CREDIT : Bonds Turn Lower After Oil Prices Stage Comeback

Bond prices retreated from their early highs to finish little changed Thursday as investors took profits and oil prices staged an impressive rally.

The Treasury’s 30-year bond, which in early trading gained more than $10 for every $1,000 in face amount, closed down 5/32 point, or about $1.25. The bellwether bond had risen by more than $30 since late last week. Its yield fell to 9.15% from 9.20% late Wednesday.

Analysts said bond prices continued their upward push at the opening amid volatile selling in the oil futures market.

“It was euphoric in the morning while oil prices declined,” said Anthony Naylor, a senior vice president at Rodman & Renshaw. “But when oil came off the bottom, the bond market began declining.”

Analysts said trading was active.

Traders were watching West Texas Intermediate, the benchmark U.S. crude oil, which fell below $15 per 42-gallon barrel in early trading for the first time in more than a year. But the crude rallied to close at $15.84 a barrel on the New York Mercantile Exchange.

Inflationary Signal

John Sebastian, an executive vice president at Clayton Brown & Associates in Chicago, said the bond market has focused on oil prices almost exclusively for the past week or so.

“When oil prices began to firm a bit (Thursday), it was as good an excuse as any to take some profits,” he said. But bond prices sold off as the rally in oil futures gained strength, Sebastian said.

Traders interpret lower oil prices as a signal that inflationary pressures may be easing. Inflation is considered a major threat for fixed-income securities because it erodes their value.

Naylor noted the credit market’s tendency to “latch onto things. For a while it watches the dollar or the yen. Now oil seems to have captured the imagination, mostly because it is a dominant global factor, and it’s doing things most of the pundits said a few months ago couldn’t happen,” he said, referring to the drastic price drop.

Corporates Advance

Prices of short-term government bonds were unchanged to 1/16 point lower; intermediate maturities were 1/32 point to 1/16 point lower, and 20-year issues fell 1/8 point, according to Telerate Inc., a financial information service.

The Merrill Lynch daily Treasury index, which measures price movements on all outstanding issues with maturities of a year or longer, was off 0.04 to 109.58.

Moody’s investment grade corporate bond index, which measures price movements on 100 corporate bonds with maturities of five years or longer, rose 0.40 to 264.31.

Yields on three-month Treasury bills fell 4 basis points to 5.89%. Six-month bills were unchanged at 6.39%, and one-year bills rose 3 basis points to 6.74%.

The federal funds rate, the interest on overnight loans between banks, traded late in the day at 6.6875%, after trading at 4.5% late Wednesday due mainly to technical factors.

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