CREDIT: Bonds Decline as Buyers Fret Over Economy
Despite a setback on Wall Street, bond prices sank Monday as worries about inflation and heavy government borrowing needs discouraged buyers.
Bond prices soared briefly in morning trading when investors bailed out of the stock market and sought the safer haven of government securities. The surge came as an abrupt reversal for the bond market, which had opened weaker after U.S. government issues slid in earlier overseas trading.
“When the stock market dropped like a lead balloon, our market rallied,” said Elizabeth Reiners, a money market economist at Dean Witter Reynolds Inc.
But the bond rally didn’t last even though Wall Street failed to snap out of its slump completely. Off more than 100 points in the morning, the Dow Jones industrial index closed with a loss of 56.44 points, at 2,904.70.
The 30-year Treasury bond, the market’s bellwether issue, finished off 7/32 point, or nearly $2.50 per $1,000 in face amount. Its yield rose to 8.55% from 8.53% late Friday.
The temporary bond buying enthusiasm knocked interest rates down. Rates recede when bond prices go up. Long-term rates bobbed back up in the afternoon while interest on shorter term issues clung to some of their improvements.
Bond market analysts said trading volume was heavy and activity was hectic at times. The short-lived rally was described as a “flight to quality,” which often occurs when money pours into government bonds from a sliding stock market. Fixed-income investments are widely regarded as less risky than alternatives in the equity market.
Speculation that interest rates will remain high and inflation might intensify aborted the rally, Reiners said.
She said the government must raise an estimated $65 billion in cash in the current quarter and another $75 billion in the fourth quarter. This means the bond market will face a flood of new Treasury notes and bonds. The government will probably have to pay higher interest rates to attract buyers.
Fear that inflation could creep higher in the months ahead also has bond investors on guard. One school of thought holds that inflation could accelerate if the Federal Reserve Board bows to political pressure and eases its monetary policy. Inflation is the archenemy of fixed income investments because it erodes their value.
The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 7.938%, down from 8% late Friday.
CURRENCY: Dollar Dips Sharply After Dow Tumbles Wall Street’s sharp drop helped push the dollar much lower against most other major currencies in foreign exchange.
Currency dealers said the dollar started out softer amid continued worries about falling interest rates, but it declined more rapidly as traders around the world learned of the sharp drop in stock prices.
Waves of computerized program selling, weak corporate earnings and concerns about broad economic factors were largely responsible for Wall Street’s selloff.
All that helped spook dollar traders, too.
“It was kind of a psychological thing,” said Trevor Woodland, chief corporate trader for Harris Trust & Co. in Chicago. “If you’re a trader you’re not going to buy a currency when the equity market is faring poorly.”
This is particularly true among foreign traders. As demand for equity falls, so does the need to convert foreign currencies into dollars to buy stocks.
In Tokyo, where the global trading day begins, the dollar closed at 148.50 yen, up 0.15 yen from Friday’s finish. The dollar traded lower at 148.40 yen in London, and at 148.19 yen in New York, down from 148.65 yen Friday.
The dollar was weaker against the British pound, compared to Friday. Sterling bought $1.8215 in London, up from $1.8140, and $1.8255 in New York, up from $1.8185.
COMMODITIES: Gold Prices Rise as Buyers Seek Haven Gold futures prices surged to their highest levels in two months as sharply lower stock prices, a weaker dollar and signs of Middle Eastern buying fired investor interest in the metal.
On other commodity markets, silver also advanced, stock-index futures tumbled; energy futures climbed; livestock and meat futures retreated; and grains and soybeans were mostly higher.
Gold futures settled $7.70 to $7.80 higher on New York’s Commodity Exchange, with the contract for delivery in August up $7.70 at $369.70 an ounce. The spot July contract settled at $369.10 an ounce, the highest settlement of a spot gold contract since May 22.
Silver futures settled 3 cents to 3.4 cents higher, with July at $4.882 an ounce.
Gold opened with a surge in New York following news of a large purchase of gold bullion in London that analysts believe originated in the Middle East. Some previous Middle Eastern transactions have been large enough to swing prices wildly, leaving the market sensitive to signs of Middle Eastern interest.
Shortly after the strong opening, the Dow index plunged, sending many stock investors fleeing to the perceived safety of the precious metals.
The stock market slowly trimmed its losses throughout the day. But gold remained strong, with new support stemming from higher oil prices--an inflationary signal--and a weaker dollar.
Bernard Savaiko, senior metals analyst with Paine Webber Inc., said the Federal Reserve Board’s recent moves to lower interest rates have been a boon to the gold market.
“It looks like some foreigners are concerned about the possibility that (Fed Chairman Alan) Greenspan’s stance toward inflation may be weakening, which pulled the props out from under the dollar,” Savaiko said.
