Bond Prices Rise Sharply as Investors Flee Stocks

Bond prices rocketed higher in heavy trading Friday afternoon, as investors fled the panicky stock market.

Interest rates, which decline when bond prices rise, dropped to their lowest levels since April, 1987.

The price of the Treasury’s closely watched 30-year bond soared nearly 2 points, or $20 for every $1,000 in face value. Its yield plunged from 8.04% late Thursday to 7.88%--its lowest level since it hit 7.84% in April, 1987.

“This is a flight to quality,” said Elizabeth Reiners, a vice president at Dean Witter Reynolds Inc.

Fixed-income securities--especially Treasury bonds--often are viewed as a safe haven in moments of trouble on Wall Street.

“It’s a classic development,” said Marshall Front, an economist at the Chicago investment firm of Stein Roe & Farnham. “Something you absolutely would expect to happen at a time of extreme panic.”

Many market watchers believe that the Federal Reserve could move to pump up the economy in order to head off the threat of recession.

The central bank does that by pushing interest rates lower to reduce the cost of borrowing and investing. Shortly after the market crash on Oct. 19, 1987, the Fed cut its key discount rate--a move widely credited with helping contain the financial losses. As interest rates drop, bond prices rise.

“The Fed will now have an important reason to ease” rates, Front said. He suggested that it could move Monday to lower the federal funds rate, the interest on overnight loans between banks. The rate finished Friday at 8.625%, down from 8.813% late Thursday.

The Dow Jones industrial index plummeted about 190 points Friday afternoon in a wave of panic selling reminiscent of the October, 1987, crash.

Analysts said the drop was triggered by news that a pilot-management group failed to secure financing for the proposed $6.75-billion takeover of United Airlines’ parent UAL Corp., combined with recent concern about weakness in the junk bond market.

While Treasury bonds jumped higher, prices of the high-risk, high-yield junk bonds plunged 1 point to 1 1/4 point in nervous trading.

Conventional corporate bonds, however, were lifted on the coattails of Treasuries. 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, rose 2.39 to 336.42.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds edged up 1/16 point to 92 13/16 point. The average yield to maturity slipped to 7.32% from 7.33% late Thursday.

In the secondary market for Treasury bonds, prices of short-term government issues rose about 1/2 point to 25/32 point, intermediate maturities jumped 13/16 point to 1 13/16 points, and long-term issues zoomed nearly 2 points, according to figures provided by 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, advanced 11.69 to close at 1,196.37.

Yields on three-month Treasury bills fell to 7.41% as the discount dropped 52 basis points to 7.19%. Yields on six-month bills slid to 7.63% as the discount retreated 39 basis points to 7.26%. Yields on one-year bills fell to 7.64% as the discount tumbled 37 basis points to 7.15%.

A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment in a Treasury bill.