CREDIT : Bond Prices Surge on News of Dollar’s Rise
Bond prices surged and interest rates fell Wednesday, as the dollar’s sharp rise curbed recent fears that rates are headed higher.
The Treasury’s closely watched 30-year bond climbed 1 7/8 points, or $18.75 for every $1,000 in face value. That pushed its yield down to 8.91% from 9.08% late Tuesday.
Analysts said a sharp rise in the value of the dollar in foreign-exchange trading set the stage for the powerful bond rally.
A communique issued at the close Tuesday of the seven-nation economic summit in Toronto suggested to some traders that there may be some room for the dollar to rise.
That fueled a dramatic surge in the dollar in Wednesday’s trading. The dollar climbed to 128.95 Japanese yen in New York, for instance, up from 126.42 yen late Tuesday.
The dollar’s surge sparked some bond buying by foreign investors, according to Sung Won Sohn, chief economist for Norwest Corp. in Minneapolis. A rising dollar increases the yields that they can get from dollar-denominated securities.
He said banks, pension funds and insurance funds also bought bonds on the theory that a strong dollar diminishes chances that the Federal Reserve Board will find it necessary to tighten credit conditions.
Second Daily Advance
“They feel with the dollar strengthening, it is less likely that inflation rates will be going up. They feel better about interest rate prospects,” he said.
But Sohn said he viewed the bond price rally as an opportunity to sell rather than buy. He said he feels the long-term trend is that rates will rise back above 9% soon.
Wednesday’s rally was the second huge daily advance in the past seven trading sessions. Prices of long-term bonds climbed more than $20 for every $1,000 in face value on June 14 after the government reported an unexpected narrowing of the U.S. trade deficit for April.
Prices tumbled in the three sessions that followed last week’s rise, however, more than erasing the gains made in that single session.
Federal Funds Rate Unchanged
In the secondary market for Treasury bonds, prices of short-term government issues rose point to 13/32 point, intermediate maturities rose 26/32 point to a full point and 20-year issues climbed 1 1/2 points, 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 0.68 to 109.89. The Shearson Lehman Hutton daily Treasury bond index, which makes a similar measurement, rose 8.07 to 1,151.20.
Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, rose 2.23 to 283.21.
In the tax-exempt market, prices rose 1/2 point, according to the Bond Buyer municipal bond index.
Yields on three-month Treasury bills fell 5 basis points to 6.51%. Six-month bills fell 8 basis points to 6.78% and one-year bills fell 8 basis points to 6.99%. 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 7.4375%, the same as late Tuesday.
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