More mileage in Wall St treasuries

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The Independent Online
This month, for the first time in two years, returns on US Treasury bonds were positive while returns on US stocks were negative - and some investors say this pattern that will continue.

US stocks slumped along with global equity markets amid concern that financial turmoil in Hong Kong and elsewhere in Asia would hurt corporate profits. Treasury bonds meantime climbed as investors flocked to the safety of US debt. Bonds also got a boost amid optimism that a slowdown would keep inflation at bay and allow the Federal Reserve to leave rates steady.

Yet many investors say the rocky times for equities are not over yet, which may mean more gains for bonds are on the horizon. "When the stock market starts to fall again, there's going to be another flight to quality," said Edgar Peters, manager at PanAgora Asset Management in Boston.

Bonds were not a bad place to be this month. A $1m (pounds 615,000) investment in 30-year Treasury bonds made on 30 September is now worth about $1,038,000. That represents a return of 3.9 per cent. By contrast, a $1m investment in the stocks comprising the Standard & Poor's 500 Index made on the same day would now be worth $967,900 - a loss of 3.21 per cent.

"There is a reverse trading pattern going on for equities and bonds and no reason that won't continue," said Lauren Best, manager at Advisers Capital Management in New York.

US stocks may see more losses in the days ahead, though the worst of the rout is over. Investors said last Monday's 7.2 per cent slide in the Dow Jones Industrial Average was an overreaction to the events overseas. South-east Asian markets, while some of the fastest-growing on the globe, do not yet account for a large portion of US exports.

What concerns these big money managers more is the trend among some investors to sell their stocks first and ask questions later. A 30 per cent rally in share prices this year has made some holders trigger-happy, they said.

"The issues in Asia won't have that big of an impact on the US economy itself, but the market needed an excuse to go down," said Vernon Winters, chief investment officer at Mellon Private Asset Management in Boston. "For so long, equities were the things to own. So something was bound to come along and disturb the market."

Mr Winters said investors did not want to find themselves behind the latest trend in prices. "What investors are saying is, `I'm going to sell now because you may be nervous about all this turmoil, and you may want to sell later. And I want to get out before you get out.'"

The Dow Jones Index ended one of its most volatile week ever down 273.33 at 7,442.08, a 3.5 per cent loss. Monday's 554-point decline, which caused the shutdown of the stock market for the first time since President Ronald Reagan was shot in 1981, was the biggest one-day point drop in history.

For the year, the 30-stock average is up 15 per cent. The Standard & Poor's 500 Index slid 27.02 points, or 2.9 per cent, to 914.62 for the week, while the Nasdaq Composite Index fell 57.31, or 3.5 per cent, to 1,593.61.

Thomas O'Neill, chief investment officer at Fleet Investment Advisors, said his money managers used the drop in prices on Monday and early Tuesday to put some cash to work. In Fleet Investments' personal accounts, the percentage of cash was cut to about 20 per cent of assets from 25 per cent. Should the market rally back to its October highs, Mr O'Neill said would not hesitate to raise cash again.

The decline in US stocks was as broad as it was deep this week. Only 76 stocks in the S&P 500 Index ended the week with a gain. Of those, 47 advanced more than 1 per cent.

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