30-Year T-Bond Yield Hits New Low : Market Overview
Bond yields continued to fall as poor economic data continued to pour in. The yield on the Treasury’s 30-year bond sank to another all-time low of 6.73% from 6.78% on Wednesday, while short-term yields also declined.
* Stocks closed lower as investors took profits from the week’s rally and braced for a key jobs report today. The Dow Jones industrial average was off 5.13 points to end at 3,398.91.
* The dollar was hit by the weak U.S. economic data and a German central bank decision to keep interest rates unchanged, holding off on a cut that might have sent the mark lower.
Credit
Interest rates slid to new lows as the bond rally continued and the market embraced the prospect of modest economic growth accompanied by low inflation.
During trading Thursday, the yield on the benchmark 30-year Treasury bond fell to another historic low of 6.69%, but edged back up to 6.73% at the close. The long bond’s price, which gains when yields fall, rose 23/32 point, or $7.1875 for every $1,000 in face amount, to close at 105 3/32.
“We’ve ventured into uncharted territory,” one government securities trader said.
“I would suspect the 6.50% level would be a huge barrier. But 6.75% was supposed to be something and we cut through that like butter,” he said.
Economists say the fast-paced climb of Treasury prices indicates that the market is adjusting to a new economic climate in which modest growth and low inflation figure prominently.
A rise in weekly unemployment benefits claims and a dip in factory orders reported by the government also gave a boost to bond prices because they suggest that growth may be slowing.
A sluggish economy means less inflation, and inflation erodes the value of a bondholder’s investment.
Also, President Clinton’s recovery package, which includes tax hikes and spending cuts, points to firmer bond prices because tax increases imply slower growth, analysts said.
Other factors include a shift out of mortgage-backed securities and into Treasuries, a shortage of new supply of securities and refinancing by municipalities.
Investors are shifting from mortgage-backed securities to government bonds because many homeowners are refinancing and paying off old mortgages early, eroding the value of mortgage-backed securities.
Meanwhile, a drop in borrowing rates has caused some municipalities to seek cheaper financing by refunding outstanding debt, issuing new paper and buying Treasuries to back the new debt, a practice known as defeasance.
Among other securities, the rate on three-month bills fell to 2.92%, the six-month bill fell to 2.99% and the one-year rate was 3.12%.
Stocks
For the first time this week, stocks ignored the seemingly unstoppable rally in bond prices. Many traders began taking profits or just stepped out of the market. They did not want to take a chance that today’s unemployment data will send the market lower, traders said.
“Everybody today is really surprised that the bonds have continued to rally,” said Dale Tills, manager of institutional equities trading at Charles Schwab. “That bodes well for the future of the equities market, but right now we’re just taking a breather.”
Among the market highlights:
* Health maintenance organization stocks fell after published remarks by Rep. Pete Stark (D-Calif.), head of the House Ways and Means health subcommittee, charged HMOs with inflating prices, paying executives too much and “practicing selective insurance to keep administrative costs down.”
United Healthcare fell 5 to 45 1/4, Oxford Health lost 3 1/4 to 36, and PacifiCare slipped 3 3/4 to 35.
* Drug stocks fell again, taking a persistent battering from President Clinton’s attack on rising drug prices. Merck fell 7/8 to 37 3/4, Bristol-Myers Squibb was off 1 7/8 to 56 1/4, and Johnson & Johnson declined 1 1/8 to 41 3/8. All were among the 15 most-actives on the New York Stock Exchange.
* Wal-Mart led the most-actives on the New York Stock Exchange and was down 7/8 to 32 7/8.
* RJR Nabisco was second most-active and was down 1/4 to 8 1/2. Philip Morris, another tobacco company, was third and off 1 1/4 to 65 3/8. Tobacco stocks have fallen in the last two sessions after members of Congress said they will introduce a bill to raise cigarette taxes.
* International Game Technology slid 4 points to 55 after a delayed opening. Morgan Stanley & Co. analyst Kurt Feuerman downgraded the stock to hold from buy.
* Airline stocks were up, recovering from losses earlier in the week. UAL rose 1 1/4 to 116 5/8 after saying its February traffic rose 13.9%. AMR advanced 1 1/8 to 59 1/8, and Delta gained 1 1/8 to 49 7/8. The run-up in airlines sent the Dow transportation index up 6.44 points to 1,520.11.
* Salomon Inc. fell 2 points to 39 1/2. The brokerage firm said it expects to post a $250-million loss for the first two months of 1993, related to trading losses.
Overseas, London shares finished weaker, with sentiment depressed by the Bundesbank’s decision to leave German interest rates unchanged and by weakness in New York. The Financial Times 100 index was 13.8 points down from Wednesday’s record high, at 2,904.8. Frankfurt stocks were slightly lower. The 30-share DAX index closed 6.33 points down to 1,687.40.
Tokyo stocks ended moderately lower in quiet trading, with investors discouraged by the effects that the yen’s renewed rise may have on exporters. The 225-share Nikkei average was down 94.31 points, or 0.56%, to 16,759.61. Hong Kong shares finished at a closing high and hit an intra-day record earlier as the market surged on hopes of an end to the political battle with Beijing. The Hang Seng index finished 31.16 points up at 6,467.80 in heavy turnover.
In Mexico City, a four-day rally ended when the market dropped slightly amid a bout of profit taking. The key Bolsa 38-stock index fell 8.12 points to 1,604.87.
Other Markets
If the Bundesbank had decided to cut German interest rates, it could have weakened the German mark, a possibility that made some wary of the currency.
“The market is still so expectant of an easing (of German rates) at this point. I don’t think the dollar should be down this low,” said Lisa Paser, a market analyst at MMS International.
Some traders said those widespread expectations of eventual German and other European rate cuts gave the dollar more resilience than it might have had in the face of the disappointing U.S. economic data.
The dollar slid in late New York trading to 1.6399 German marks from 1.6480 late Wednesday. The dollar rose to 116.75 yen from Wednesday’s close of 116.65 yen.
Petroleum prices finished at their highest levels since October. Buying intensified after sellers didn’t try to take profits from the rally, analysts said.
Light, sweet crude oil for delivery next month settled at $21.07 per barrel, up 59 cents, on the New York Mercantile Exchange. The last time oil finished above $21 was on Oct. 28, when it was $21.12.
Gold prices were unchanged on the New York Commodity Exchange, where bullion for current delivery settled at $329.00 an ounce. A late quote from Republic National Bank said spot gold settled at $328.90, down 5 cents from Wednesday.
Market Roundup, D6
