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Dow falls while bond prices see sharp jump

Fri., May 16, 2014

NEW YORK – Investors retreated from stocks Thursday, leading the Dow Jones industrial average to its worst day in five weeks.

The Dow lost 167.16 points, or 1 percent, to 16,446.81. The Standard & Poor’s 500 index fell 17.68 points, or 0.9 percent, to 1,870.85 and the Nasdaq composite fell 31.33 points, or 0.8 percent, to 4,069.29.

The sell-off comes two days after the Dow and S&P 500 hit record highs.

But the bigger story of what happened on Wall Street was in the bond market.

Bonds had their best day since early February, when measured by the Barclays U.S. Aggregate bond index, a broad gauge of the entire market, from Treasurys to corporate debt.

The yield on the U.S. 10-year note hit its lowest level in 10 months, dropping to 2.49 percent. At the beginning of the week, the 10-year had a yield of 2.66 percent. That is an extraordinary move for bond yields.

To add to the mystery, U.S. consumer prices rose at their fastest pace in nearly a year in April, the Labor Department said Thursday. The consumer price index, an often-quoted barometer of inflation in the U.S., rose by 0.3 percent last month due to higher food and gas prices. Inflation is on pace to rise 2 percent this year. While not alarming, it is noticeably higher than a year ago.

In a normal environment, investors don’t buy bonds at 2.5 percent interest if inflation is running at 2 percent. It’s just not worth it.

“It’s really confusing, to be honest,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago, who oversees $66 billion in assets. “The bond market thinks there’s a risk out there that the stock market isn’t seeing.”

One explanation is that foreign buyers raced into the U.S. Treasury market looking for safety, causing a distorted move in prices, traders said. Despite their fall, yields of U.S. government bonds are higher than those of some developed economies.


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