As the economic turmoil in Asia and Russia spreads through global financial markets, it is likely to curb growth in the US and drive interest rates lower. Investors piled into Treasuries last week, sending yields to record lows, after Japan said its recession was deepening and speculation grew that Russia might devalue its currency or default on debt payments.
"If you pull back the drapes, it's a mess outside," said David Jallits, bond manager at Strategic Fixed-Income in Virginia. Long-term yields could fall to 5 per cent, he said.
The yield on the benchmark 30-year bond fell 6 basis points to 5.54 per cent on Friday, the lowest since the Government began regular sales of the securities in 1977. Treasury bonds returned 9.2 per cent so far this year, as US government securities have become the investment of choice for those looking for a refuge from the turbulent financial markets.
"Interest rates are falling as more and more money moves into the safe haven," said David Kotok, bond manager at Cumberland Advisors in New Jersey. "I believe we're going to see more of it."
The rush to Treasuries is not the only factor that bond bulls say will push interest rates even lower. As economies around the world slow, the soaring consumer confidence that fuelled the eight-year US economic expansion is bound to return to earth.
Concern about slower growth and waning corporate profits is also shaking up the stock market. The Dow Jones index has slumped about 10 per cent in the past month on concerns that share prices are higher than the dimming outlook justifies.
Telecommunication equipment makers led the drop after Ciena Corp warned that increasing competition will result in disappointing earnings. "The irrational exuberance is going to go away," said James Penner at the Montana Board of Investments. "I wouldn't be a bit surprised to see further declines."
The Dow Jones fell 2 per cent on the week to 8,425, its lowest close in six months. Mr Penner predicted that more companies would issue profit warnings over the next few weeks because of the Asian slump.