The bond market’s slump deepened dramatically on Thursday as the price drops of the last week accelerated sharply on growing pessimism over inflation and further interest rate drops.
Price declines were spread throughout the market, and short-term interest rates moved sharply higher.
The bellwether 30-year Treasury issue fell nearly $30 for each $1,000 in face value, with its yield rising to 7.73% from 7.55% late Wednesday.
“The market got creamed,” said Raymond Stone, manager of financial economics for the investment firm Merrill Lynch. “I think it’s just a negative psychology on holding financial assets.”
Bond prices have been moving generally lower for the last week, primarily because of interest rate pessimism. Several economic indicators of recent weeks have pointed to a possible strengthening of the economy over the rest of this year, which would lead to higher interest rates.
In addition, analysts said, retail sales figures slated for release today were rumored to be stronger than expected, another possible sign of economic upturn.
“The data over the last few weeks I think have put to rest the fear that the economy was headed into a recession,” said Ben Laden, chief economist for T. Rowe Price in Baltimore.
“Any strength in the economy would rule out any further ease by the Fed and also would suggest, along with higher inflation, (that) the yield curve could become more positively sloped, so we could see higher long-term interest rates over the next few months,” he said.
The Federal Reserve Board already has cut the discount rate--the interest that it charges on loans to financial institutions--four times this year, lowering it to 5.5%.
Further lessening the chances of another discount rate cut is the stiff resistance by Japan and West Germany to U.S. urging that they cut their domestic interest rates. On Thursday, the West German Bundesbank made no monetary policy changes at its weekly council meeting, signaling no immediate plans for rate cuts.
And in the last several days, Japanese officials have reiterated previous views that they believed it unnecessary to lower their interest rates to increase domestic demand.
In the secondary market for Treasury bonds, prices of short-term governments fell in the range of 3/8 point to 9/16 point, intermediate maturities fell just over a point and long-term issues were down as much as 3 11/16, 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 Shearson Lehman daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 11.08 to 1,220.74, the biggest drop in the index since a 12.62-point fall on May 29.
In corporate trading, industrials fell 1 point in light trading and utilities plunged 2 points in heavy trading. Among tax-exempt municipal bonds, general obligations fell 3/4 point and revenue bonds were down 1 points. Trading was light to moderate.
Yields on three-month Treasury bills were up one basis point at 5.20%. Six-month bills and one-year bills each rose 10 basis points to 5.42% and 5.52%, respectively. A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, traded at 5.875%, unchanged from late Wednesday.
The skid in the bond market coincided with a plunge in stocks. The Dow Jones average of 30 industrials slid a record 86.61 points to 1,792.89, shattering the previous worst one-day loss of 61.87 points set July 7.
Like the bond market, the sharp jump in interest rates resulted in the stock market plunging on record volume.
Record Volume on NYSE
Volume on the NYSE, at 237.57 million shares, surpassed the previous high of 236.57 million set Aug. 3, 1984.
While stocks often take their cue from the bond market, several analysts said each influenced the other on Thursday, probably helping to worsen declines that had already begun.
Large blocks of 10,000 or more shares traded on the NYSE totaled 3,993, compared to 2,724 on Wednesday.
The NYSE’s composite index of all its listed common stocks dropped 6.37 to 135.25.
Nationwide turnover in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 271.92 million shares.
Standard & Poor’s index of 400 industrials fell 13.34 to 260.48, and S&P;'s 500-stock composite index was down 11.88 at 235.18.