Treasury Bonds Enter Purview of U.S. Inquiry Into Attack Gains

by Charles Gasparino and Gregory Zuckerman
The Wall Street Journal
October 2, 2001


A broad government inquiry into whether anyone with prior knowledge profited from the Sept. 11 attacks widened to include suspicious trading in the Tresury bond market.

Investigators from the U.S. Secret Service contacted a number of bond traders regarding large purchases of five-year Treasury notes before the attacks, according to people familiar with the probe. The investigators, acting on a tip from traders, are examining whether terrorists, or people affiliated with terrorist organizations, bought five-year notes, including a single $5 billion trade, the people say.

Five-yera Treasury notes are among the best investments in the event of a world crisis, especially one that hits the U.S. The notes are prized for their safety and their backing by the U.S. government, and usually rally when investors flee riskier investments, such as stocks. Since the attacks, the notes have posted a return of 2.5%. Returns could have been far greater since many big bond investors turn to the futures market, where they use leverage, or borrowed money, to amplify their gains.

Recently, government authorities have interviewed a number of people from Mellon Financial Corp.'s Dreyfus Corp., the big mutual fund company specializing in bonds, and have contacted Wall Street's Goldman Sachs Group Inc. seeking bond-trading information, people with knowledge of the matter say. A Goldman spokeswoman said the firm "has receiving requests from various governmental authorities and is cooperating." A Dreyfus spokesman said the company would neither confirm nor deny being contacted.

The bond inquiry is part of a widespread effort by U.S. and European authorities to investigate reports of suspicious trading ahead of the attacks. Authorities have been examining the surge in short-selling activity in many airline and insurance stocks during the days preceding the disaster. Speculation about possible unusual trading has been based parly on disproportionate drops in stock prices of these stocks and other companies during the week before the attack. Since Sept. 11, airlines and insurers have been among the hardest-hit sectors of the stock market. Investigators also have been examining a surge in bearish options-trading activity in some airline stocks during the week before the terrorist attacks.

So far, investigators haven't found any conclusive evidence that the terrorists or anyone else with prior knowledge made these bearish bets. Proving any such activity would be extremely difficult. Some government investigators say it will be nearly impossible to draw links to the terrorists and suspicious trading activity, and many leads have turned up empty. Making matters even more difficult for investigators in the Treasury note mattter: the opaqueness of the market, the most liquid in the world, where billions of dollars of bonds are traded seamlessly on a daily basis.

In any event, investigators are looking at whether the activities in the bond and stock markets were linked. "No one knows at this point what this all might lead to, but we're interested in following these leads," a government official with knowledge of the investigation said. A spokesman for the Secret Service said: "At this point we can't comment on ongoing investigations or inquiries."

As part of the broad probe, the Securities and Exchange Commission, Wall Street's top regulator, has asked major Wall Street securities firms to turn over customer accounts, and stock-trading records involving short-selling before the attacks. Short sellers, expecting a stock to fall, sell borrowed shared in the hope they will profit by being able to buy them back later at a lower price. An SEC spokesman declined to comment.

Potential terrorist activity in the bond market adds a twist. Treasurys such as the five-year note have been hot all year as the stock market and economy kept sliding. During the month before the attacks, prices of the notes rallies some more, with the yield which moves inversely to the price falling from 4.53% on Augu. 10. The five-year note and other Trasurys rallies some more during the days before the terrorist attacks, even though some economic indicators, such as a National Association of Purchasing Management manufacturing report indicated that the economy might be on the mend. But a downbeat employment report released two days before the attacks sparked new concerns about the economy and more bond buying.

A recovering economy typically signals that bond prices will fall because people fear inflation, which cuts into the value of these fixed income securities. The current five-year note, maturing in May 2006, closed on Sept. 10 at 101 9/32 with a yield of 1.32%. Yesterday, it traded at 103 19/32, and a yield of 3.769%.

What is clear is that the five-year notes are safer and easier to trade than longer term securities, such as the 30-year Treasury bond. Any suggestion that the U.S. government would have to issue more bonds to pay for a recovery effort after a disaster would hurt long term bonds more that the five-year. The price of the 30-year bond has climbed marginally since the attacks, on fears the federal suplus is over, inflation is down the road, and many more long-term bonds will have to be sold.

"If they were going to do something like this, they would do it in the five-year part of the market," said Michael Shamash, a bond market strategist for Tucker Anthony Inc. "It's extremely liquid, and the tracks would be hard to spot."


Copyright 2001 Dow Jones & Company, Inc.

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