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Historic day for interest rates: 10-year Treasury yield falls below 2%

August 18, 2011 |  3:44 pm

The new rallying cry for Treasury bond market bulls: “Only 2 percentage points between here and zero!”

Another panic out of stocks led to another panic into Treasuries on Thursday, driving the annualized yield on the benchmark 10-year T-note below 2% for the first time.

At one point early in the day some buyers were willing to accept a yield of 1.96% on the notes, the lowest ever. The yield (charted below) rebounded to 2.06% by the end of trading, but that still was down sharply from 2.17% on Wednesday.

10y819 Just four weeks ago T-note buyers got a yield of 3%. Now, anyone who waited to buy has procrastinators' remorse.

Shorter-term Treasury yields also continued to fall as money poured in. A five-year T-note now pays a minuscule 0.88% yield, down from 1.55% four weeks ago.

Overnight in Europe fears about rising stress in the euro-zone banking system deepened again, fueling another plunge in stock prices. That spilled into the U.S. equity market at the opening bell.

What’s more, U.S. investors had to contend with weak economic reports on July home sales and, in particular, the Federal Reserve Bank of Philadelphia’s index of mid-Atlantic business activity in August, which appeared to flash a recession warning.

The Dow Jones industrial average finished the day down 419.63 points, or 3.7%, at 10,990.58.

Many bond market pros say that no one who’s buying 10-year T-notes yielding near 2% believes that that’s a great long-term return. But investors know that a weakening economy usually translates into lower interest rates, or at least keeps a lid on rates. That enhances Treasuries’ traditional role as a haven, regardless of Standard & Poor’s recent downgrade of the government’s debt rating.

“You’ve got some price-insensitive [bond] buyers coming out of stocks and going into Treasuries,” said Mike Kastner, a partner at Halyard Asset Management in White Plains, N.Y. “I think it’s a deer-in-the-headlights type reaction -- nobody knows what to do.”

Treasury buyers weren’t deterred by the government’s report on July inflation. The consumer price index rose 0.5% for the month and was up 3.6% from a year earlier. That means the after-inflation return on a 10-year T-note yielding 2.06% is a negative 1.54%.

If you go with the “core” CPI, meaning prices excluding food and energy, the year-over-year inflation rate is 1.8%. That leaves the 10-year Treasury note return still positive -- but a lot less so than it was a month ago.

On shorter-term Treasuries, however, interest returns now are negative after inflation. But that still feels less painful to many investors than losing 3.7% a day in stocks.

RELATED:

Mortgage rates hit new low

Investor flight from stock funds accelerates

Gold tops $1,800 an ounce as investors again rush for safety

-- Tom Petruno

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