Bond Prices Dive After Trade Report Triggers Selling Wave

A fierce wave of selling swept through the credit markets Thursday after investors learned that the U.S. trade deficit swelled to a record $17.6 billion in October.

Hardest hit were longer-maturing issues. The Treasury’s bellwether 30-year bond, for instance, tumbled nearly 2 points, or $20 per $1,000 in face amount. Its yield, which moves inversely to its price, soared to 9.39% from 9.20% late Wednesday.

Corporate and municipal issues also suffered steep losses.

The Commerce Department report took bond traders by surprise, and left many wondering about the fate of the dollar, which tumbled to new depths after the figures were released early Thursday.

Traders say there’s widespread concern that if the dollar continues its free-fall, the Federal Reserve may have to tighten credit to support the currency, thereby driving up interest rates. Bond prices and interest rates move inversely.

The Reagan Administration had been allowing the dollar to fall rather than risk a possible recession in the aftermath of the Oct. 19 stock market crash. Until this past spring, the government had pushed for a weaker dollar to help the U.S. trade balance.

A weaker dollar also puts pressure on inflation, which erodes the value of fixed-income securities. And it lessens the attractiveness of dollar-denominated bonds and notes to foreign investors.

The October deficit was $3.56 billion higher than the $14.1 billion September shortfall. Most economists had been forecasting an October deficit of around $14.5 billion, and some even called for an improvement.

“Up until today there had appeared there was an improvement trend for the trade statistics; the trade surpluses abroad had been getting smaller,” said Robert Brusca, chief financial economist for Nikko Securities Co. International. “There’s a piece of the puzzle that doesn’t fit.”

The federal funds rate, the interest on overnight loans between banks, traded at 6.813%, up from 6.75% late Wednesday.