Rush to safety pushes Treasury yields to generational lows

The stock market’s latest collapse is another boon for U.S. Treasury bond investors. They have the only paper most people want to hold at this grim moment.

The wild selling of equities Thursday was matched by wild buying of Treasuries, driving yields on the securities to generational lows.

The 30-year T-bond yield plunged to 3.49% from 3.91% on Wednesday, an astounding one-day decline for a long-term bond.

The two-year T-note yield fell to 0.98% from 1.09% a day earlier and 1.24% a week ago.

As investors bid up the prices of Treasuries, their yields drop because the fixed interest return on the securities is lower as a percentage of the price.

"We’re in a panic mode right now" in markets, said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management in New York.

At these yields, buyers obviously aren’t looking to earn much interest, Pollack notes. It’s just a matter of feeling certain that they’ll get their principal back -- as opposed to risking it in stocks, commodities, real estate or any other crumbling market.

But in fact, there will be a capital-gains windfall for Treasury owners if yields continue to drop. Lower yields on new bonds would mean older bonds paying higher fixed rates would be worth more.

Case in point: The share price of the Vanguard Long-Term Treasury bond mutual fund jumped 3.2% on Thursday, to $12.29.

Through Wednesday, the fund’s year-to-date "total return" (interest earnings plus principal change) was 7.65%. So with Thursday’s gain, that return now is in double digits -- in a year when major stock market indexes are down between 43% and 51%.

Many Wall Street pros have been incredulous that Treasury yields could continue to decline, given the massive amount of new debt Uncle Sam plans to sell over the next year.

But predicting a bottom for Treasury yields has become at least as hard as predicting a bottom for stock prices.