Posted on: Monday, July 1, 2002

Investors flock to Uncle Sam

By Heather Bandur
Bloomberg News Service

NEW YORK — U.S. government bonds are outpacing stocks so far this year and the streak may continue as investors choose government debt instead of shares because of concern that corporate profits aren't accounted for properly and may be slow to rebound.

Government debt has returned 3.6 percent in the first six months of the year, including reinvested interest, putting it on pace to return 7.5 percent by the end of 2002, according to Merrill Lynch & Co.

The Standard & Poor's 500 Index fell 13 percent so far this year, including reinvested dividends.

Treasuries may beat stocks for the first three-year period since 1939-41 as bankruptcies and stagnant business investment continue to contribute to declines in the major U.S. stock indexes during the first half of the year, analysts said.

Accounting probes at companies such as Xerox Corp.., and WorldCom Inc.'s disclosure that it hid expenses, have sapped investor confidence, prompting some to buy Treasuries for safety.

"It's the only market in the world that's not affected by the credit risks that are hitting the stock market," said Robert Kessler, who oversees $2 billion for Kessler Cos. in Denver.

Kessler expects two- and 10-year Treasury yields to drop below the lows they touched in November. The two-year note now yields 2.81 percent, 51 basis points higher than the 2.3 percent level in November. The 4.80 percent yield on the 10-year Treasury note is 62 basis points above its November low. A basis point equals 0.01 percentage point.

"Treasuries are proving for a third year in a row that they are a very good value," Kessler said.

Investors who held Treasury securities made more than if they'd invested in the S&P 500 in 2000 and 2001, pocketing 6.7 percent and 13.4 percent, respectively, while the S&P 500 lost 11.9 percent and 9.1 percent.

Following WorldCom's announcement last week, Treasuries gained, sending the two-year note's yield to a five-month low. The yield declines when prices rise.

Slowing business investment has also weighed on stocks, and they may continue to fall after six straight quarters of declines, analysts said.

"The stock market was overvalued, in part, because earnings statements were overstated," said Jade Zelnik, chief economist at Greenwich Capital Markets in Greenwich, Conn. "It will take some time for that perception to be purged from the market."