The stocks of several of the largest banks and brokerages plummeted Thursday on speculation that they had suffered substantial losses because of a sharp rally in the 30-year Treasury bond.
Investors feared companies with big bond trading operations had substantial short positions on the 30-year Treasury and were getting "killed" by the rally, said Andy Collins, an analyst at ING Barings.
Bond traders often take short positions on 30-year Treasuries in anticipation of rate hikes by the Federal Reserve's Open Market Committee. The policymaking committee jacked up the federal funds and discount rates by 25 basis points Wednesday and is expected to hike rates again this year.
But the long bond rallied on news that the government is buying back 30-year Treasuries and will limit issuance of them to reduce its debt.
Shares of Citigroup Inc. fell $1.3125, or 2.28%, to $56.25; and Lehman Brothers Inc. $1.8125, or 2.51%, to $70.4375; and Goldman Sachs Group $5.75, or 6.31%, to $85.375. Meanwhile, the American Banker index of 50 largest banks fell 0.76% and its index of 225 banks fell 0.22%.
After a bumpy morning, J.P. Morgan & Co. finished the day up $1.5625, or 1.29%, to $122.75.
Rumors that several large financial institutions had suffered severe losses raced through trading rooms mid-morning.
Following such speculation was a rumor -later denied by the Federal Reserve Bank of New York - that it had scheduled a secret meeting to deal with trouble at a particular institution.
Lehman Brothers, and Citigroup - which owns Salomon Smith Barney - denied their operations were being hurt by the bond rally. "We are fine," said Leah Johnson, a spokeswoman for Citigroup "Given the volatility in the market, we felt it was important to comment."
Other companies declined to comment.
Thursday afternoon the yield on the 10-year Treasury bond rose to 6.43%; while the yield on the 30-year bond fell to 6.139%.
"I think there is some real damage being done here," said Scott J. Brown, an economist at Raymond James & Associates of St. Petersburg, Fla. "We have had a substantial bond rally in the last two weeks. Somebody had to be short."