New York Market: Bonds to keep bubbling

US Treasury bond investors say this year's 20 per cent plus returns aren't over yet. Government bonds have become the investment of choice worldwide as people seek an alternative to all types of other securities amid concern that financial market turmoil will trigger a global economic slowdown.

"We're going through a time no one has seen before," said John Poole at Mellon Private Asset Management. "It's backed by worldwide deflation. It's incredible."

Since December, 30-year US bonds have handed investors returns of 21.3 per cent, better than the average 15.8 per cent annual gain posted by the Dow Jones index through the 1990s. Even though yields of 4.84 per cent are the lowest since 1967, few expect that demand for Treasuries will ease soon. "It's not unrealistic to believe we'll get down into the range of 4.25 per cent," said Vic Thompson at State Street Global Advisors.

Expectations that the Federal Reserve will follow Tuesday's cut in the benchmark rate with more reductions to keep a recession at bay, along with signs that the US economy is already slowing, adds to the outlook for bigger bond returns.

The three-week rally in US stocks spluttered last week, and more disappointing news about the earnings outlook is likely to push prices lower in coming weeks. Communications equipment makers such as Lucent Technologies led the market lower, along with Lehman Brothers and other brokerages and retailers.

Companies will report results for the third quarter over the next few weeks, and earnings won't be as robust as once expected. Just last week, Gillette said that third-quarter profits will drop 20 per cent because of sluggish sales overseas and lower-than-expected demand for its newest razor.

"There's a partial acknowledgement that earnings are going to be a problem," said Ned Riley, chief investment officer at BankBoston Corp. He expects the Dow Jones index to slip below 7,000 as investors come to terms with slowing earnings growth.

For the week, the Dow average dropped 3 per cent, the S&P 500 index fell 4 per cent and the Nasdaq tumbled 7.6 per cent.

Investors will be looking for world leaders to come up with a plan to head off a global recession and ease problems ranging from Japan's recession to the prospect for a currency devaluation in Brazil.