While tech stocks boomed and most major equity market indexes soared in 1999, investors in bonds took it on the chin.
"Treasuries are still falling this morning, taking a pretty sharp hit overall on the day," said John Canavan of Stone & McCarthy Research Associates, a financial markets research firm, just before yesterday's shortened trading day ended. "The two-year, five-year and 10-year Treasury notes have all already reached new lows for this year's downturn." And 30-year bonds almost matched their low for the year at the close.
"It's really a pretty appropriate way to wind up the year," Canavan observed. "It's been a horrible year for Treasuries on the whole, and it is merely ending with an exclamation point."
Someone who plunked down $10,000 for a new 10-year U.S. Treasury note in November 1998, when world financial markets were still suffering in the wake of the Russian government's default on part of its debt, got a 4.75 percent coupon yield. But the note's value in the secondary market remained close to par for the rest of last year, even through the jitters about global financial markets and a clouded outlook for the U.S. economy.
As it became clear this year that the U.S. economy was roaring ahead, long-term rates began to rise and the prices of outstanding notes and bonds, which go down when yields rise, started tumbling. When markets closed the year yesterday, that $10,000 initial investment was worth $8,821.875 in the secondary market.
Of course, that loss of more than $1,178 would only be realized if an investor sold the note, and is partially offset by two interest payments totaling $475. Still, more losses could be on the way in coming months.
Bond yields, which move in the opposite direction of prices, "are now at a two-year high, reacting to the strength of the economy and concern about what the Federal Reserve will do about it," said Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. "We now believe that yields on 30-year Treasuries could rise as high as 6.75 percent during the first half of 2000. But as growth eventually moderates and inflation remains absent, we look for lower bond yields during the second half of the year."
Steinberg and many other analysts expect the Fed, which raised rates three times during 1999 for a total three-quarter percentage point increase in its target for overnight interest rates, to move again relatively soon to keep the economy from overheating. If it does, longer-term rates likely would rise as well.
On the other hand, no one is really certain how much concerns about risks associated with the century date change may have pushed up rates. Trading activity last month was exceptionally slow because many firms essentially had closed their books for the year.
Even though no serious problems were reported anywhere as the midnight hour rolled westward around the globe, there was still some uncertainty about possible glitches in computer systems when most of the world's financial market resume trading Monday morning. Two of the largest, Tokyo and London, will be closed until Tuesday because of holidays.
And if trading itself resumes smoothly, some analysts and policymakers are concerned that unwinding all the precautionary financial steps taken in anticipation of the date change may prove to be bumpy. In other words, it could take a few weeks before markets truly get back to normal.
A Note to Readers
A full listing of the annual returns for individual U.S. stocks will appear in Sunday's tomorrow's Business section. The year-end report on mutual fund performance will appear in the Business section on Sunday, Jan. 9.