term iShares Lehman 10-20 Year Treasury fund (nyse: TLH - news - people ) rose by 48 cents, or 0.5%, to close at $106.55.

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"You still have a yield curve that makes sense," said Bill Walsh, chief executive of the 
investment services firm Hennion & Walsh, since the shortest maturity still has the lowest yield.

From a historical perspective, however, Walsh said the yield curve was pretty steep as a result of the usual pressures such as supply and demand and the flight to quality--bond markets are considered a safe place to park money. "The two-year note at 1.20% is really indicative that people are afraid of the equity market," he remarked. "People are still buying quality, but they like the short-term maturity because they're worried about all the uncertainty."

Investment-grade corporate bonds found favor as well. The iShares IBoxx $ Investment Grade Corporate Bond Fund (nyse: LQD - news - people ) added 0.7%, or 65 cents, to close Monday at $90.55. But an aversion to risk kept investors away from junk bonds: the SPDR Lehman High Yield Bond (nyse: JNK - news - people ) fund fell 1.2%, or 37 cents, to $30.43.

--Reuters contributed to this article