Bond prices soared Friday on sharply lower oil prices and a new drive by President Bush to resolve the Persian Gulf crisis peacefully.
The Treasury’s bellwether 30-year bond rose 1 1/16 point, or $10.63 per $1,000 in face amount. Its yield plunged to 8.39% from 8.49% late Thursday.
It was the long bond’s biggest one-day gain in more than a month and brought interest rates to their lowest level since before Iraq invaded Kuwait. On Aug. 1, the day before the invasion, the yield closed at 8.35%.
Bond prices shot up immediately after Bush’s 11 a.m. announcement that he was sending Secretary of State James A. Baker III to Baghdad in a last-ditch overture to persuade Iraq to pull out of occupied Kuwait.
Prices dropped back slightly as some traders decided to take quick profits but resumed the upward trend as oil prices also responded to Bush’s remarks. Crude oil tumbled $4.06 cents a barrel on the New York Mercantile Exchange. Gold also fell sharply.
Traders read the plunge in oil prices as an anti-inflationary sign that would make the Federal Reserve more likely to move to ease interest rates. Lower interest rates generally increase the value of government securities such as bonds. Inflation erodes the value of Treasury securities.
Another sign that seemed to support a Fed move was the fourth straight monthly fall in the government’s chief economic forecasting gauge, another sign of a recession that many economists believe already is under way.
The federal funds rate, the interest on overnight loans between banks, was quoted at 7.50%, down from 7.563% late Thursday.
In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 91 1/2, up 5/32 point from late Thursday. The average yield to maturity was 7.47%, down from 7.48%.
CURRENCY: Dollar Declines on Bush’s Remarks The dollar fell against most major currencies following the President’s announcement that he was sending Secretary of State Baker to Baghdad and inviting the Iraqi foreign minister to Washington.
On Thursday, the dollar soared ahead of passage of a U.N. resolution calling for use of force against Iraq if Baghdad did not withdraw from Kuwait by Jan. 15.
Investors traditionally have turned to the U.S. currency as a “safe haven” in uncertain or politically tense times.
“It seems less likely that we’re headed toward war than yesterday (Thursday),” said Walter Simon at Julius Baer & Co.
The dollar bought 1.5020 German marks late in New York, off from 1.5040 late Thursday. It also fell against the Japanese yen, to 132.50 from 133.25 Thursday.
The British pound edged down to $1.9430 in New York from $1.9435 late Thursday.