"The outlook for bonds over the next six to nine months is extremely positive," said Ned Riley, chief investment officer at BankBoston. Mr Riley predicts yields on benchmark 30-year yields will fall below 5 per cent in the next year.
Bonds turned in their best weekly performance in almost two months last week, in part because shakiness in stocks prompted investors to seek safer investments. The Dow Jones Industrial Average fell 3.4 per cent Tuesday, its biggest loss of the year, on concern that Asia's economic slowdown will hurt the profits of some US companies.
Now, with no quick solution seen to Asia's problems and US corporate profits expected to grow at a slower pace, investors say there is more room for bonds to rally - even with yields already near the lowest level since the government began selling 30-year bonds more than 20 years ago.
"Rates are going to go lower," said David Berry, bond manager at Lincoln National. Thirty-year bond yields fell to 5.63 per cent on Friday, down 8 basis points during the past week.
Some money managers said they were seeing more cash coming into bond funds as investors turn to conservative investments to offset the risk of owning stocks. The slide in stocks "is causing people to rebalance," their holdings, said William Dawson, at Federated Investors in Pittsburgh. "We're getting more money into our government bond type funds."
After Tuesday's stock plunge, investors who sold richly valued large stocks moved money into small and mid-size companies. The Dow lost 3.2 per cent last week to 8,598 and failed in the last three days of gains to make up all the ground lost on Tuesday, rising only 1.3 per cent. But the Russell gained 4.3 per cent, the S&P 500 Index 1.6 per cent and the Nasdaq 3.4 per cent.
Investors are seeing "the revenge of the mid-caps and small-caps," said Michelle Clayman, chief investment officer at New Amsterdam Partners. "Earnings estimates are improving for a lot of those companies."
When prices dropped, some investors jumped in. "We bought a hell of a lot of stocks" this week, said Steve Lieber, chairman of Evergreen Asset Management. "We were sitting with masses of cash waiting for the market to show some sobriety. The sobriety occurred and our pocketbook opened."