Bonds Sag Further on Interest-Rate Concerns
Bond prices suffered further losses Thursday as pessimism about the outlook for interest rates blanketed the credit markets.
The retreat in bond markets mirrored that in stock and commodities markets. The Dow Jones industrial index dropped 8.38 to 1,518.23, following Wednesday’s record 39.10-point plunge.
An unexpectedly large decline in the nation’s basic money supply in late December failed to buoy bond prices to any lasting degree.
The Federal Reserve Board reported that the M1 money supply fell $3.1 billion in the week ended Dec. 30, about double the prediction of analysts.
Some analysts said the money figures briefly aided prices. But any recovery proved short-lived, and the benchmark 30-year Treasury bond finished down 1 3/8 point, or about $13.50 for every $1,000 in face value.
The price slide represented a continuation of Wednesday’s sharp sell-off, which halted the recent rally that had sent interest rates on a steady march downward. One dealer said there has been a “profound and sudden change in market psychology.”
Jobless Report
The setback began Wednesday after the Labor Department reported what were seen as strong employment figures for December. The job-market improvements were taken as a signal that the economy’s health is intact, perhaps improving.
That interpretation dashed the hopes of analysts who were previously thinking that the Federal Reserve Board would pursue an increasingly generous credit policy in a bid to lower interest rates and invigorate the economy.
Many analysts had been hoping that the Fed would confirm its relaxation in policy by soon cutting the discount rate, the fee the Fed charges on loans to commercial banks and savings institutions.
But, after studying the employment figures, the analysts had a change of heart about the discount rate. The key rate has stood at 7.5% since May.
Analysts also noted that credit markets moved sharply lower early Thursday as rumors, later discounted, that the Arab nations were heeding a call from Libya to withdraw their assets from the United States swept through financial markets.
Higher Rates Expected
David M. Jones, senior vice president and economist with Aubrey G. Lanston & Co., a leading dealer in government securities dealer, said interest rates probably will move higher.
“There has been a profound and sudden change in market psychology,” Jones said, adding that Wednesday was a “watershed day.”
In secondary trading of Treasury securities, prices of short-term governments dropped 9/32 point to 15/32 point and intermediate maturities fell from 3/4 point to 15/32 points, according to the investment firm of Salomon Bros. The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.
The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, was off 0.64 from late Wednesday to 110.08. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, was down 7.59 at 1,154.23.
In corporate trading, industrials dipped one point in moderate trading and utilities fell one point in light dealings. Among tax-exempt municipal bonds, revenue bonds and general obligations were both down one point in moderate activity.
Yields on three-month Treasury bills rose one basis point to 7.18%. Six-month bills were up eight basis points at 7.30% and one-year bills went up 10 basis points to 7.31%. A basis point is one-hundredth of a percentage point.
Yields on 30-year Treasury bonds rose to 9.46% from 9.32% late in Wednesday’s session.
The federal funds rate--the interest on overnight loans between banks--traded at 8%, compared to 7.75% late Wednesday.
In the stock market, broader indicators showed a steeper decline. Decliners outnumbered advancers by a margin of five to one in a tally of New York Stock Exchange-listed issues.
