Markets Rally on Reports of Help for Dollar : Word That ‘Group of 7’ Officials Would Agree on Floor Boosts Bond Prices
The healthier dollar sparked buying enthusiasm for both bonds and stocks Wednesday, allowing the Dow Jones industrial average to steam ahead 64.16 points to 2,061.67 and the Treasury’s bellwether 30-year bond to surge $10 per $1,000 face amount.
Analysts said the trigger for the markets rise was a news report from Japan that said officials of the seven major industrial countries are likely to agree on a plan of support for the dollar.
The credit markets started out on a down note because of the dollar’s early weakness in foreign exchange but rebounded with the currency’s improvement.
The dollar got a boost from a news report from Japan saying finance ministers and central bankers of the Group of Seven countries are likely to agree that the dollar should be held above 125 yen.
“This report was taken to heart on the foreign exchange markets, and the dollar went within minutes to 126 yen and it carried the bond market right up with it,” explained Carol A. Stone, a senior economist with Nomura Securities International Inc. “That’s basically the thrust of the bond market strength.” The dollar is often closely watched in the credit markets, in part as a way to measure inflation.
Investors worry that a weak dollar will raise import prices while making dollar-denominated bonds and notes less attractive to foreigners. There’s also concern that the Federal Reserve might move to drive up interest rates to prop up the dollar, thereby lowering the prices of existing bonds.
Larry Wachtel, a market watcher for Prudential-Bache Securities Inc., said the dollar’s strength soon rippled through the bond market, sending long-term rates lower. That in turn made yields on stocks look more attractive, he said.
In each of the markets, he said traders who had sold borrowed contracts in expectations that the dollar, bonds and stocks would fall suddenly saw prices rising and felt compelled to buy in an effort to cut their potential losses.
“Too many people were selling the market short,” he said.
On Wednesday, the Fed injected reserves into the financial system as part of a seasonal operation and that technical factor helped prop up bond prices, analysts said.
Gains in Secondary Market
The yield on the Treasury’s 30-year issue slipped to 8.75% from 8.84%.
In the secondary market for Treasury bonds, prices of short-term governments rose between 1/16 point and 1/8 point; intermediate maturities were point to 1/2 point higher, and 20-year issues were up 3/8 point, according to Telerate Inc.
The movement of a point is equal to a change of $10 in the price of a $1,000 bond.
The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 0.30 to 111.45. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, stood at 1,166.85, up 3.93.
In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds was up 15/32 point to 87-31/32 as of 3 p.m. EST. The average yield fell to 8.17% from 8.21% late Tuesday.
Yields on three-month Treasury bills were up 4 basis points to 6.03%. A basis point is one-hundredth of a percentage point. Six-month bills fell 9 basis points to 6.15%, and one-year bills were off 3 basis points at 6.54%.
The federal funds rate, the interest on overnight loans between banks, traded at 7.25%, up sharply from 6.893% Tuesday, because of technical factors.
The stock market surge prompted the New York Stock Exchange to implement a new rule for the first time and close its automatic order execution system. The rule halting program trading was adopted after October’s market crash and is aimed at curbing dramatic price shifts.
Gainers swamped losers by a margin of nearly 3 to 1 in the overall tally of NYSE-listed issues, with 1,187 up, 414 down and 384 unchanged. The NYSE index rose 3.47 to 149.76.
Volume on the Big Board came to 189.76 million shares, up from 135.29 million shares on Tuesday.
The stock market opened with some modest gains but gave most of them back by noontime before sweeping broadly ahead in the early afternoon.
Large blocks of 10,000 or more shares traded on the NYSE totaled 4,076, compared to 2,789 the day before.
The Wilshire index of 5,000 equities closed at 2,634.113, up 55.654 or 2.16% from Tuesday.
Nationwide turnover in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 225.98 million shares.
Standard & Poor’s index of 400 industrials rose 8.54 to 308.71, and S&P;’s 500-stock composite index was up 6.98 to 265.49.
The American Stock Exchange market-value index rose 2.51 to 297.58. The NASDAQ composite index closed at 377.74, up 4.33.
In Tokyo, Nikkei 225-share index closed Wednesday at 26,511.17 points, up 195.82, on the Tokyo Stock Exchange.
In early trading today, Tokyo’s stock market jumped to a record, with the Nikkei index topping the previous high of 26,646.43 set on Oct. 14 last year, a week before the global stock market crash.
The index rose 136.01 in only the first nine minutes of trading to hit 26,647.18 after Wall Street’s sharp rise Wednesday.
In London, the Financial Times 100 share index rose 7.4 to close at 1,745.0.
