Rising Interest Rates Push Bonds Lower

Bond prices moved lower in light trading Tuesday, depressed by further rises in short-term interest rates and weakness in the dollar, but the bond market ended the day well above the lows reached early in the session.

By contrast, cash-laden investors poured more funds into stocks, sending the Dow Jones industrial average up a record 54.14 to close at a record 2,237.49. It was the largest one-day gain ever, topping the 51.60-point jump of Jan. 22.

The bellwether 30-year Treasury bond, off about 3/4 point at midday, finished down point, or about $2.50 per $1,000 in face amount. Its yield rose to 7.61% from 7.57% Friday.

The credit markets were closed Monday in observance of Washington’s Birthday.

Bonds fell sharply in early trading, reacting further to the market’s downturn on Friday and continued dollar declines in early foreign exchange activity.

Adding to Pressure

A weaker dollar raises speculation that dollar-denominated securities such as bonds and notes will become less attractive to foreign investors, forcing interest rates to move higher to attract buyers. Interest rates and bond prices move inversely.

Also pressuring bonds lower was continued strength in the federal funds rate, the interest charged on overnight loans between banks. The rate, which recently had been below 6%, was at 6.50% late Tuesday, compared to 6.063% late Friday.

Analysts said the federal funds rate was bolstered Tuesday by technical pressures stemming from settlement of the Treasury’s recent $29-billion refinancing operation. But because many traders view fed funds as an indication of the Federal Reserve’s intentions for interest rates, the recent rise in the rate has been taken by some as an indication of Fed tightening of credit.

“There’s a lot of uncertainty in the market as to where the Fed really wants short-term interest rates to be,” said Steven Wood, an economist for BankAmerica Capital Markets Group in San Francisco. “Until the market gets more comfortable with those levels, we’re going to continue to see a lot of volatility.”

Harold Nathan, senior financial economist for Wells Fargo & Co. in San Francisco, said bonds were aided by a rally in bond futures, which advanced throughout the day to prompt late buying in the cash markets.

In the secondary market for Treasury bonds, prices of short-term maturities were off 1/32 point, intermediate maturities ranged from 1/32 point higher to 1/16 point lower, while 20-year issues were down 1/32 point, according to 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.

In corporate trading, industrials were down point and utilities moved 1/8 point lower in light dealings, Salomon Bros. said.

Among tax-exempt municipal bonds, general obligations were unchanged and revenue bonds fell point in moderate trading, Salomon Bros. said.

Yields on three-month Treasury bills rose 4 basis points to 5.67%. Six-month bills rose 5 basis points to 5.72%, and one-year bills were off 1 basis point at 5.69%.

A basis point is one-hundredth of a percentage point. BIGGEST DAILY GAINS Here are the 15 biggest days recorded by the Dow Jones industrial average, in terms of point gains:

Feb. 17, 1987 54.14 points Jan. 22, 1987 51.60 points Jan. 5, 1987 44.01 points Nov. 3, 1982 43.41 points Jan. 27, 1987 43.17 points March 11, 1986 43.10 points Dec. 2, 1986 43.03 points March 14, 1986 39.03 points Aug. 17, 1982 38.81 points Sept. 4, 1986 38.38 points April 16, 1986 38.32 points Oct. 6, 1982 37.07 points Nov. 30, 1982 36.43 points June 13, 1986 36.06 points Aug. 3, 1984 36.00 points

Source: Associated Press