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Bond Prices Fall

October 16, 1998

NEW YORK (AP) _ Bond prices fell Friday as investors continued to absorb a surprise cut in short-term interest rates by the Federal Reserve.

While longer maturities were lower, Treasury bills rallied on speculation the Fed will cut rates again.

Another rate cut would be beneficial because it would make fixed-income securities already in circulation more valuable than those issued later at lower rates.

Treasury bills are more sensitive to changes in interest rates and rallied strongly. But longer-term securities fell slightly because they could suffer if the rate cut makes the economy too strong and rekindles inflation.

The price of the benchmark 30-year Treasury bond fell 1/4 point, or $2.50 per $1,000 in face value. Its yield, which moves in the opposite direction, rose to 4.98 percent from 4.96 percent late Thursday.

In the broader market, prices of short-term Treasury securities fell 1/16 point, and intermediate maturities were down 7/32 point to 11/32 point, reported Bridge Telerate, a financial information service.

Yields on three-month Treasury bills fell to 3.61 percent as the discount fell 0.30 percentage point to 3.54 percent. Six-month yields were 3.87 percent, as the discount fell 0.07 percentage point to 3.75 percent. One-year yields were 3.86 percent as the discount fell by 0.05 percentage point to 3.71 percent.

In an unexpected move Thursday, the Fed cut the overnight rate on loans between banks, the federal funds rate, to 5 percent. It also cut the discount rate on its own loans to banks by a quarter point to 4.75 percent.

The cut is the second during the past three weeks. The central bank cut rates for the first time in nearly three years on Sept. 29, also by a quarter point.

The Lehman Brothers Daily Treasury Bond Index, reflecting price movements on bonds with maturities of a year or longer, fell to 1,341.67 from 1,342.94.

Yields are the interest bonds pay by maturity, while the discount is the interest at which they are sold.

The federal funds rate, the interest on overnight loans between banks fell to 4 percent from 6 percent.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds rose to 126 7/8. The average yield to maturity fell to 5.05 percent from late Thursday’s rate of 5.09 percent.

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