CREDIT : Bonds Retreat on News of Trade Figures
Bond prices retreated Wednesday, with long-term Treasury issues falling furthest after the government reported marginal improvement in the nation’s trade deficit amid continued domestic economic growth.
The Treasury’s 30-year bond lost 3/4 point, or about $7.50 for every $1,000 face amount. Its yield climbed to 9.04% from 8.97% late Tuesday.
Shorter-term Treasury issues finished with small losses. Corporate and municipal issues also fell.
As trading began, the government reported that the U.S. trade deficit fell to $10.35 billion in October from $10.67 billion in September.
The figure was in line with analysts’ expectations, but the report sent the dollar lower in foreign exchange trading and bond prices followed suit.
Steven A. Wood, an economist for BankAmerica Capital Markets Group in San Francisco, said bond traders were speculating that the trend toward lower deficits had begun leveling off.
“The market is saying we are stuck with a lower but still unacceptably high trade deficit,” he said.
The fear is that to reduce the deficit further, the dollar may have to decline, which could deter foreign investors and possibly spur higher inflation.
Harold Nathan, senior financial economist for Wells Fargo & Co. in San Francisco, said bond prices also were hurt by a pair of new economic reports.
The Federal Reserve Board said use of industrial capacity rose 0.2 percentage points to 84.2% last month, the highest level since 84.3% in November, 1979.
The Fed also said industrial production climbed a brisk 0.5% in November following an identical 0.5% rise in October.
Economy Still Strong
Combined with a report earlier this week of a 1.1% rise in November retail sales, Nathan said indications are the economy “is going ahead at a pretty good pace” with the possibility that inflation may accelerate.
That could prompt the Federal Reserve could take steps to tighten credit conditions, encouraging higher interest rates to restrain growth and diminish inflationary pressures, he said.
Also depressing long bonds was an unconfirmed rumor that a state pension fund had sold a huge amount of 30-year bonds and bought 10-year notes, said William V. Sullivan Jr., director of money market research at Dean Witter Reynolds Inc.
The 10-year notes have in recent days offered higher yields than 20- and 30-year issues. By the end of the day, 10-year Treasury notes yielded about 9.17%, or more than a tenth of a percentage point more than 30-year issues.
In the secondary market for Treasury issues, prices of short-term and intermediate governments fell 1/16 point, while 20-year issues dropped 5/8 point, according to the Telerate Inc. financial information service.
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, fell 2.11 to 1,130.46.
In corporate trading, industrials were down. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, fell 1.11 to 293.78.
In the tax-exempt market, prices fell 3/16 point, according to the Bond Buyers index of 40 actively traded municipal issues.
Yields on three-month Treasury bills slipped to 8.37% as the discount fell 1 basis point to 8.10%. Yields on six-month bills rose to 8.80% as the discount rose 1 basis point to 8.32%. Yields on one-year bills rose to 9.10% as the discount rose 5 basis points to 8.44%.
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 8.375%, up from 8.313% late Tuesday.
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