FINANCIAL MARKETS : CREDIT : Mideast Threat Raises Rates, Sinks Bonds
Bad inflation news from Washington and war words from Iraq’s Saddam Hussein combined to wallop the bond market Thursday, jacking up interest rates and depressing prices sharply in nervous trading.
The Treasury’s key 30-year bond fell 1 23/32 points, or $17.19 per $1,000 in face amount. The bond’s yield jumped to 8.92% from 8.76% late Wednesday. It was the highest yield since it flirted with 9% in early May.
Economists said the bond market’s deterioration began early in the day when the Labor Department said the consumer price index for July rose 0.4%, considered an unexpectedly high increase.
That was the last measurement of inflation prior to the Iraqi invasion of Kuwait on Aug. 2, which has sent oil prices sharply higher. Strategists concluded the inflation rate will likely be even worse than previously thought when the effect of the oil price jump is calculated for August and beyond.
“What you’re looking at here are straight worries about inflation,” said Lincoln Anderson, an economist for Bear, Stearns & Co. “The CPI report was not a good one.”
Bondholders sell on bad inflation news, which erodes the value of fixed-income investments and lessens the likelihood that the Federal Reserve will ease interest rates to stimulate economic growth.
The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 8.125%, down from 8.375% late Wednesday.
CURRENCY Dollar Continues Downward Tumble
The dollar tumbled to an all-time low against the German mark during domestic trading as heightened Persian Gulf tensions and further signs of U.S. economic weakness spurred a wave of selling.
The dollar was quoted at 1.5525 marks in late New York trading, down from 1.566 marks late Wednesday and from 1.5645 marks Tuesday, the previous low in the modern mark’s 42-year history.
The dollar also was sharply lower against the Swiss franc and British pound.
“As long as the U.S. is involved in this crisis I think we’re going to find that the dollar is not the safe haven it once was during international crises,” said Scott Horwitz, a vice president for foreign exchange trading with Bank of Boston.
In New York, the dollar fell to 147.25 Japanese yen from 147.65 yen late Wednesday. Earlier in Tokyo, it rose to 147.90 Japanese yen from 147.15 yen at Wednesday’s close. In London, the dollar was quoted at 147.62 yen.
The dollar also fell worldwide against the British pound. The pound rose to $1.9095 in New York from $1.9090 late Wednesday. In London, sterling fell to $1.8985 from $1.9045 late Wednesday.
COMMODITIES Gold Rises; Other Markets End Mixed
Gold futures prices surged Thursday on New York’s Commodity Exchange as a flurry of developments in the Persian Gulf triggered a rally in crude oil prices, a dive in the stock market and a renewal of inflation fears.
On other commodity markets, livestock and meat futures were mixed, and grains and soybeans were mixed.
Gold futures settled $6.20 to $6.90 higher, with the contract for spot delivery up $6.60 at $409.20 an ounce; silver was 9.9 to 10 cents higher, with the spot August contract at $5.168 an ounce.
The heightened tensions in the Mideast contributed to a 66-point drop in the Dow Jones industrial index and a sharp rise in oil prices on the New York Mercantile Exchange, reflecting dimming prospects for a resumption of Iraqi and Kuwaiti oil exports any time soon.
West Texas Intermediate crude oil settled 5 to 92 cents higher, with September at $27.36 a barrel. Heating oil was 2 to 2.62 cents higher, with September at 75.47 cents a gallon. Unleaded gasoline was 1.8 to 3.41 cents higher, with September at 87.46 cents a gallon.
Livestock and meat futures settled mixed on the Chicago Mercantile Exchange as cattle traders evened up their positions ahead of today’s monthly cattle-on-feed report from the Agriculture Department.
