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Markets & Stocks
Bonds: Can it get worse?
December 31, 1999: 1:35 p.m. ET

After tough year for Treasuries, analysts see more losses ahead
By: Staff Writer Jake Ulick
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NEW YORK (CNNfn) - Treasury bonds fell Friday, ending one of the bond market’s worst years on record, when inflation-wary investors fled the relative safety of fixed-income securities for the higher returns of stocks.
    Three Federal Reserve interest rate hikes since June -- and the anticipation of more next year -- also weighed on bonds, whose yields track the central bank’s lending rate.
    The benchmark 30-year Treasury bond fell nearly a point, or 26/32, in a shortened, New Year’s Eve trading session Friday. Its yield, which moves in the opposite direction from its price, rose to 6.48 percent - matching the highest level in more than two years -- from 6.41 percent Thursday.
    The Lehman Brothers Aggregate bond index, a broad measure of bond performance, returned negative 0.58 percent in 1999, according to preliminary data, the second-worst year in its 24-year history.
    "It’s been a tough year,”’ said Bruce Alston, who manages $1.5 billion in bonds for Value Line Asset Management.
    Over the last 12 months, Treasurys lost value at levels not seen since 1994. Pimco, one of the nation’s biggest bond fund managers, endured plenty of portfolio losses. Its Long Term U.S Government Fund, for example, is off 8.5 percent year-to-date as of Thursday’s close.
    Some of the nation’s biggest bond holders -- insurers and pension funds -- suffered along with individual investors.
    And the much-anticipated Y2K effect, when investors worried about year-end financial market disruptions were supposed to park money in bonds, never happened.
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    But the losses come with a caveat. Late last year, economic crises in Asia and Russia drew overseas investors to the relative safety of bonds, sending the yield on the 30-year bond to an all-time low of 4.70 percent. As those economies this year began recovering, yields had only one direction to go: Up.
    "It’s the unwinding of the flight-to-quality trade,” Value Line’s Alston said.
    
Inflation building

    As United States and world economies strengthened in 1999, bond investors demanded higher yields to compensate for an expected rise in inflation, which erodes a bond’s principal and coupon payments. While actual inflation remained tame this year, the expectation of rising prices was widespread.
    Further, the Federal Reserve hiked interest rates three times this year in an effort to cool the buoyant economy. Still, the credit tightening has had little apparent effect. Unemployment is near a 30-year low, consumer spending is buoyant and stock markets continue to soar.
    Stocks, which often move inversely to bond prices, weighed particularly hard on bonds this year, as investors chased the higher return on equities.
    "Money was pulled away from the bond market to go toward the equity market, where the allure was quite attractive,” said Tony Crescenzi, bond strategist at Miller, Tabak & Co.
    
What’s next?

    Analysts agree that yields will head higher before they go lower, boding poorly for bond prices early next year.  How many rate hikes? When will they happen? Most analysts foresee a quarter point hike in February. That would push the benchmark Federal funds rate to 5.75 percent. Some see another quarter-point hike in March. Others forecast a total of three rate hikes throughout the year.
    But a consensus is emerging that the nation’s central bank will get its rate hikes out of the way before the 2000 presidential election in November.
    As such, many forecast bond yields leveling of by the second or third quarter of 2000.
    Value Line’s Alston forecasts at top yield on the 30-year bond between 6.75 and 7 percent.
    "Seven percent on the long-bond is very attractive,” said Alston, who sees yields at that level drawing money from stocks.
    For the beaten up bond market, that kind of asset shift couldn’t happen soon enough Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.