Bond Prices Rally in Spite of Major Decline of Dollar
Bond prices rallied in a volatile session Monday as investors fled the slumping stock market in favor of government securities, despite a fresh decline in the dollar that sparked the Wall Street downturn.
The Dow Jones industrial average closed 76.93 points lower at 1,833.55 in heavy trading. At mid-afternoon, however, it had been down as much as 110 points. Broader stock market measures also showed deep losses. About eight stocks fell in value for every one that rose on the New York Stock Exchange, with 1,576 down, 195 up and 219 unchanged. The NYSE’s composite index fell 5.47 to 129.69.
Rates on short-term Treasury bills fell nearly a third of a percentage point to levels not seen since late October, while yields on longer-term securities showed milder declines.
“The only thing to say about the bills is that they were stock-market led,” said Ken Dagel of Kleinwort Benson Government Securities.
But gains in longer term notes and bonds were limited by concern over inflation, especially linked to the dollar’s drop to 1.6392 West German marks from 1.6510 on Friday. During the day, the dollar sank to postwar lows against the yen and the mark.
The bellwether 30-year Treasury issue, down as much as 3/4 point during the day, finished 17/32 point higher, a gain of more than $5 per $1,000 in face value from late Friday. Its yield declined to 9.11% from 9.13%.
Bond prices opened lower in response to a sharp dollar drop in overnight foreign-exchange activity. The dollar slumped to new lows against major foreign currencies and remained weak in later U.S. trading on what analysts said was pessimism that a recent proposal to reduce the federal budget deficit would yield significant results.
A falling dollar generally depresses bond prices, which move inversely from interest rates, by raising the danger of higher inflation and by curbing foreign interest in U.S. fixed-income instruments, both of which force interest rates higher in order to continue attracting investors.
But bonds rebounded strongly when the U.S. stock market opened lower and quickly plunged to its lowest levels in five weeks.
“The overriding concern here is the stock market, (and) whether it is signaling a recession,” said Steven Wood, an economist for BankAmerica Capital Markets in San Francisco. “If so, the interest rate levels we have here are much too high.”
Market watchers said the renewed slump in the stock market more than a month after its Oct. 19 crash raised speculation about an ensuing economic slowdown, which would lessen the likelihood the Federal Reserve would push interest rates higher in an attempt to curb inflation.
Lowest Since Oct. 26
“That’s not good for the dollar, it’s certainly not good for the foreign investor, but from the domestic investor’s point of view it’s a good opportunity to buy bonds,” said Lawrence Kreicher, a senior international bond analyst for Merrill Lynch Capital Markets.
In Washington, the Treasury Department sold $6.4 billion in three-month bills at an average discount rate of 5.49%, down from 5.70% last week. Another $6.4 billion was sold in six-month bills at an average discount rate of 6.12%, up slightly from from 6.11% last week.
The rates on three-month bills were the lowest since Oct. 26 when they sold for 5.12%, while the six-month rates were the highest since Nov. 16 when these bills averaged 6.33%.
In the secondary market for Treasury bonds, prices of short-term government issues rose by as much as point, intermediate maturities rose by up to 19/32 point and 20-year issues were up as much as 5/8 point, according to figures provided by Telerate Inc.
The movement of a point equals a change of $10 in the price of a bond with a $1,000 face value.
The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 0.39 to 109.78.
In corporate trading, industrials were up 1/2 point and utilities rose 3/8 point in light activity.
Yields on three-month Treasury bills fell 32 basis points to 5.31%. A basis point is one-hundredth of a percentage point. Six-month bill yields fell 5 basis points to 6.16% and one-year bills fell 7 basis points at 6.55%.
The federal funds rate, the interest on overnight loans between banks, traded at 7.188%, up from 6.75% late Friday.
Dollar’s drop sends stocks plunging. Part I, Page 1.