Bond Prices Soar as Investors Flee the Stock Market : Rally Sends Interest Rates Into Nose Dive; Dollar Slips

Interest rates entered the second week of a nearly uninterrupted plunge on Monday, as Wall Street took another tumble and nervous investors continued to run for cover in the bond market.

The yield of the Treasury’s closely watched 30-year bond fell to 8.90% from 9.09% Friday. Its price, which moves inversely to its yield, soared 2 points, or $20 for every $1,000 in face value.

Monday’s rise came on the heels of a spectacular advance last week, which saw the 30-year bond climb nearly 10 points, or $100 per $1,000, from its level on Friday, Oct. 16--the last trading day before Wall Street’s historic collapse.

“There is such a push to quality,” said William Brachfeld, executive vice president in charge of bond trading at Daiwa Securities Inc. “We’ve had an enormous rally.”

Bond prices are being boosted by demand from investors shifting funds from the battered stock market into Treasury securities, pushing interest rates lower.

Fed May Loosen Credit

Last Thursday, banks responded to the drop in money-market interest rates by lowering their prime lending rates by a quarter percentage point to 9%. It was the first industrywide reduction since August, 1986, in the prime rate, which is used by banks as a benchmark for setting interest rates on a range of business and consumer loans.

The climb in bond prices is also being fueled by speculation that the turmoil on stock exchanges around the world could lead to an economic recession, spurring the Federal Reserve Board to loosen credit by nudging interest rates lower.

Economists warn that the huge loss of paper wealth caused by the stock plunge could cause consumers to cut back on purchases for big-ticket items such as cars and appliances. On Monday, the Fed again injected fresh money into the banking system, contributing to the decline in interest rates, as it had done last week.

And some observers believe that the Fed, the nation’s central bank, could move to cut its discount rate, the interest it charges on loans to U.S. financial institutions.

Henry Kaufman, chief economist of Salomon Bros. and a leading financial analyst, said in his weekly commentary Friday that the Fed may cut its discount rate at least once by year-end.

In early September, following a negative report on the U.S. trade deficit, the Fed raised the discount rate by half a percentage point to 6%--the first such increase in more than three years. But at that time, it was an altogether different bond market, wracked by fears of a rekindling of inflation, with yields on the 30-year Treasury bond approaching the landmark threshold of 10%.

Monday’s advance in bond prices was braked somewhat, analysts noted, by concern over the dollar, which began to tumble steeply Friday amid rumors of an imminent devaluation of U.S. currency by finance leaders of the seven largest industrial countries.

The dollar recovered in late trading Monday in New York, rising to 142.34 Japanese yen from 141.80 yen late Friday.

A weaker dollar makes Treasury bonds and notes, which are denominated in the U.S. currency, less attractive to foreign investors.

The federal funds rate, the interest banks charge each other on overnight loans, was quoted late in the day at 7.375%, up from 6.875% late Friday.

The dollar’s decline “has created some tentativeness” in the bond market, said William Sullivan, director of money-market research for Dean Witter Reynolds Inc.