Bond yields hit record lows on Europe, recession worries

— -- The yield on the bellwether 10-year Treasury note tumbled to a new low Tuesday, reflecting Wall Street's pessimism about the economy and the Treasury market's reputation as a safe haven.

The 10-year T-note yield swooned to 1.97%, its first close below 2%.

For consumers, the low Treasury yield means even lower mortgage rates. The 30-year fixed-rate mortgage rate was 4.22% last week, according to mortgage giant Freddie Mac.

"It would stand to reason that unless we have a dramatic turnaround, mortgage rates will sport new record lows," says Keith Gumbinger, vice president of HSH Associates, which tracks mortgage rates. Freddie Mac's lowest mortgage rate was 4.17%, set in November..

But few borrowers will take advantage of those low yields, Gumbinger says. About 25% of homeowners owe more than the property is worth. Those who do qualify may have already refinanced last year, when mortgage rates were also low.

For savers, low rates mean yet more dismal returns. The yield on the five-year T-note was 0.88% Tuesday, close to the record low of 0.86% set Sept. 1.

To economists, low yields are nothing to celebrate. Traders push bond prices up — and yields down — when they think economic growth will sputter. Inflation erodes the value of a bond's fixed interest payments, and a slowing economy dims the prospects for inflation.

"The bond market does love economic misery," says Ken Volpert, head of taxable bonds at Vanguard. And there's been plenty of misery to spread around:

•Unemployment. Unemployment remained at 9.1% in August, according to the Bureau of Labor Statistics. While private employers added 17,000 jobs, governments trimmed about the same amount. "Having the federal government move to some form of austerity, in the long run, is good for everybody, but not so good near-term," says Geoffrey Schechter, manager of MFS Government Securities.

•Europe. Debt crises in Italy, Greece, Portugal and Ireland have shaken the European Union, raising the question of whether the EU will be able to prop up its troubled members. The DAX index, which measures the German stock market, has tumbled 31% from its May 2 high.

Treasuries look good compared with European debt. "I don't see how they get out of this easily," says Paul Lefurgey, lead bond manager at the Madison Mosaic funds.