Bond Prices Dive as Traders Watch Mideast Reports
Bond prices were sharply lower this morning in nervous trading pegged to news reports on the Middle East.
The Treasury’s benchmark 30-year bond was down 17/32 point, or $5.31 per $1,000 face amount, around midday. Its yield, which rises when prices fall, climbed to 8.98% from 8.93% late Monday.
The market opened lower after U.S. bond prices skidded in European markets on fears of war amid escalating tensions in the Persian Gulf between Iraq and the United States.
Prices fell even further in New York, with yields on the 30-year bond climbing above 9% during the morning session, on rumors later denied by the State Department that a U.S. plane had been shot down over Iraq.
“That started the ball rolling,” said Kevin Flanagan, money market economist with Dean Witter Reynolds Inc.
The long bond gained some support after Iraq’s foreign minister was quoted as saying the country was prepared to discuss the situation with Washington, but fell again because of continued rhetoric on both sides.
The credit markets weaken on war fears because the threat of conflict could further send up oil prices, aggravating inflation, and add to the U.S. deficit via increased defense spending.
Inflation erodes the value of fixed-income securities such as bonds. Bond prices have fallen in recent weeks because of the gulf tensions and sharply rising crude oil prices.
“People are very concerned about the possibility of a war and what that would mean for the defense budget and the deficit,” said Scott Winningham, market analyst with Stone & McCarthy Research Associates in Princeton, N.J.
In the secondary market for Treasury bonds, prices of short-term governments fell 1/4 point, intermediate maturities were down 3/16 point to 3/8 point and long-term issues were down from 1/2 point to 3/4 point, according to 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 Brothers daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, was down 3.32 to 1,140.68.
Yields on three-month Treasury bills issued at auction Monday rose to 7.81% as the discount rose 1 basis point to 7.56%. Yields on six-month bills auctioned Monday rose to 7.86% as the discount was up 2 basis points to 7.47%. Yields on one-year bills were up to 7.87% as the discount was up 1 basis point to 7.36%.
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, which is paid at maturity.
The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 8%, unchanged from late Monday.
