CREDIT : Bond Price Rise Tied to Dollar’s Strong Rally
Long-term government bond prices rose strongly Tuesday, buoyed by a dollar rally inspired by Federal Reserve Board Chairman Alan Greenspan’s comments about the central bank’s inflation-fighting strategy.
Other government issues posted moderate gains.
The benchmark 30-year Treasury bond rose 3/4 point, or $7.50 for every $1,000 in face value. Its yield, which moves in the opposite direction from its price, fell to 8.78% from 8.85% late Monday.
Analysts attributed the credit market’s performance to the way the dollar behaved after Greenspan expressed the central bank’s determination to fight inflation.
Testifying before the House Banking Committee, Greenspan said strains on factory capacity and a tight labor market, particularly in the Northeast, likely would keep inflation pressures high. The central bank’s monetary policy therefore should continue on the tight side, he said.
Sale of Two-Year Notes
The notion that a tighter monetary policy could drive interest rates higher, increasing returns on dollar-denominated investments relative to holdings in other currencies, propped up the dollar.
For bond traders, this implied that demand will be brisk at sales of government notes and bonds. The Treasury is scheduled to sell about $9.25 billion of two-year notes on Wednesday.
In the secondary market for Treasury bonds, prices of short-term government issues rose by between 1/16 point and 1/8 point, intermediate maturities rose by 5/16 point, and long-term issues were up about 3/4 point, according to Telerate Inc., a 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 Hutton daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, went up 2.84 to 1,141.95.
In corporate bond trading, industrials were up. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, rose 1.51 to 299.87.
3-Month Yields Decline
In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds rose 5/32 point to 92 17/32. The average yield to maturity declined to 7.64% from 7.66% late Monday.
Yields on three-month Treasury bills declined to 8.50 as the discount fell to 8.22%. Yields on six-month bills held steady at 8.72% and the discount remained at 8.26%. Yields on one-year bills declined to 8.88% as the discount fell to 8.23%.
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, was quoted at 9 1/16%, up from 9% late Monday.