New York, June 9: Three steps forward, one big step back. A new spate of interest-rate worries hit bonds sending indexes down, led by slumping Treasury bonds. Indeed, the pullback in bonds pushed the yield on the 30-year Treasury bond, which moves opposite to price, briefly to 6 per cent Tuesday -- a level not hit since May of last year. But the yield eased in late New York trading to 5.99 per cent. Worries about the Federal Reserve's plans for interest rates at its meeting June 29 and 30 again kept trading volumes lighter than normal, helping exaggerate stock and bond swings. The swing this time was down, set off by midafternoon reports that William Poole, president of the St. Louis Federal Reserve Bank, had told reporters that the Fed should act even before inflation signs appear.The 30-year bond was down 12/32, or $3.75 for every $1,000 in face value. Poole is considered one of the Fed's interest-rate hawks, and he doesn't currently have a vote on the Fed's policy-making Federal Open Market Committee.But the comment was widely taken as confirmation that he favors raising benchmark interest rates at the Fed's meeting.
"People went from really bullish to bearish and I think the explanation is that they are concerned about a Fed tightening and higher interest rates," said Jon Olesky, head of block trading at Morgan Stanley Dean Witter.
Investors had bid stocks up despite falling bond prices last week, "but there seems to be a point where in the face of declining bond prices you do get stock investors' attention, and we clearly hit that," Olesky added.
Curiously, hopes for peace in Kosovo may also have hurt U.S. securities. Relieved investors returned money to the euro and yen, pulling funds out of dollar-denominated securities that had been viewed as a haven.
Investor confidence also was shaken by news that the Labor Department revised estimates of first-quarter nonfarm productivity gains down to 3.5 per cent from 4 per cent. Big productivity gains help hold down inflation.
Some investors said theyconsider bonds cheap with yields almost at 6 per cent and that they could start buying at the 6 per cent level. In fact, when the yield briefly touched 6 per cent Tuesday, bonds did rebound from their lows, but only slightly.
The benchmark 30-year bond fell more than 12/32 of a point, or $3.75 per $1,000 in bond face value. Its yield, which moves opposite to the price, stood at 5.99%.
The Wall Street Journal
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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