CREDIT : Bond Prices Shoot Up; Some Analysts Baffled
Bond prices advanced strongly Tuesday in a rally that confounded many credit market experts, who had thought a spate of government reports detailing strong economic growth would depress prices.
The Treasury’s key 30-year bond surged nearly a point or $10 per $1,000 in face amount, the strongest one-day rise in more than a month. Its yield, which moves inversely to price, fell to 9.06% from 9.15% late Monday.
Some analysts attributed the strength to the short supply of bonds and greater demand by foreign buyers, a result of the more expensive dollar. Some linked it to historical rallies the day before a government debt refunding announcement and to legal limits on the Treasury’s ability to sell more long-term bonds.
A few ascribed the advance to a drop in oil prices, which implies lower inflation in the future. Others said they didn’t know the reason.
“In my view, a lot of this is simply unwarranted,” said John V. Sebastian, chief economist at Clayton Brown & Associates in Chicago. “I love to have people buy bonds, but at the same time I’m a realist as well, and I think maybe things have gone a little too far too fast.”
Especially baffling was the market’s reaction to a 1.4% surge in the government’s chief economic forecasting gauge in June, an 8.4% jump in new home sales and a 5.5% rise in factory orders.
Bullish Atmosphere
Those reports helped paint a picture of a robust economy, which implies greater demand for credit, higher inflation and rising interest rates. Bond prices usually fall in such circumstances.
Carl Steen, an economist at Drexel Burnham Lambert Inc. in New York, said the market’s positive reaction to the index of leading indicators report was partly due to a revised drop in the May figure, from 0.1% to 0.8%.
“In a bullish atmosphere, they look for good news where they can find it,” he said.
In the secondary market for Treasury bonds, prices of short-term governments rose 1/8 point, intermediate maturities rose about 1/2 point and long-term issues rose 15/16 point, Telerate Inc., a financial data service, said.
The movement of a point equals a change of $10 in the price of a bond with a $1,000 face value.
The Shearson Lehman daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 3.92 to 1,143.42.
Fed Funds Rate Eases
In corporate trading, industrials and utilities both rose in moderate activity. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, advanced 2.12 to 284.47.
Among tax-exempt municipal bonds, general obligations rose about 1/2 point and revenue bonds rose to 3/8 point. Trading was moderate.
Yields on three-month Treasury bills were unchanged at 7.089% and the discount remained at 6.88%. Yields on six-month bills fell to 7.46% as the discount eased 3 basis points to 7.11%. Yields on one-year bills fell to 7.82% as the discount fell 3 basis points to 7.30%.
A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment in a Treasury bill. The discount is the percentage that bills are selling below the face value, which is paid at maturity.
The federal funds rate, the interest on overnight loans between banks, traded at 7.688%, off from 7.813% late Monday.
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