Bond investors clamor for little - or no - return

Short-term Treasurys aren't doing much for investors beyond offering a safe haven, but demand remains high anyway as gloomy economic outlook persists.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By David Goldman, staff writer

Can the markets sustain a stock rally through the end of the year?
  • Yes
  • No
Click chart to view latest bond prices
Click chart to view latest bond prices
Tracking the bailout
Who's getting the bank bailout money
The government is engaged in an unprecedented - and expensive - effort to rescue the economy. Here are all the elements of the bailouts.

NEW YORK ( -- As continuing stock market volatility leaves investors searching for a safe place to put their money, many have decided government bonds are the best option - even if the bonds give back a bit less than investors put in.

Short-term bond yields have hovered around - or below - zero since the credit crisis began with Lehman Brothers' collapse in mid-September. That means investors in those bonds essentially pay the government to watch over their money and take back the same amount or even a little less when they get their money back from Uncle Sam.

It's not just a few people investing in zero-interest bonds, either. Tuesday, the Treasury auctioned $30 billion worth of 28-day bills Tuesday at a yield of 0%, after receiving $126 billion in open interest. The yield on the 3-month bill dipped as low as -0.2% Tuesday before closing above 0%.

Demand for bonds with no return remains high amid a continually dim economic outlook. The U.S. economy is in a deep, prolonged recession with escalating job losses, record-low consumer confidence, rising foreclosures, a housing market that has yet to hit bottom and an ongoing credit crunch.

As investors look to avoid uncertainty and stock market volatility, Treasury-only money market funds have become increasingly popular, said Pierre Ellis, senior economist at Decision Economics.

"There is a desperate urge to avoid all risk" and investors are opting to "step back and wait for the smoke to clear," he said.

Bush administration officials have dedicated trillions of dollars in programs aimed at easing credit and restoring the financial markets to normalcy. But lawmakers and policy analysts have criticized the government's handling of the bailouts, saying they lack clear objectives and oversight.

The House Financial Services Committee held a hearing of key bailout official Neel Kashkari as well as appointed oversight personnel to determine the issues facing and methods of fixing the economic rescue package.

With no clear recovery in sight, investors are looking for a safe haven that will shield their money from the stormy economic environment, even if that means getting back the same amount they put in. With stocks unable to choose a direction and commodity prices continuing to plummet, Treasury bonds have been the only safety net of late.

Even with historically low yields, longer-term Treasurys have actually performed quite well for investors. As S&P 500 index investors have lost 40% on their investments this year, bond fund investors have gotten back about 12% during the same time period, according to the Lehman Brothers Aggregate U.S. Treasury index.

Bond prices: Yields edged higher Wednesday as stocks rallied as a government bailout of U.S. automakers moved closer to reality.

When equities show strength, investors typically shift assets out of the safety of Treasurys to take advantage of the higher returns that come with stocks. And lately, the market gyrations have suggested a rebound may be coming.

"There is a perception that the stock market may be bottoming," said Ellis, and investors don't want to be left out of a big Wall Street rally.

Prices, which move in a direction opposite to yields, were lower after the Treasury auctioned $28 billion worth of 3-year notes Wednesday and $20 billion worth of 278-day bills. The Treasury was set to auction $16 billion worth of 10-year bonds on Thursday.

The benchmark 10-year Treasury fell 14/32 to 109 7/32, and its yield rose to 2.69% from 2.64% late Tuesday. Two weeks ago, the 10-year yield fell below 3% for the first time since the note was first issued in 1962, and on Dec. 4, the yield on the benchmark Treasury closed at a record low of 2.55%.

The 30-year bond slipped 1-3/32 to 127-4/32 and its yield rose to 3.09% from 3.04%.

The 2-year note was down 1/32 to 100-25/32 and its yield rose to 0.87% from 0.86%.

The yield on the 3-month note, which is closely watched as an indicator of investor confidence, rose to 0.02%.

Investors and money-market funds shuffle funds in and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A higher yield indicates that investors are slightly more optimistic.

Lending rates: The overnight Libor rate fell for the eighth day in a row to 0.12%, according to data available on, which pushed the bank-to-bank lending rate to a new record low. On Monday, the rate was 0.14%.

Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend money in London, and is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor.

The overnight lending rate has been falling to record lows for the past several sessions as central banks have lowered their key lending rates, flooding the system with liquidity.

The 3-month Libor rate also moved lower, falling to 2.1% from 2.16%.

Two market indicators signaled modest optimism. The "TED spread" narrowed to 2.08 percentage points from 2.13. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the more unwilling investors are to take risks.

Another indicator, the Libor-OIS spread, narrowed to 1.84 percentage points from 1.91 percentage points. The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending. staff writer Catherine Clifford contributed to this report.  To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More

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.