US bond safe haven threatened by rate hikes,volatility Updated 3:54 PM ET February 14, 2000 NEW YORK (Reuters) - U.S. Treasuries could be losing their key role as a safe haven in times of market troubles, due to growing bond market volatility and an outlook of still higher interest rates, fund strategists said Monday. Cash and other non-interest bearing investments may offer a better option for investors who believe a financial meltdown is unlikely even if stocks were to plummet, strategists said.

"We are advising people to just stay on the sidelines. You're not going to miss anything over the next six months," said Podorefsky. "After six months, bonds may be a better place for investment," he added.

Cash or short-term maturity instruments like Treasury bills tend to weather periods of rising interest rates better than medium- or longer-dated issues which tend to be very sensitive to changes in monetary policy.

Prices on the 30-year bond and 10-year note rose last week as the Dow Jones industrial average fell, leaving it the Dow index 11.0 percent below its mid-January highs.

But strategists said the flows into longer-dated Treasuries were muted despite the stock market correction, suggesting that recent bond-market problems and prospects for higher interest rates were keeping investors on the sidelines.

CASH IS KING AND BONDS SIDELINED

Bonds typically benefit from flows of money out of stock markets during major market turmoil, the most recent example being the plunge in global stock prices following the Russian financial and economic turmoil in August 1998.

While companies can go bust and default on their obligations to investors, countries rarely do and U.S. Treasuries, despite the United States' ever-widening current account deficit, are seen as one of the safest bets of all.

But while investing in bonds may have less downside risk than holding stocks, there is no guarantee that prices of fixed-income securities will not fall. Indeed, with the Federal Reserve trying to reign in a steaming U.S. economy, bond prices could fall steeply as interest rates rise, strategists said.

"If your goal is return of capital, not return on capital, then moving to bonds is a very good trade,"said Robert Podorefsky, market strategist at BankBoston.

SHARES TEND TO BOUNCE

Bonds' role as a safe haven could also be diminishing because share market downturns in recent times have all proved short-lived, fund managers said.

"Some of the lessons we have learned are that stocks don't go down very much before they start to come up again," said Bruce Alston, director of fixed income at Value Line Investment Management.

An 11 percent correction in U.S. stocks in October 1997 was recouped by February 1998 while losses in the Dow Jones index after Russia's financial crisis were made up within a couple of months following a wave of interest rate cuts.

Despite the fall in stocks last week, the shift to bonds was muted, prompting market strategists to ponder whether recent volatility, which has sent U.S. Treasuries into a spin, may have cooled fund managers' ardor for bonds as a safe harbor.

Concern over the future supply of U.S. Treasuries - which are used as a global benchmark for investors to price everything from stocks to derivative contracts such as swaps - have caused dizzying swings in bond prices in recent weeks.

Thirty-year Treasury bonds have surged, buoyed by concern over the future supply of these bellwether issues after the Treasury Department on February 2 announced it would be issuing fewer bonds and buying back $30 billion in longer-term debt.

The yield, which moves in the opposite direction to prices, fell as low as 6.05 percent the following day, having closed around 6.75 percent in mid-January. It was at 6.23 percent on Monday.

William Stevens, a senior portfolio manager at Montgomery Asset Management which manages funds of around $12 billion, said bonds could benefit from the growing link between share prices and individuals' net wealth.

"Bonds are probably more of a safe haven than they were in the past because so much consumer net worth is in the stock market so changes in stocks prices can effect the real economy and the Fed will react to what the real economy does," Stevens said.

"A decline in stock prices would therefore require less tightening or even easing by the Fed and in that case bonds would be a safe haven from stock market falls," he said.

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