Only as bad as expected

Tell me if you've heard this before: The economy is really bad.

Of course it is. Of course you have. But emotional investors react as if they've been hit on the head with a rock every time they hear truly ugly new economic facts that, by the way, had already been forecast and priced into capital markets.

The news was certifiably bad yesterday. Reports showed US industry contracting at the fastest pace in 26 years. Manufacturing in Europe, Russia, China, and elsewhere also shrank, according to economic reports. And it turns out the United States has been in a recession for about a year now, according to the latest pronouncement by the National Bureau of Economic Research.

Stock markets around the world absorbed most of that news and slumped by about 5 percent. US markets reprised their now-familiar final-hour swoon and gave up between 7.7 percent and 9 percent.

On good days, I judge a rally by how many stocks go up. The opposite is true on bad days, and the details of yesterday's performance revealed some very negative psychology. Among the stocks that make up the Standard & Poor's 500 index, 498 declined. Just two gained ground, and one of those companies is being sold.

The stock market message was bad but relatively simple: No one escapes when the economy goes bad like this. Oil companies, manufacturers, financial giants, retailers, and technology businesses all suffer. Anyone I've missed is headed for trouble, too.

The same kind of message was reverberating through the market for US Treasury debt yesterday, producing a very different reaction. Prices for what investors consider to be the world's safest securities were going through the roof.

Interest yields on Treasury securities, which move in the opposite direction of prices, have been falling sharply for weeks. But that trend accelerated yesterday, affecting a broader range of Treasury bills, notes, and bonds along the way.

Short-term Treasury securities have been priced to yield microscopic interest rates for a couple of months, and they remained that way yesterday. The government's 3-month bill yielded a next-to-nothing 0.04 percent.

Now, soaring prices on longer-term government debt are creating securities offering much lower interest rates for years into the future.

The 10-year Treasury note traded to yield just 2.75 percent for investors and touched 2.65 percent during the day. That was the lowest interest rate since the government started tracking 10-year Treasury prices daily in 1962 and the least since 1955 based on monthly records.

The price of the 30-year Treasury bond soared as well, driving its interest rate down to 3.23 percent. It touched a record 3.18 percent during the day.

Like stocks, Treasury securities were reacting to reports of a declining economy. Treasuries are the safest investment in an economic storm, and the threat of inflation in a deep recession is small. That makes very low interest rates more palatable.

Federal Reserve chairman Ben Bernanke gave the market an even bigger boost yesterday when he said the government itself may start buying Treasuries to drive longer-term rates down in an attempt to spark the economy.

It's far from certain that interest rates on other kinds of debt, from corporate bonds to mortgages, would follow suit. Rates on other types of debt have declined, but not at the same pace.

William Kohli, a managing director at Putnam Investments, says the very low rates apply only to the simplest and safest securities. Investors who take even modest risks or buy slightly complex securities demand much higher interest rates, he says.

Some economists, such as David Rosenberg of Merrill Lynch, believe soaring Treasury securities are becoming the latest investment bubble, like technology stocks and real estate before them. Others, like David Horsfall, deputy chief investment officer at Standish Asset Management in Boston, think it's too early to say.

Bad economic news is bound to affect the prices of stocks and bonds. But the admittedly grim facts do not stray far from earlier projections that had already driven the price of any investment risk sky high.

Still, stocks plunge 8 percent or more in a day. Treasury yields plunge as investors flock to the safety of US government debt. Technical reasons explain some of those movements, but they are forces at the margin.

Emotion explains much more about the sharp ups and downs taking place in markets today. The news that drives sellers is only as bad as expected. But that's more than bad enough.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.