Stronger Dollar, Optimism Over Outlook for Inflation Fuel Rally in Bond Market
The bond market staged a robust rally Tuesday, helped by the dollar’s strength and general optimism about the inflation outlook.
“The bond market looked like it was comatose only a few days ago. It has come back to life today,” said Marshall Front, an economist at the Chicago investment firm of Stein Roe & Farnham.
At the same time, the rebound in bond markets and the stronger dollar acted as a spark and set Wall Street on fire, pushing the Dow Jones industrial average to its biggest point gain in history. The Dow index soared 75.23 to close at 2,568.05, leaving the 2,500 barrier in the dust.
The Treasury’s key 30-year bond, which lost about 1/2 point Monday, or $5 per $1,000 face amount, gained about $10 Tuesday as its yield retreated to 9.53% from 9.60%.
Yields on Treasury bills also declined. Prices on corporate and municipal issues were mostly higher.
Bond trading activity resembled “a yo-yo” in the early going Tuesday, with prices pushed higher by a stable dollar but depressed by moderately higher oil prices, analysts said.
However, that changed later in the session as the dollar advanced significantly on foreign exchange markets, Front said.
Favorable Price Report Expected
He said bond traders were optimistic about prospects for the dollar after this weekend’s meeting in Washington of finance ministers from seven major industrialized nations, also known as the Group of Seven.
A stronger dollar is considered bullish for the credit markets because it makes bonds and notes more attractive to foreign investors and lessens the possibility of higher inflation, which erodes the value of fixed-income securities.
Front said bond investors also speculated that today’s government report on August consumer prices would show inflation remaining under control and that Congress soon would pass the Gramm-Rudman budget-reduction compromise plan.
In the secondary market for Treasury bonds, prices of short-term governments rose between 1/16 point and point; intermediate maturities were 5/32 point to 9/16 point higher while 20-year issues were up about a point, according to Telerate Inc.
In corporate trading, industrial issues were point higher while utilities rose 1/8 in light trading, Salomon Bros. said.
Among tax-exempt municipal bonds, general obligations were unchanged and revenue bonds were up 1/8 point. Trading was light.
Yields on three-month Treasury bills fell 4 basis points to 6.45%. Six-month bills fell 5 basis points to 6.70%, and one-year bills were off 2 basis points to 7.08%.
The federal funds rate, the interest on overnight loans between banks, traded at 7.44%, unchanged from Monday.
In the exchange markets, the dollar’s rise was pegged to its reputation as a safe haven during international turmoil.
Traders said the dollar opened higher in Europe following reports that an American military helicopter fired on an Iranian vessel in the Persian Gulf on Monday. It stayed stronger later in the trading day in New York.
“Dealers are becoming uneasy about selling the dollar because the Middle East situation is likely to smolder for a while,” one trader said.
The U.S. helicopter attacked because the Iranian vessel was sowing mines in international waters, the Pentagon said.
Traders were also reluctant to be short on dollars in case the Group of Seven takes an action that boosts the value of the U.S. currency, said James Vick, a vice president and senior corporate trader for Manufacturers Hanover Trust Co.
The Group of Seven consists of the United States, Britain, Japan, France, West Germany, Italy and Canada.
In London, the British pound fell to $1.6440 from $1.6505. Later, in New York, sterling fell to $1.64235 from $1.6524.
The dollar closed in Tokyo at 143.53 Japanese yen, up marginally from 143.08 yen Monday. In London, the dollar firmed to 144.03 yen. At the end of trading in New York, the dollar strengthened to 144.35 yen from 142.98 late Monday.
THE DOW’S BIGGEST DAYSSept. 22, 1987: 75.23 points
April 3, 1987: 69.89
April 21, 1987: 66.47
May 26, 1987: 54.74
Feb. 17, 1987: 54.14
May 5, 1987: 51.85
Jan. 22, 1987: 51.60
Aug. 11, 1987: 44.64
Jan. 5, 1987: 44.01
Aug. 10, 1987: 43.84
Source: Associated Press
