FINANCIAL MARKETS : CREDIT : Job Data, Mideast Worries Batter Bonds
Long-term bond prices plunged again Friday as high unemployment and Middle East tensions battered the rumor-riddled credit markets.
But short-term interest rates were hammered down after the Labor Department reported that the nation’s unemployment rate shot up to 5.5% in July from 5.2% in June.
The report was another sign that the nation’s faltering economy may be heading into a recession, which could herald lower interest rates.
The Treasury’s bellwether 30-year bond tumbled 1 1/8 points, or $11.25 per $1,000 in face value, on top of losses Thursday of more than $12. The bond’s yield climbed to 8.56% from 8.45% late Thursday.
Economists said the unemployment report, combined with a wave of other negative economic data in recent days, normally would give the Federal Reserve enough reason to lower interest rates, which would boost bond prices.
That sentiment was reflected among shorter-maturity bills and bonds. But the longer end of the market was gripped by the belief that the spike in oil prices would fuel inflation worldwide.
Inflation, which the Fed seeks to control through monetary policy, erodes the value of fixed-income securities such as bonds.
The long end of the market was wracked by speculation about events in the Middle East, including unconfirmed rumors that Iraq was poised to possibly invade Saudi Arabia after its seizure of Kuwait.
A serious escalation of hostilities in the region could push oil prices even higher, worsening the inflation and economic outlook. However, late in the day, Iraq said it planned to begin removing its troops from Kuwait on Sunday.
The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 7.85%, down from 8% Thursday.
In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 92 3/4, down 3/8. The average yield to maturity rose to 7.34% from 7.31% late Thursday.
CURRENCY
Dollar Advances in Volatile Trading The dollar climbed against most major currencies in volatile trading as dealers divided their attention between the Middle East crisis and the unemployment data, which indicated that the U.S. economy may be on the verge of recession.
Investors unloaded dollars early in the U.S. trading day, reacting to the unemployment report.
But the turmoil in the Middle East kept dealers on guard against selling dollars aggressively.
The jump in oil prices since Iraq invaded neighboring Kuwait early Thursday has been a key reason for the dollar’s advance. Oil transactions are conducted in dollars.
“There still was a great deal of buying interest,” said Kevin Lawrie, treasury manager at the Bank of Boston’s office in New York. “No one’s comfortable going home short of dollars over the weekend when anything can happen out there.”
Rumors that Iraqi troops had begun an assault on Saudi Arabia temporarily gave investors an extra incentive to buy dollars as a safe-haven currency.
When the word came later in the session that Iraq planned to withdraw its troops from Kuwait over the weekend, the dollar buying subsided somewhat.
By the time trading was done in New York, the dollar stood at 149.925 Japanese yen, up from 149.30 yen Thursday. In Tokyo, the dollar rose to close at 149.35 Japanese yen from 148.90 yen at Thursday’s close. Later, in London, it rose to 149.85 yen.
Sterling’s value against the dollar dipped in the United States. One British pound fetched $1.85375 late in New York, compared to $1.8545 late Thursday. In London, the pound rose to $1.8570 from $1.8495 late Thursday.
COMMODITIES
Oil Futures Soar on Supply Concerns Recession fears and inflation worries, coupled with conflicting reports from the Persian Gulf, ricocheted through U.S. commodity markets, resulting in price moves with little relation to supply and demand factors.
“It seemed like a lot of attention was focused on what the latest rumors were,” observed Tim Evans, a copper trader with Deak International Inc., a New York-based dealer of metals and currencies.
Oil futures ended sharply higher, despite active selling late in the session; precious metals were higher; copper futures fell; livestock and meat were mixed, and grains and soybeans were mixed.
Commodity traders kept close watch on stock and crude markets, where changing news reports about the Iraq-Kuwait situation caused wild price swings that rippled out to other markets.
The recession fears weighed heavily on the copper market, which is especially sensitive to signs of economic weakness, and on the stock market.
Copper futures settled 2.4 to 3.4 cents lower on New York’s Commodity Exchange, with the contract for delivery in August at $1.261 a pound.
Skyrocketing oil futures contributed to inflation fears, which prompted buying in the precious metal and soybean markets.
Gold for current delivery settled at $377.40 an ounce, up 60 cents on New York’s Commodity Exchange; silver was 0.5 to 0.7 cent higher, with August at $4.842 an ounce.
On the Chicago Board of Trade, wheat futures settled 2 to 4.5 cents lower, with September at $2.805 a bushel; corn was 1.25 to 3.25 cents lower, with September at $2.495 a bushel; oats were 4.75 to 7 cents lower, with September at $1.14 a bushel; soybeans were 1 cent lower to 6.25 cents higher, with August at $5.865 a bushel.
