30-year T-bond yield hits record low as buyers swarm

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While most investors were focused on the stock market, the Treasury bond market had a historic moment on Monday: The yield on the 30-year T-bond fell to its lowest level since the government began issuing the securities on a regular basis in 1977.

In other words, we have the lowest 30-year T-bond yield in more than 30 years.

What drove the Dow Jones industrial average down 504 points for the day -- fear of calamity in the financial system -- was high-energy fodder for Treasury bond bulls.

As buyers rushed into 30-year T-bonds, the annualized yield on the securities plunged to 4.02% from 4.32% on Friday.

Tom Tucci, head of Treasury trading at RBC Capital Markets in New York, noted that the two market watchwords on Monday were liquidity and safety: Investors wanted to park cash in securities they could easily sell and that offered relative safety of principal.

When people are in that kind of mood Treasuries often are the only investments they want.

Yields on shorter-term Treasury issues also dived as big investors, including banks, snapped them up, desperate for a haven for their capital.

The 3-month T-bill yield plummeted to 0.81% from 1.47% on Friday. The 10-year T-note, a benchmark for mortgages, ended the day at 3.38%, down from 3.72% on Friday and the lowest since March.

But only the 30-year T-bond set a new record low yield.

Although Monday was a blowout for Treasury bond bulls, yields have been sliding for the last seven weeks. Anticipation of a further weakening of the economy -- which would be expected to keep downward pressure on interest rates -- has more than offset the certainty of rising government borrowing to cover the ballooning federal deficit.

Perhaps most important, the plunge in oil prices has lessened inflation expectations. Inflation is the No. 1 fear of bond investors because it erodes fixed-income returns.

Crude oil futures sank $5.47 to $95.71 a barrel on Monday, the lowest since February.

Not surprisingly, analysts who are the most bearish on the economy are the most bullish on Treasury bonds. That group includes Merrill Lynch & Co. economist David Rosenberg.

‘The prospect for huge returns in the bond market is significant,’ Rosenberg wrote in a report last week. He’s talking about capital gains rather than interest returns: As yields fall the value of older bonds rises.

The share price of the Vanguard Long-Term Treasury bond mutual fund jumped 30 cents, or 2.6%, to $12.01 on Monday, and is up 6.9% since July 25.

But like I said: To be bullish on bonds at this point -- with yields this low -- you really must have a bleak outlook on the economy, and strong faith that inflation is waning.