FINANCIAL MARKETS : CREDIT : Bonds Mixed After Volatile Early Trading
Bond prices were mixed Friday as the allies dismissed an Iraqi offer to withdraw from Kuwait and economic news hinted that the recession may already have hit bottom.
The price of the Treasury’s bellwether 30-year bond finished up 1/8 point, or $1.25 per $1,000 in face value. The bond’s yield was 7.98%, down from 7.99% late Thursday.
Prices of shorter- and intermediate-term government securities were mostly lower. Trading was volatile in the morning during a rush of news on the war and economy, before quieting dramatically the rest of the day.
News that Iraq had offered to withdraw from Kuwait sent bonds higher. But prices retreated as President Bush and other allied leaders dismissed the offer because it carried several conditions.
“The (market’s) sentiment has changed as the opinion has grown that this does not represent any meaningful, credible solution,” said Scott Winningham, a credit market analyst with Stone & McCarthy Research Associates in Princeton, N.J.
Steven A. Wood, economist with BankAmerica Capital Markets Group in San Francisco, said economic news Friday, while still weak, included signs that the worst of the recession may already have occurred.
Continuing economic weakness is usually a plus for bonds because it puts more pressure on the Fed to push interest rates lower to stimulate business.
But Wood said that if an especially bad industrial production report for December is taken as the recession’s low point, the Fed may not be inclined to lower interest rates further.
“The data suggest that the recession is still here but very well may also suggest in some preliminary fashion that the worst part of the decline is behind us,” he said.
The Federal Reserve said industrial production slipped 0.4% in January in its fourth straight monthly decline. The Fed revised its December output figure to a decline of 1.1%, much steeper than the 0.6% originally reported.
The Labor Department reported wholesale prices fell 0.1% in January as energy costs tumbled, and the Commerce Department said the U.S. merchandise trade deficit narrowed sharply in December to $6.3 billion.
The federal funds rate, the interest on overnight loans between banks, was quoted at 4%, down from 7% late Thursday. The low rate was attributed to technical factors, not to a change in federal monetary policy.
In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 93 1/32, down 1/16 point. The average yield to maturity rose to 7.24% from 7.23% late Thursday.
The dollar rose against major currencies following Iraq’s conditional offer to withdraw from Kuwait and on the Labor Department’s wholesale prices report.
Jack Adkins, analyst for Refco Group Ltd. in Chicago, said traders were buoyed by the peace proposal, even though it carried weighty political baggage for the United States.
“The sentiment is that maybe there would be a peace settlement soon,” Adkins said.
In New York, the dollar settled at 130.50 Japanese yen, up from 129.67 yen on Thursday. The dollar closed at 1.4765 German marks, up from Thursday’s 1.4665 marks. The British pound fell to $1.9670 from $1.9795.
Other late dollar rates in New York, compared to late Thursday’s rates, included: 1.2692 Swiss francs, up from 1.2570; 1.1528 Canadian dollars, up from 1.1523; 5.0320 French francs, up from 4.9950, and 1,110.50 Italian lire, up from 1,103.25.
Precious metal futures prices fell sharply amid the peace hopes.
“We saw the first sign today that Saddam Hussein may be starting to cave in a little,” said Anne Orton, vice president of Deak International Inc., a New York-based dealer in currencies and metals.
On other commodity markets, orange juice futures crashed; livestock and meat futures were mixed; and grains and soybeans were mostly higher.
In precious metals trading on New York’s Commodity Exchange, gold futures finished $3.80 to $4.10 lower, with February at $364.40 an ounce; silver was 4.3 to 4.9 cents lower, with March at $3.78 an ounce.
President Bush and other allied leaders quickly rejected Iraq’s offer as not meeting the United Nations’ requirement of an unconditional withdrawal.
But in the metals market it was perceived as “a slight opening in the door,” said William O’Neill, senior futures strategist with Merrill Lynch Futures.
The selloff in precious metals was partly a typical reaction by those markets to a perceived reduction in international tensions and in part a response to the deflationary implications of lower oil prices, which fell on ideas that a significant disruption of Middle East oil supplies has grown less likely.
The drop in silver erased most of Thursday’s strong gains, which were tied to a strike at Mexico’s large Panoules refining complex.
Most cattle futures rose and pork futures fell in a shortened, pre-holiday session as traders evened up their positions ahead of the three-day weekend. U.S. commodity markets will be closed Monday for Presidents’ Day.
Live cattle were 0.05 to 0.33 cent higher, with February at 79.05 cents a pound; feeder cattle were 0.10 cent lower to .20 cent higher, with March at 88.65 cents a pound; live hogs were unchanged to 0.50 cent lower, with February at 51.57 cents a pound, and frozen pork bellies were 0.55 cent to 1.10 cents lower, with February at 64.15 cents a pound.
Market Roundup, D6