Financial Markets : Credit : Treasury’s Debt Plan Depresses Bond Prices

Bond prices fell Wednesday after the Treasury Department announced procedures for selling $50 billion in new debt to help finance a bailout of the nation’s ailing thrifts.

Credit market strategists said the Treasury’s plan was structured in such a way that it had the effect of removing some potential demand for other government bonds, which helped depress prices.

The Treasury’s bellwether 30-year bond fell 9/16 point, or $5.63 per $1,000 in face amount. Its yield, which moves in the opposite direction from its price, climbed to 9% from 8.95% late Tuesday.

The Treasury said it would issue zero-coupon bonds to Resolution Funding Corp., the government-formed borrowing corporation that would raise $50 billion under President Bush’s plan to finance liquidation of insolvent thrifts.

Zero-coupon bonds are sold at a discount and redeemed after a specific period at a specific face value.

Under the thrift legislation, Refcorp would sell $50 billion of 30-year bonds over three years--$10 billion in the current fiscal year, $25 billion in fiscal 1990 and $15 billion in fiscal 1991.

Long Bond Was Steady

William Sullivan, director of money market research for Dean Witter Reynolds Inc., said prices fell because under the Treasury plan, Refcorp won’t have to buy bonds in the open market to serve as collateral for the zero-coupon bonds it will sell to raise money for the bailouts.

The 30-year bond was unchanged to up slightly in light trading until the late-afternoon announcement.

In the secondary market for Treasury bonds, prices of short- and intermediate-term securities were unchanged to down 3/32 point while long-term governments were off 1/4 point to 19/32 point, according to Telerate Inc., a financial reporting service.

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 Hutton daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 0.75 to 1,132.66.

Corporates Edge Up

Corporate bond prices were up slightly. Moody’s investment grade corporate bond index, which measures total return on a portfolio of 80 corporate bonds with maturities of five years or longer, gained 0.18 to 304.62.

The Bond Buyer index was unavailable.

Yields on 3-month Treasury bills rose to 8.84% as the discount gained 2 basis points to 8.52%. Yields on 6-month bills fell to 8.98% as the discount fell 1 basis point to 8.49%. Yields on one-year bills were unchanged at 9.14% as the discount held at 8.47%.

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, paid at maturity.

The federal funds rate, the interest on overnight loans between banks, traded at 10.5%, up from 9.75% late Tuesday.

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