CREDIT : Bond Prices Head Down as Foreign Interest Rates Rise
Bond prices slumped Thursday after a round of interest rate hikes overseas and a government report that inflation accelerated during the second quarter.
The Treasury’s bellwether 30-year bond fell 17/32 point, or about $5.30 for every $1,000 in face amount.
Its yield, which moves inversely to its price and is an indicator of interest rate trends, rose to 9.45% from 9.40% late Wednesday.
The central banks of Britain, West Germany and several other European countries raised key interest rates Thursday in response to the dollar’s recent strength.
The coordinated steps pushed the dollar downward, and set a negative tone as trading opened in the bond market, said Elizabeth G. Reiners, vice president for money market research at the investment firm Dean Witter Reynolds Inc.
The Federal Reserve recently raised its discount rate, the interest it charges its member banks, and traders feared the overseas rate hikes might prompt the Fed to increase the rate again. That would force bond prices lower.
The bond market was dealt a bigger blow, however, when the Commerce Department issued its revised gross national product figures for the second quarter.
GNP Put at 3.3%
The department said the economy expanded at a robust annual rate of 3.3% from April through June despite the severe impact of the drought on farm production. That was up from an earlier estimate of 3.1%.
What hurt bonds was a gross national product price index, which rose at an annual rate of 5.1% during the quarter, the sharpest increase since a 5.8% rise in the third quarter of 1982.
The 30-year Treasury issue fell nearly a point on the news, Reiners said. The market has been sensitive to reports about inflation because the Federal Reserve has tightened credit in an attempt at keeping inflation in check.
Prices recovered, however, as traders had second thoughts about the GNP report, Reiners said.
In the secondary market for Treasury securities, prices of short-term government issues were 1/8 point to 7/32 point lower; intermediate maturities ranged 9/32 point to 3/8 point lower, and 20-year issues were 13/32 point lower, according to figures provided by Telerate Inc., a financial information service.
The Shearson Lehman daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 2.66 to 1,123.07.
Fed Funds Rate Rises
Corporate bonds also were down. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, was down 0.60 to 281.51.
Municipal bonds slipped as well. The Bond Buyer municipal bond index slipped 7/32 point to 88 16/32, while its yield rose to 8.16% from late Wednesday’s 8.14%.
Yields on Treasury bills moved higher. Three-month bills rose 3 basis points to a discounted rate of 7.28% and a yield of 7.51%.
Six-month bills were up 3 basis points to a discounted rate of 7.48% to yield 7.87%, and one-year bills rose 4 basis points to a discounted rate of 7.71% and a yield of 8.27%.
A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, was quoted at 8.25%, up from 7 13/16% late Wednesday.
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