CREDIT : Bond Prices Ease in Wake of Sharp Gains
Bond prices pulled back in light dealings Wednesday as some traders cashed in on the meteoric price rise of Tuesday’s session.
Prices of the Treasury’s widely followed 30-year issue fell 1/8 point, or $1.25 for every $1,000 in face value, after climbing more than $20 on Tuesday.
Yields on the long bonds, often seen as an indication of broader rate trends, edged up to 8.83% from 8.81% on Tuesday.
Prices soared on Tuesday as the government reported a sharp decline in the nation’s trade deficit in April to $9.89 billion from $11.7 billion in March.
That suggested to some investors that pressure was off the Federal Reserve to tighten credit policy and push rates higher in defense of the dollar.
William V. Sullivan Jr., director of money market research at the investment firm Dean Witter Reynolds Inc., said some traders decided to sell part of their holdings and take profits in the wake of Tuesday’s price run-up.
Negatives on the Horizon
Analysts were divided, however, on whether there is room for continued significant declines in interest rates. The 30-year bond has traded at yields below 8.8% since mid-April.
Despite the euphoria that accompanied Tuesday’s price rally, Sullivan said “a couple of negatives have popped up on the horizon.”
One was another rise in commodity futures prices, which have been climbing in recent days as a drought has parched farmland in the Midwest during a critical stage of the growing season. If the drought continues, food prices may be headed higher.
He also noted that the government reported Wednesday that industrial production rose in May for the eighth consecutive month, edging up 0.4%.
Sullivan said some bond traders worry that continued economic growth in the face of dwindling excess industrial capacity could lead to “bottlenecks, shortages and an acceleration in inflationary pressures.”
In the secondary market for Treasury bonds, prices of short-term government issues slipped 1/16 point, intermediate maturities fell point and 20-year issues were off 3/16 point, according to figures provided by Telerate Inc., a business information service.
Indicators Drop
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, fell 0.12 to 110.68. The Shearson Lehman Hutton daily Treasury bond index, which makes a similar measurement, fell 0.92 to 1,158.93.
In the tax-exempt market, prices slipped 1/8 point, according to the Bond Buyer’s municipal bond index.
Yields on three-month Treasury bills fell 2 basis points to 6.33%. Six-month bills fell 2 basis points to 6.53% and one-year bills rose 3 basis points to 6.84%. A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, was quoted late in the day at 8.25%, up from 7.313% on Tuesday.
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