Bonds Rebound After Early Slide Swamps Stocks : Credit Markets Are Mixed With Many Issues Posting Gains in Late Trading
The bond market declined early Tuesday, helping to trigger a record one-day fall in the stock market, but turned upward later in the day even as stocks continued to plummet.
Traders said the Dow Jones industrial index’s record 91.55-point descent produced no visible aftershocks in the bond market, but the key factor that sent stocks tumbling--fear of higher interest rates--managed to keep bond prices from posting any strong advances.
Higher interest rates spell lower bond prices.
Ironically, despite the fear of higher interest rates, it was a decline in the federal funds rate to 7.25% late Tuesday from 7.4375% the previous day that gave encouragement to the bond market and sent the Treasury’s closely watched 30-year issue, which on Monday declined about a point, or $10 per $1,000 face amount, up 3/16 point or about $2. Its yield, which moves inversely to its price, slipped to 9.78% from 9.79% late Monday.
Fears Quelled
Bond prices dropped in early trading Tuesday after the West German central bank raised the minimum bid rate for its repurchase agreement to 3.60% from 3.50%, dealers said. The lack of any money market operations by the Federal Reserve also added a slight note of concern over higher short-term rates.
The drop in the fed funds rate, used by banks to price short-term, overnight loans, quelled fears of an imminent tightening in Fed policy.
“This pushes out into the future--or makes less likely--an increase in the discount rate,” said one economist.
A better-than-expected response to one of the Treasury auctions Tuesday, along with a drop in oil prices, also bolstered bond prices in late trading, analysts said.
Yields on four-year Treasury notes rose in the auction to the highest level in two years, attracting vigorous buying. The average yield was 9.24%, up from 7.89% at the last comparable auction on June 24.
The Treasury will sell $6.75 billion of seven-year notes today.
Bond investors had been concerned in recent days that an increase in prices of key commodities such as oil could signal a rekindling of inflation, a principal enemy of the credit markets. On Tuesday, futures contracts for November delivery of West Texas Intermediate, the U.S. benchmark crude oil, dropped 38 cents per 42-gallon barrel, to close at $19.44 on the New York Mercantile Exchange.
In the secondary market for Treasury bonds, prices of short-term government issues were unchanged to 1/32 point higher, intermediate maturities were 1/32 point lower to 1/16 point higher, and 20-year issues declined 1/8 point, according to investment firm 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 rose 1/2 point and utilities advanced 3/8 point in moderate trading, according to Salomon Bros.
Among tax-exempt municipal bonds, general obligations gained point and revenue bonds rose 1/8 point in light activity, Salomon Bros. said.
Rates on three-month Treasury bills, meanwhile, declined 4 basis points to 6.51%. A basis point is one-hundredth of a percentage point. Six-month bills fell 7 basis points to 6.93% and one-year bills were also down 4 basis points, at 7.38%.
