New York market: Patience may be rewarded

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The Independent Online
GOOD THINGS come to those who wait. So says a camp of investors who expect US Treasury yields to fall to new lows this year - although not right away.

As evidence mounts that Asia's financial problems are curbing US growth and helping to stamp out inflation, "there will be room for bonds to rally," said Jonathan Francis, manager at Putnam Investments.

Mr Francis predicts that 30-year bond yields could fall to 5.5 per cent by the year-end.

Bond yields have drifted so far this year as evidence of robust growth counterbalanced signs of subdued inflation.

The brisk economy kept the Federal Reserve poised to boost bank lending rates at any sign that prices are picking up, and limited gains for bonds, leaving yields on benchmark 30-year Treasuries trading between 5.80 per cent and 6 per cent.

A fresh round of turmoil in Asia and tumbling Russian markets last week served to push 30-year yields down to the bottom of the recent range.

Yet it may take more upheaval overseas, or unequivocal signs of a US slowdown, to help bonds bust out and drive yields back to record lows.

As long as the Fed is leaning toward higher rates, yields can't fall too far.

"We have a floor on how low yields can go," said Hugh Whelan, bond manager at Aeltus Investment Management.

Shares of small companies could be the first to make a comeback as investors buy shares at cut-rate prices after a month-long decline in the US market.

The market's slump worsened last week when the Dow Jones fell 150 points in one day.

By the end of trading on Wednesday, the Dow had lost 3.0 per cent of its value in two weeks. The broader Standard & Poor's 500 Index had fallen 3.4 per cent in five weeks.

"The recent market correction has been bloody, and much more difficult in small-caps than in large," said Steven Hayward, a money manager at the Marshall Funds. "Now it's ready to turn around,'' he said.

For the week, the Dow industrials fell 1.7 per cent. Not all money managers are convinced that smaller stocks will lead the way out of this slump.

"I see the leadership being maintained by the large-cap names that have a steady earnings history," said Ned Riley, chief investment officer at BankBoston.

"People are going to gravitate back to the tried and true: health care, financial and even the big technology names."

Copyright: IOS & Bloomberg

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