Credit : Concern Over Auction Slows Bond Price Rise

Bond prices moved higher Monday, but momentum from last week’s big gain was slowed by fears that the coming record Treasury auction could saturate the government debt market.

The Treasury’s 30-year bond closed at its lowest yield in more than a year at 8.04%, down from 8.09% late Friday. The bellwether long bond rose 9/16 point, or $5.63 per $1,000 in face amount.

The long bond’s yield last reached 8.04% in the first week of 1990.

Analysts said yields fell and bond prices gained in a follow-through to Friday’s 1 1/4-point price surge. That gain came after a Labor Department report that the unemployment rate rose to 6.2% from 6.1% in January, in another sign of the slumping economy.

The Federal Reserve responded immediately to the harsh economic news by cutting the discount rate, the interest it charges on loans to commercial banks, to 6% from 6.5%.

The move immediately prompted several major banks to lower their prime lending rates to 9% from 9.5%. Others followed suit on Monday.

Lower interest rates generally increase the value of government securities.

However, anticipation of an oversupply of debt in the face of the government’s upcoming auction this week of $34.5 billion in short-, medium- and long-term securities apparently eroded some of Monday’s momentum, said Mike Casey, international economist at Maria Ramirez Capital Consultants Inc.

The federal funds rate, the interest on overnight loans between banks, rose to 6.5% from 5.5% late Friday.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds fell 7/32 point to 92 23/32. The average yield to maturity fell to 7.27% from 7.28% late Friday.

Currency

The dollar closed lower in domestic and overseas trading, defying aggressive attempts by central banks to shore up the flagging U.S. currency.

The dollar fell against most foreign currencies in early trading, extending the sharp losses it suffered Friday. The U.S. currency skidded Friday after the Fed cut the discount rate.

The dollar, like all currencies, is supported by higher interest rates, so the cut in the discount rate is a “sell” signal for foreign exchange traders.

When the U.S. currency hit a record low of 1.4560 German marks Monday, several central banks, including the Fed, the Bank of England and the German Bundesbank, entered the foreign exchange markets, buying dollars against the mark to stop the dollar’s slide, dealers said.

But the banks’ intervention worked only temporarily as the U.S. currency resumed its fall.

The dollar ended the European day at 1.4645 German marks, down from 1.4680 marks Friday. In New York, the dollar fell even further to 1.4635 marks from 1.4680 late Friday.

“The market’s sending the signal that while it’s a bit more reluctant to sell under the current environment, the fundamentals haven’t changed despite the intervention,” said Mike Faust, a currency market analyst with MMS International in Chicago, referring to the decline in U.S. interest rates.

Faust said traders were puzzled that monetary officials did not back up Monday’s intervention with statements in support of the dollar. That omission helped send the dollar downward, he said.

“They know that just coming in (to the market) is not enough,” Faust said.

The Gulf War has--at least temporarily--become a side issue for dollar traders, he said. In the absence of any major developments from the Middle East, the market is free to consider economic issues again.

The British pound gained against the dollar, rising to $1.9810 in New York from late Friday’s $1.9760. In earlier London trading, the British pound rose to $1.9777 from $1.9765 late Friday.

In Tokyo overnight, the dollar rose to a closing 131.28 Japanese yen from 131.25 yen at Friday’s close. Later, in London, it fell to 131.04 yen, and in New York, it closed at 130.635 yen, down from 131.50 on Friday.

Other late dollar rates in New York, compared to late Friday’s prices, included: 1.2510 Swiss francs, down from 1.2525; 4.9810 French francs, down from 4.9960; 1,100.50 Italian lire, down from 1,105.00, and 1.15955 Canadian dollars, down from 1.15975.

Commodities

Cotton futures prices rose sharply to new seasonal highs on the New York Cotton Exchange as steady demand and tightening supplies continued to support the market.

On other commodity markets, cattle futures were narrowly mixed; pork futures were mostly higher; grains and soybeans were mixed; oil futures were mixed and precious metals were mixed.

Cotton futures settled 0.75 to 1.2 cents higher, with the contract for delivery in March at 80.73 cents a pound. The contract rose as high as 81.4 cents during the session, a new high for March, 1990, deliveries.

Cotton has climbed about 5 cents a pound since the year began amid steady overseas demand and an outlook for shrinking supplies of U.S. cotton.

The Agriculture Department has forecast a U.S. cotton stockpile of 2.5 million bales on July 31, the end of the current marketing year, compared to 3 million bales on the same date last year.

Gold futures rose and silver futures fell, reversing last week’s trends, in lackluster trading on New York’s Commodity Exchange.

Gold settled $2.50 to $3.10 higher, with February at $368.60 an ounce; silver was 0.5 cent to 1.5 cents lower, with February at $3.839 an ounce.

Market Roundup, D10