Bond prices surged higher Wednesday on the strength of government economic growth figures that analysts said indicated an impending economic slowdown and moderate inflation, two bullish factors for bonds.
The Treasury's bellwether 30-year issue, down about $9 per $1,000 in face amount Tuesday, jumped nearly $20. Its yield, which moves inversely to its price, fell to 8.53% from 8.71% late Tuesday.
Spurring the market was the government's report that the economy as measured by the gross national product grew at a 4.2% rate from October to December.
The rate was stronger than many analysts had expected, but virtually all the growth stemmed from a steep rise in business inventories. At the same time, consumer spending--a major component of economic growth--plummeted by 3.8%, the steepest drop in eight years.
Major drops in consumer spending generally portend economic slowdowns. The report cheered the bond markets on speculation that a slow economy would reduce the chances that the Federal Reserve would drive interest rates higher to curb higher inflation that might accompany a resurgent economy.
Steve Wood, an economist for BankAmerica Capital Markets in San Francisco, also noted that inflation as measured by an index tied to the GNP rose at an annual rate of 3.7% in the fourth quarter. That was higher than the 2.7% gain in 1986 but still a relatively moderate pace, he said.
Supported Existing Issues
Bonds gained support from the Treasury's announcement that it would borrow $27 billion at its quarterly refunding auction next week. The refunding, which will include sales of $9.25 billion in three-year notes, $9 billion in 10-year notes and $8.75 billion in 30-year bonds, will be smaller than the $28 billion borrowed at the last major refunding in August.
Anticipation of the slight decline in the supply of bonds helped support prices of existing issues, Wood said.
In the secondary market for Treasury bonds, prices of short-term governments rose in the range of 5/16 point and 1/2 point, intermediate maturities rose in the range of 29/32 point to 1 15/32, and 20-year issues were up 1 29/32 point, according to figures provided by the financial information service Telerate Inc.
The movement of a point is equivalent to 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 0.93 to 112.88. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, rose 10.13 to 1,180.42.
In corporate trading, industrials were up 1 point and utilities rose 5/8 point in active trading, according to the investment firm Salomon Bros.
Moody's investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, rose 2.17 to 279.33.
Yields on three-month Treasury bills were down 9 basis points to 5.72%. Six-month bills were down 12 basis points at 6.06% and one-year bills fell 14 basis points at 6.27%. A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, traded at 6.5%, down from 6.6875% late Monday.
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