New Trade Figures Send Bond Prices Plummeting

The same government report that sent the Dow Jones industrial index down a record 95.46 Wednesday swamped the bond market as well.

Bond prices plunged as pessimism engulfed the market following release of the latest figures on the nation’s balance of trade.

The Treasury’s closely watched 30-year bond dropped 2 points, or $22.50 for every $1,000 in face value. Its yield, which moves inversely from its price, jumped to 10.16% from 9.90% late Tuesday. The last time the yield on the long bond closed at 10% was Nov. 20, 1985.

The bond yield’s surge past 10% raises broader concerns, since it is a key indicator of the direction of interest rates throughout the economy. Housing mortgages, bank loans and other key lending rates are linked to 30-year bond yields.

A 30-year fixed mortgage, which had fallen below 9% on a national average, has jumped past 11%, the highest level since late 1985, in recent weeks. Housing and construction figures have been pressured by higher mortgage rates, and consumer demand has been dampened by higher consumer loan rates.

Analysts said the market was devastated by a Commerce Department report showing the nation’s shortfall of exports to imports at $15.7 billion in August. While down from the record $16.5 billion posted in July, the trade deficit was higher than the expected range of $13.5 billion to $15.5 billion.

The report pushed the dollar sharply lower against other currencies, mainly because the Reagan Administration has promoted a lower dollar as a way of reducing the trade deficit--by making imports more expensive here and U.S. exports cheaper in other countries.

This in turn helped send interest rates higher in the bond market, because a shrinking dollar diminishes the value of U.S. securities held by foreigners.

The report “is telling us that, to get the trade deficit down, it’s going to take lower economic growth or a lower dollar,” said Robert Chandross, vice president and chief economist of the North American office of Lloyds Bank PLC in New York.

“And if we’re not going to let the dollar go down because central banks want to make a stand, it’s going to have to come out of the hide of the economy,” he said.

Norman Robertson, chief economist at Pittsburgh’s Mellon Bank, said the market also was concerned that the Federal Reserve is facing pressure to raise the discount rate.

The poor trade figure and its impact on the dollar quickly revived concerns that the Fed may again hike the discount rate from the 6% level set last month.

The federal funds rate, the interest on overnight loans between banks, traded at 7.50%, down from 7.675 late Tuesday.