Bond Market Signals Rates Are Bottoming

For the first time since December, the bond market is closing the credibility gap with Ben Bernanke and signaling its agreement with the Federal Reserve chairman that an economic collapse has been averted and that interest rates are bottoming.

Treasury yields rose 0.33 percentage point on average through April 4 from this year's low of 2.49% on March 17, according to Merrill Lynch & Co. indexes. The increase is the first since December, when the Fed cut its target rate for overnight loans between banks and said lower borrowing costs "should help promote moderate growth."

The Fed's unprecedented support for JPMorgan Chase & Co.'s takeover of New York-based Bear Stearns Cos. on March 16 is restoring confidence in Mr. Bernanke, who told Congress last week that "monetary and fiscal policies are in train that should support a return to growth." Yields tumbled to the lowest levels since 2003 in the first quarter, when banks racked up $232 billion of losses and writedowns and the economy lost jobs.

"There is a sense of stability returning to the market," a manager of $137 billion at Hartford Investment Management Co. in Hartford, Conn., John Hendricks, said. "Bernanke's comments that there's a significant amount of monetary easing already in the system and you've got these other measures coming into play as well that should help the economy rebound in the second half."

The turning point came when the Fed promised $30 billion to back New York-based JPMorgan's bailout of Bear Stearns, preventing the biggest collapse of an investment bank. The central bank lowered its pledge to $29 billion on March 24 after JPMorgan quadrupled the purchase price to about $2.4 billion.

Treasuries, which tend to perform the best when the economy and inflation are slowing, lost 1.59% on average since March 17, according to Merrill's indexes. They had gained 14.5% since June 12 as gross domestic product growth slowed to a 0.6% annual rate in the fourth quarter, home prices fell 14% and bank losses swelled.

High-yield, high-risk corporate bonds returned 2.46% following the Bear Stearns rescue, after losing 4.58% this year through March 17, the Merrill indexes show.

While acknowledging for the first time that the economy may be in a recession, Mr. Bernanke told the Joint Economic Committee of Congress last week that the Fed's actions "will help to promote growth over time and to mitigate the risks to economic activity."

The bond market is looking much like it did in December, when yields rose as much as 0.27 percentage point to 3.91% on average. The rise followed the Fed's decision to cut its target for overnight loans between banks to 4.25% on December 11.

Mr. Bernanke is persuading bond investors of his ability to manage the economy after the Fed reduced the target federal funds rate to 2.25%, pumped $628 billion through the financial system and allowed securities firms to borrow directly from the central bank for the first time since it was created in 1913.