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Bond Prices Fall in Slow Trading

November 27, 1992

NEW YORK (AP) _ Treasury bond prices fell in light trading today after the government reported unexpected strength in American incomes in October.

The price of the Treasury’s main 30-year bond was down 3/8 point, or $3.75 per $1,000 in face amount, around midday. Its yield, which rises when prices fall, was 7.57 percent, up from 7.535 percent late Wednesday.

The U.S. credit markets were closed Thursday for Thanksgiving and trading was expected to end by early afternoon today as many investors took an extended holiday.

Bond prices dipped after the government reported that Americans’ personal income climbed 1 percent in October and spending rose a strong 0.7 percent.

The rise in personal incomes was the largest in 10 months and was about twice what many analysts expected. Spending growth was within expectations.

″On the surface, that report looked very strong,″ said Nancy Vanden Houten, money market economist at Merrill Lynch Capital Markets.

The strength could be another indication of recovery in the economy, a development that would reduce chances that the Federal Reserve would push interest rates lower. Rising incomes could also foreshadow an increase in demand for consumer products, a development that could lead to higher prices and depress the value of bonds.

But Ms. Vanden Houten said there were several special factors behind the income rise that aren’t likely to be repeated.

For example, the income figure reflected large subsidy payments to farmers, bonuses to auto workers and special retirement payments to postal workers.

With the special factors removed, incomes rose only 0.4 percent in October, which was more in line with expectations.

Nonetheless, prices stayed down well after the release of the report.

Ms. Vanden Houten noted that trading was very light because of the holiday on Thursday, and said price moves are often exaggerated in such environments.

In the secondary market for Treasury securities, short-term maturities were off by between 1-16 point and 7-32 point and intermediate maturities were down 9-32 point, the Telerate Inc. financial information service reported.

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 Lehman Brothers Daily Treasury Bond Index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, was down 2.62 to 1,244.93.

Yields on three-month Treasury bills rose to 3.30 percent as the discount rose 1 basis point to 3.24 percent. Yields on six-month bills rose to 3.54 percent as the discount rose 1 basis point to 3.44 percent. Yields on one-year bills rose to 3.74 percent as the discount rose 1 basis point to 3.60 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.

The federal funds rate, the interest on overnight loans between banks, slipped to 3 1-16 percent from 3 1/4 percent late Wednesday.

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