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Prices Mixed, T-Bill Yields Tumble After Apparent Easing

December 20, 1989

NEW YORK (AP) _ Treasury bill yields tumbled and bond prices were narrowly mixed Wednesday after the Federal Reserve appeared to signal an easing of monetary policy.

The Treasury’s benchmark 30-year bond fell 3-32 point, or about 94 cents per $1,000 in face amount. Its yield, which rises when prices fall, increased to 7.84 percent from 7.83 percent late Tuesday.

The credit markets had little reaction to the U.S. military intervention designed to oust Panamanian dictator Manuel Antonio Noriega. Bond prices normally rise in times of instability as investors transfer money to safe long-term fixed investments such as bonds.

Analysts said the Federal Reserve Bank of New York added reserves to the banking system. The action helped lower the federal funds rate, a key barometer of interest rates.

The federal funds rate, the interest banks charge each other for overnight loans, was quoted at about 8 1/4 percent, down from 8 1/2 percent late Tuesday.

Economists have expected the Fed to ease monetary policy to stimulate the sagging economy. The Fed had not added any reserves to the banking system with the federal funds rate trading below 8 1/2 percent since late November.

″I think they wanted to give the markets a clearcut sign,″ said Kevin Flanagan, money market economist with Dean Witter Reynolds Inc.

Bond prices fell in the afternoon as traders sold at highs of the day after the Fed intervention. ″Tha market was kind of rallying into it,″ said Kathleen Camilli at Drexel Burnham Lambert Inc.

But others said the Fed had not given a clear signal yet, pointing to similar recent actions that did not lead to a decline in interest rates.

″The market is going to sit down and puzzle whether this was merry Christmas present or whether there’s a lump of coal in the pipeline,″ said Robert Brusca, chief economist at Nikko Securities International Inc.

Traders also failed to respond to a Commerce Department report that the economy grew at an annual rate of 3 percent from July through September. Analysts said the economy has slowed dramatically during the fourth quarter, which may have offset the news of a boost in economic activity.

Yields on three-month Treasury bills tumbled to to 7.79 percent as the discount fell 10 basis points to 7.55 percent. Yields on six-month bills declined to 7.76 percent as the discount lost 9 basis points to 7.38 percent. Yields on one-year bills fell to 7.60 percent as the discount lost 6 basis points to 7.10 percent.

A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment in a Treasury bill. The discount is the percentage that bills are selling below the face value, which is paid at maturity.

In the secondary market for Treasury bonds, prices of short-term governments were up 1-16 point, intermediate maturities were unchanged to up 1-16 point, and long-term issues ranged from down 1-6 point to up 1-32 point, according to Telerate Inc., the financial information service.

The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.

The Shearson Lehman Hutton Daily Treasury Bond Index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 0.06 to 1,197.87.

In an auction of $8.05 billion in four-year Treasury notes, yields fell to 7.65 percent, down from 8.35 percent at the last auction on Oct. 2. It was the lowest rate since four-year notes averaged 6.79 percent on March 25, 1987.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 93 25-32, up 1-32 point. The average yield to maturity held at 7.22 percent from late Tuesday.

0-89 1816EST

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