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Treasury Market Lifted By Surge In Dollar With BC-Bonds-Glance

July 28, 1994

NEW YORK (AP) _ Treasury bond prices erased early losses to post their biggest gain in two weeks Thursday in a rally sparked by a surge in the dollar against its foreign counterparts.

But bond strategists said sentiment in the fixed-income market remained cautious as participants braced for important data due out Friday that will give the first broad indication of economic strength in the second quarter.

The price of the Treasury’s main 30-year bond rose 9-16 point, or $5.63 per $1,000 in face value. Its yield, which moves in the opposite direction, eased to 7.55 percent from 7.61 percent on Wednesday.

After dropping sharply Wednesday, bond prices fell further Thursday in early trading after the Labor Department reported first-time claims for state unemployment benefits dropped to a four-month low.

The decrease, by 59,000 claims, far exceeded a forecasted drop of 7,000 and suggested to market participants that economic strength could potentially aggravate inflation. Inflation tends to erode the value of bonds, which pay a fixed rate of interest.

But bond prices improved as the dollar advanced strongly in New York trading, rising above 100-Japanese yen for the first time in a month.

The dollar’s strength was viewed as positive for bonds because a stronger U.S. currency tends to help keep inflation pressures in check. In addition, foreign investors are more likely to buy dollar-denominated investments such as Treasury bonds in a rising dollar environment.

Also lending a degree of support to the fixed-income market was a report by the Conference Board that help-wanted advertising fell in June, which seemed to indicate that employment was not as strong as indicated by the earlier report.

The advance in Treasury prices, in turn, triggered a rush to buy bonds by speculators who had placed bets on a further decline in bond prices. These traders, called short sellers, had borrowed bonds early Thursday and then sold them immediately, hoping their value would decline.

When it became clear that bond prices had bottomed, however, these traders were forced to cut their losses by buying bonds at the higher prices in order to pay off the loans.

″People got overly bearish,″ said Nick Kinas, a government bond trader at Bank Leumi Trust Co. of New York. ″We got a pretty strong short-covering rally.″

On Friday, the Commerce Department releases its estimate on second quarter growth. Analysts are calling for an increase of around 4 percent in the nation’s Gross Domestic Product, suggesting a continuation of the economic strength that began late last year.

Prices of short-term Treasuries rose 3-32 point to 1/8 point and intermediate maturities rose 3-16 point to 13-32 point, the financial information service Telerate Inc. reported.

The Lehman Brothers Daily Treasury Bond Index, reflecting price movements on bonds with maturities of a year or longer, rose 3.15 to 1,213.39.

Yields on three-month Treasury bills fell to 4.51 percent as the discount dropped .03 percentage point to 4.41 percent. Six-month yields fell to 5.01 percent as the discount declined .02 point to 4.83 percent. One-year yields dropped to 5.52 percent as the discount declined .03 point to 5.24 percent.

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, was 4 5-16 percent, up from 4 1/4 percent late Wednesday.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 91 12-32, down 1-32 from late Wednesday. The average yield to maturity was 6.40 percent, up from 6.39 percent.

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