FINANCIAL MARKETS : Bond Rates Hit 3-Year High on Job Report : Markets: News of more employment and higher wages convinces many traders that the Fed will raise rates soon, perhaps as much as a point.
Long-term interest rates rose to three-year highs Friday as the bond market was jolted by an unexpected tumble in October unemployment. The news seemed to squash any investor doubts that the economy expanded strongly into the fourth quarter. Traders said the most disturbing part of the report was the rise in average hourly earnings to $11.24 from $11.16.
Investor worries about rising interest rates and inflation also spread to the stock markets, which fell. The dollar also weakened after the Federal Reserve System refrained Friday from buying dollars as it did Wednesday and Thursday.
Long-term bond prices dropped for a fifth straight day and yields soared to 8.15%, the highest level since August, 1991.
The close belied the market’s jerky reaction to the much-awaited job figures. Initially, bond yields dropped as traders greeted news that non-farm payrolls grew a smaller-than-expected 194,000 last month.
But the early move was quickly overpowered by more dramatic data showing the jobless rate declined to the lowest level since October, 1990. The report also shows the average hourly wage posting the biggest one-month gain since September, 1983.
The report convinced some investors that the Federal Reserve Board may act more aggressively than previously believed to curb inflation pressures. Market strategists said a growing minority believes the Fed may push up short-term rates as much as a full percentage point when it meets to set monetary policy Nov. 15.
The market adjusted to that possibility by pushing up rates on existing short-term Treasury bills, whose value would be hurt by a rate increase by the Fed on new securities.
Kathleen Stephanson, senior economist at Donaldson, Lufkin & Jenrette Securities Corp., said the Wall Street firm believes there is a 60% likelihood the Fed will push up rates by half a percentage point and a 40% chance of a full-point hike.
“I think that one could make a stronger case for a more aggressive move. Quite a few people are drawing that conclusion,” Stephanson said.
Putting further pressure on bonds Friday were concerns that the market may have trouble digesting a fresh batch of notes scheduled for auction next week.
The Treasury plans to sell $17 billion in three-year notes on Tuesday and $12 billion in 10-year notes on Wednesday in its quarterly refunding.
Yields on three-month Treasury bills rose to 5.31% as the discount rose 0.08 percentage point to 5.18%. Six-month yields rose to 5.85% as the discount rose 0.08 point to 5.62%. One-year yields rose to 6.34% as the discount rose 0.08 point to 5.99%.
Yields are the interest bonds pay by maturity, while the discount is the interest at which they are sold.
Stock prices skidded Friday for the fourth time this week, weakened by inflation fears and rising yields in the bond market. The Dow Jones industrial average fell 38.36 points to 3,807.52, pushing its weekly loss to 123.14 points, the biggest weekly decline in more than two months. Heavy use of computerized selling programs in the last 30 minutes of trading took the Dow sharply lower into the close.
“We attempted a rally and it failed, so then the traders decided to sell,” said Michael Metz, chief market strategists at Oppenheimer & Co. “This is a market that has great difficulties with high interest rates, rising inflation and anticipation of a move by the Federal Reserve to tighten” interest rates.
Broad market indexes fell sharply as well. The NYSE’s composite index fell 2.45 points to 254.21. The Standard & Poor’s 500-stock index slid 5.59 points to 462.32.
The dollar declined as the Federal Reserve Bank of New York refrained from supporting the U.S. currency after two straight days of intervention.
In late New York trading, the dollar was quoted at 97.50 Japanese yen, down from 97.71 on Thursday. Matt Porio, a vice president at Chase Manhattan Bank in New York, said dealers who expected the Fed to buy dollars again Friday were disappointed. They scrambled to sell the greenback, which pushed the currency’s value down.
“People expected some sort of signal from the Fed, and when nothing happened, the day turned negative for the dollar,” Porio said.
* JOB RECOVERY: California’s jobless rate fell. A1
