CREDIT : Bonds Drop as Oil Prices Rekindle Inflation Fears
Fears of inflation prompted by higher oil prices drove bond prices lower in light trading Monday.
The Treasury’s bellwether 30-year bond fell 15/16 point, or more than $9 for every $1,000 in face amount. Its yield rose to 9.23% from 9.14% late Friday.
Oil prices rose sharply Monday on news of a possible cease-fire between Iran and Iraq, and that triggered selling in the bond market, analysts said.
“I guess the oil price increase scared people,” said Mitchell Held, chief financial economist with Smith Barney, Harris Upham & Co. in New York.
Held said a plunge in grain prices was not enough to offset concerns about surging oil prices, which recently hit a 21-month low.
Higher Oil Prices
“If we had an outbreak of peace in the Middle East, we could really see some changes in the oil market,” said Robert Brusca, chief economist at Nikko Securities Co. in New York.
Peace between Iran and Iraq could signal a rise in oil prices if nations in the region can get together and agree on production limits, analysts said.
But bond investors fear that higher oil prices could cause a rise in inflation, which erodes the value of fixed-income securities such as bonds and notes. An acceleration of inflation could also prompt the Federal Reserve to tighten credit and encourage higher interest rates, depressing bond prices.
In the secondary market for Treasury bonds, prices of short-term government issues were 1/8 point to 5/32 point lower, intermediate maturities fell by between 3/16 point and 1/2 point and 20-year issues were down 23/32 point, according to the financial information service Telerate Inc.
The movement of a point is equivalent to a change of $10 in the price of a $1,000 bond.
The Shearson Lehman daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, was down 3.60 to 1,135.37.
Tax-exempt municipal bonds fell point. Trading was light.
Three-month Treasury bills were down 8 basis points to a discounted rate of 6.63% and a yield of 6.82%. Six-month bills were unchanged at a discounted rate of 7.05% and a yield of 7.40%, and one-year bills were up 1 basis points at 7.27% to yield 7.78%.
A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment in a Treasury bill. The discounted rate is the interest rate the market uses to price bills.
The federal funds rate, the interest on overnight loans between banks, was quoted at 7.875%, up from 7.813% late Friday.
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