CREDIT : Prime Rate Cut Spurs Jump in Bond Prices

Bond prices jumped sharply higher in hectic trading Tuesday, pressured upward by a cut in the prime lending rate by major banks and new government reports pointing to a slowdown in the economy.

The Treasury’s closely watched 30-year issue rose 1 points, or $12.50 for every $1,000 in face value. Its yield, which moves inversely to its price, tumbled to 8.32% from 8.42% late Monday.

The yield on the 30-year bond has not hit levels this low since last April.

Fresh indications that the economy may be slowing helped boost bond prices, which had already rallied vigorously last week in anticipation of lower interest rates.

The Commerce Department reported that its index of leading economic indicators fell in December for the third month in a row--a possible harbinger of recession. The department also said new home sales fell for the second consecutive month in December, closing out a year in which home sales fell 10.1% below 1986 levels.

Separately, several major banks lowered their prime rates by a quarter percentage point to 8.5%. The reductions placed the prime at its lowest level since July, 1986, when the rate was cut to 8% from 8.5%.

Sign of Decline

The government reports confirm that the economy is “slowing down and added to investor confidence that bond prices will continue to rise,” said Ward McCarthy, chief financial economist at Merrill Lynch Capital Markets.

Bond prices rise when the economy is weak because interest rates tend to be lower.

While the prime rate cut was not seen as an aggressive move, McCarthy called the action “an acquiescence on the part of the banks that (interest) rates are going to continue to decline.”

Analysts credited the prime rate cut for sparking stronger buyer interest in bonds. McCarthy said many investors were “scared into the market--they were afraid not to buy, and market strength induced more strength.”

But William Brachfeld, executive vice president of fixed income at Daiwa Securities Inc., noted that the market was skittish, with prices opening lower and then moving in a volatile fashion during the session.

He questioned how successfully the market can absorb the flurry of new debt issues the government is auctioning off this week.

Need More Good News

On Tuesday the government auctioned $9.25 billion in three-year notes, with an average yield of 7.42%. That was down from 8.03% at the last three-year note auction on Nov. 3.

The Treasury plans to auction $9 billion in 10-year notes today and $8.75 billion in 30-year bonds on Thursday, for a total of $27 billion in new debt issues.

“We need a sustained dose of good news for the bond market” to maintain prices at these relatively high levels, Brachfeld said.

In the market for already outstanding Treasury bonds, prices of short-term government issues edged up 1/16 point, intermediate maturities ranged 3/16 point to 23/32 point higher, and 20-year issues gained 31/32 point, according to Telerate Inc., a financial information service.

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 Shearson Lehman Treasury index, which measures price movements on outstanding Treasury issues with maturities of a year or longer, was up 5.02 at 1,190.22.

In corporate trading, industrials rose 1/2 point and utilities rose 3/8 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 1.13 to 283.48.

Among tax-exempt municipal bonds, general obligations rose 3/4 point while revenue bonds were 1/2 point to 3/4 point higher. Trading was active, according to Merrill Lynch.

Yields on three-month Treasury bills, fell 3 basis points to 5.70%. Six-month bills slipped 4 basis points to 6.06% and one-year bills fell 3 basis points to 6.22%. A basis point is one-hundredth of a percentage point.

The federal funds rate, the interest on overnight loans between banks, was quoted at 6.625%, down from 6.9375% late Monday.

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