CREDIT : Bond Prices Dip After Hike in Prime Rate
Bond prices were unchanged to slightly lower Thursday in active trading as the market shrugged off a half-percentage-point increase in the prime lending rate.
The Treasury’s closely watched 30-year bond declined point, or $2.50 for every $1,000 in face value. Its yield, which moves inversely to its price and is often an indicator of interest rate trends, rose to 9.38% from 9.36% late Wednesday.
The moderate decline in the key 30-year issue followed steep falls on Tuesday and Wednesday. The yield on the bond hasn’t been this high since last December, when it reached 9.40%.
Major U.S. banks boosted their prime rates to 10% from 9.5% early Thursday. The prime rate is often used as a benchmark for a range of loan charges for consumers and small and medium-sized businesses.
Funds Rate Down
But analysts said the increase had little impact on bond prices because it had been widely anticipated following the Federal Reserve’s half-percentage-point boost in its discount rate to 6.5% on Tuesday.
The discount rate is the interest the Fed charges on loans to major financial institutions.
“Tuesday was the day for excitement; everything has been downhill since then,” said Elizabeth Reiners, a vice president of Dean Witter Reynolds Inc. “Most people expected the prime rate to go (up).”
She said bond prices were more directly affected Thursday by the dollar’s marked decline against other major currencies. The dollar was quoted at around 132.74 Japanese yen in late trading in New York, down from 133.68 yen late Wednesday.
Weakness in the dollar makes assets denominated in the U.S. currency, such as bonds and notes, less valuable.
In the secondary market for Treasury bonds, prices of short-term government issues were unchanged to 1/32 point lower; intermediate maturities were unchanged, and 20-year issues slipped 1/16 point, according to figures provided by 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 Shearson Lehman daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, slipped 0.09 to 1,125.88.
Corporate bonds also declined. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, was down 1.03 at 280.30.
Three-month Treasury bills, meanwhile, edged up 1 basis point to a discounted rate of 7.00% and a yield of 7.21%. Six-month bills rose 4 basis points to a discounted rate of 7.43% to yield 7.82% while one-year bills also were up 4 basis points, at 7.64% to yield 8.20%.
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 late in the day at 8.063%, down from 8.188% late Wednesday.
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