CREDIT : Inflation Fears Recede; Bonds Gain
Bond prices edged higher Tuesday and short-term interest rates fell as prices of some commodities moved lower, easing recent concerns about inflation.
The Treasury’s 30-year bond rose 3/8 point, or $3.75 per $1,000 in face amount, as its yield fell to 8.75% from 8.77% on Monday.
Bond prices fell as much as $10 for every $1,000 in face value on Monday as oil and commodities prices soared.
While oil prices rose on Tuesday, the prices of some commodities fell, prompting some bond traders to reassess their view of inflation prospects, said Sung Won Sohn, chief economist of Norwest Corp. in Minneapolis.
“Traders overreacted yesterday, and today they are sitting back and thinking that they may have overreacted,” he said.
Commodities prices are often viewed as a precursor of inflation, which erodes the value of bonds and increases chances that the Federal Reserve will encourage higher interest rates to prevent rising prices.
The pace of activity in the bond market was restrained, analysts said, as some traders are reluctant to take a large position in advance of Thursday’s report on U.S. trade deficit figures for February.
Meanwhile, the Treasury Department sold $6.26 billion in seven-year notes at the lowest yields since last June.
The average yield was 8.44%, down from 8.67% at the January auction and the lowest since seven-year notes averaged 8.10% on June 25.
Indexes Advance
In the secondary market for Treasury bonds, prices of short-term governments rose 2/32 point, intermediate maturities rose 5/32 point and 20-year issues were up 1/32 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 0.13 to 111.63. The Shearson Lehman composite index, which makes a similar measurement, rose 1.54 to 1,167.76.
In corporate trading, industrials and utilities were unchanged in light dealings, according to the investment firm Salomon Bros.
Yields on three-month Treasury bills fell 11 basis points to 5.91%. Six-month bills fell 12 basis points to 6.08% and one-year bills fell 4 basis points to 6.45%. A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, was quoted at 6.675%, down from 6.75% on Monday.
In the tax-exempt market, the Bond Buyers municipal bond index, which measures prices on 40 long-term bonds, rose 1/8 point to 88.50 while its yield to maturity slipped to 8.11% from 8.12%.
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