A swirl of Persian Gulf developments and a robust $12.5-billion auction of Treasury notes sent long-term bond prices significantly higher Wednesday.
The Treasury’s bellwether 30-year bond rose 13/16 point, or $8.31 per $1,000 in face amount. Its yield was down to 8.28% from 8.35% late Monday. Markets were closed Tuesday for Christmas.
Analysts said the Treasury’s successful $12.5-billion auction of two-year notes, while adding an overall bullish tone to trading, may also have dampened demand in the secondary market’s short-end.
Yields on the auctioned two-year Treasury notes fell to 7.32%, their lowest level since two-year notes averaged 7.16% on Feb. 24, 1988.
In the secondary market, short-term maturities were up 1/16 point to 3/16 point, intermediate maturities rose 9/32 point to 15/32 point and long-term issues gained 9/16 point to 25/32 point, the Telerate Inc. financial information service reported.
The movement of a point equals a change of $10 in the price of a bond with a $1,000 face value.
Overall trading was choppy and light, with many traders waiting to make a move until after New Year’s. This made the market particularly vulnerable to the day’s steady stream of Middle East developments.
“A lot of people are trying to get themselves a low profile for the year-end,” said Jim Kenney, head trader at Prudential-Bache Securities Inc.
Early in the day, the market backed off on news that the State Department asked all nonessential personnel and dependents of U.S. government workers to leave Jordan and Sudan before the Jan. 15 deadline that the United Nations has set for Iraq to withdraw or face the possibility of war.
The State Department also recommended that U.S. citizens defer travel to the two countries, where the populations generally support Iraq.
Traders interpreted the development as heightening the prospect for a war in the Persian Gulf that could spark higher inflation. High inflation generally erodes the value of government securities such as bonds and notes.
Prices rebounded on an Israeli newspaper report, later denied, that Washington and Baghdad had set a date for talks on an Iraqi withdrawal from occupied Kuwait.
The independent daily Maariv, quoting Israeli diplomats in contact with American officials, said Secretary of State James A. Baker III probably will meet with Saddam Hussein in Baghdad on Jan. 9. The State Department said the report wasn’t true.
“There’s one rumor after another,” said Carol A. Stone, senior economist at Nomura Securities International Inc. “The rest of it has to do with the fact the recession gives the bond market a positive tone.”
The Lehman Bros. daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 3.85 to 1,181.30.
Yields on three-month Treasury bills fell to 6.66%, as the discount was down 6 basis points to 6.47%. Yields on six-month bills were down to 6.86%, as the discount fell 7 basis points to 6.55%. Yields on one-year bills fell to 6.93%, as the discount was down 4 basis points to 6.51%.
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 on overnight loans between banks, traded at 7.5%, up from 7.0% late Monday.
In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds was unchanged from late Monday’s 91 5/32 point. The average yield to maturity also was unchanged at 7.48%.