CREDIT : Bond Prices Depressed by Fears of Mideast War
Bond prices fell Monday as oil futures prices climbed to almost $39 a barrel, and concern intensified that the Iraqi standoff could erupt into a war, traders said.
The Treasury’s bellwether 30-year bond fell 19/32 point, or $5.94 per $1,000 face amount. Its yield climbed to 9.17% from 9.11% late Friday.
On the New York Mercantile Exchange, the November price for light, sweet crude rose $2.82 a barrel to settle at $38.25. Earlier, it peaked at $39.20 per barrel.
The continued rise in oil prices since Iraq’s Aug. 2 invasion of Kuwait has intensified the bond market’s concern that inflation is worsening.
Inflation hurts bonds because it erodes their value and makes it less likely that the Federal Reserve will ease interest rates. Lower rates benefit fixed-return securities such as bonds.
The bond market also reacted to increasingly belligerent comments by Iraqi President Saddam Hussein, said James Marshall, a trader with Clayton Brown & Associates in Chicago.
Over the weekend, Hussein said his nation would attack Mideast oil fields as well as Israel if the international embargo against Iraq causes too much hardship. On Monday, he said Iraq would fight to keep Kuwait even if it took 1,000 years.
Marshall said he was surprised that bond prices didn’t fall further with the sharp increase in oil prices.
He said he believed that the bond market was supported somewhat by investors who bought bonds because they believed that they were a value with their prices depressed. Bond prices also fell Friday.
“You’ll always get a little value or bargain hunting after a couple of declines,” he said, adding that the support provided by these buyers may be temporary.
The federal funds rate, the interest banks charge one another for overnight loans, was quoted at 8.188%, up from 8.063% Friday.
CURRENCY Dollar Declines Except Against Yen The dollar closed lower as the world’s central bankers meeting in Washington decided to let the currency run its downward course unimpeded.
The U.S. currency ended weaker against the British pound and the German mark but gained against the Japanese yen, which suffered from higher oil prices.
The dollar was sold off on the Group of Seven’s apparent acceptance of the currency’s recent drop. The G-7--the United States, West Germany, Japan, France, Britain, Canada and Italy--said over the weekend that current exchange rates should lead to “continued adjustment” of trade patterns.
In New York, the dollar finished at 1.5595 marks, down from Friday’s close of 1.5785 marks, and at 137.35 yen, up from 136.65 in the previous session.
The yen and the dollar have taken a beating lately from soaring oil prices, which could hurt growth in Japan and push up inflation in the United States as the risks of recession escalate.
“The mark is more insulated to oil prices than the yen,” said Donald Hubbard, a dealer for Midland Bank in New York.
In addition, traders sent the yen too high last week, setting the stage for a correction, said John Hazelton, vice president of Manufacturers Hanover Bank.
The British pound was quoted at $1.8805 late in New York, up from late Friday’s $1.8430.
The pound benefited from better-than-expected August current account figures.
With tensions rising in the Persian Gulf, traders were reluctant to sell dollars heavily, said Jack Griffin, a dealer for Banque Indosuez in New York.
Many traders foresee the dollar continuing its descent against the mark and pound.
COMMODITIES Gold Futures Top $400 an Ounce Prices of gold futures roared above $400 an ounce as soaring energy prices, crumbling stock prices and a slumping dollar renewed investor interest in precious metals.
On other commodity markets, coffee prices sagged, grains and soybeans were mostly higher, cattle futures fell and pork futures were mixed.
Gold settled $13.60 to $15.30 higher on New York’s Commodity Exchange, with the contract for delivery in September at $403 an ounce, the highest level in a month.
Silver futures ended 12.5 to 13.7 cents higher, with September at $4.915 an ounce.
Demand for gold was triggered mainly by the enormous jump in oil prices and a nearly 60-point plunge in the Dow Jones industrial index, largely in reaction to the heightened fears of war in the Middle East, analysts said.
In addition to the twin threats of greater inflation and international turmoil, two traditional buy signals for gold, analysts said precious metals were supported by the further decline in the dollar’s value against other major currencies.
James Steel, an energy and precious-metals analyst with Refco Inc. in New York, noted that the dollar had strengthened during the oil crises of the 1970s.
“Other oil-importing countries like Japan and Germany have seen their currencies appreciate,” Steel said. “This could indicate that in this time of rising energy prices, the world has more confidence in their economies than in ours.”
Analysts said the large-scale selling of physical gold that kept a lid on prices last week appeared to have abated, which may have encouraged speculators to buy gold futures.
Coffee futures plunged on New York’s Coffee, Sugar & Cocoa Exchange after Brazil, the world’s largest coffee producer, called for a one-year extension of an international pact that contains no coffee export limits.
Several other large coffee-producing countries, including Colombia, have been pushing for a return to export quotas to boost prices.
Coffee settled 2.25 to 3.5 cents lower, with December at 94 cents a pound.
Most grain and soybean futures rose on the Chicago Board of Trade as surging energy prices fanned inflation fears.
The run-up in oil prices overshadowed such bearish factors as slack export demand for U.S. grains and forecasts for favorable growing conditions in the Corn Belt.
In a report released after the close, the Agriculture Department said corn and soybean development continues to lag behind the normal pace. Fifty-three percent of the corn crop was mature as of Sunday, compared to a 76% average for that date; 41% of the soybean crop was at the leaf-drop stage, compared to a 57% norm.
