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Bond Prices Rise Sharply After News Of Slow Economic Growth

January 30, 1996

NEW YORK (AP) _ Treasury bond prices surged Tuesday as mounting evidence of economic weakness boosted confidence among fixed-income investors that the Federal Reserve would cut interest rates.

The price of the Treasury’s main 30-year bond increased 27-32 point, or $8.44 per $1,000 in face value. Its yield, which moves in the opposite direction, fell to 6.04 percent from 6.09 percent late Monday.

Bond buyers initially emerged in response to the government’s morning report that retail sales rose an anemic 0.3 percent in December, ending the holiday shopping season on a sour note.

Bond prices rose even further after the Conference Board business group later said that consumer confidence sank in January to a two-year low, reflecting widespread corporate job cuts, snowstorms and the government shutdown.

Coming after weeks of reports that the economy weakened in recent months, the latest evidence seemed to give the Fed’s key interest-rate panel, the Federal Open Market Committee, more reason to cut interest rates at its two-day meeting, which ends Wednesday.

Financial observers said the news swayed some undecided participants to join a majority view in the market that bankers would reduce the federal funds rate, the rate on overnight loans between banks, by one-half percentage point to 5.25 percent.

``They have more ammunition to cut interest rates tomorrow. I’m certain they have trimmed their economic growth forecast,″ said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

Rate reductions, which are used by the Fed as a tool to stimulate economic growth, enhance the value of fixed-income securities that are already in circulation. Another cut would be the Fed’s third in eight months.

Also helping bonds was a powerful stock-market rally that enhanced the allure of all dollar-denominated investments, analysts said. The Dow Jones industrial average rose 76.23 to 5,381.21.

Despite the bond market’s advance, some players said they remained concerned about a huge volume of fresh government securities scheduled to hit the market. On Wednesday, for example, the Treasury announces details of about $44 billion worth of 3-, 10- and 30-year securities to be auctioned next week.

Elsewhere in the market, prices of short-term Treasury securities ranged from 5-32 point to 7-32 point higher and intermediate maturities ranged from 3/8 point to 15-32 point higher, reported Dow Jones Telerate Inc., a financial information service.

The Lehman Brothers Daily Treasury Bond Index, reflecting price movements on bonds with maturities of a year or longer, rose 4.10 points to 1,295.19.

Yields on three-month Treasury bills fell to 5.13 percent as the discount dropped 0.04 percentage point to 4.97 percent from their level at Monday’s bill auction. Six-month yields fell to 5.03 percent as the discount dropped 0.07 point to 4.83 percent from level at auction. One-year yields fell to 4.96 percent as the discount fell 0.06 point to 4.72 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 5.44 percent, unchanged from late Monday.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 121 1/8, up 5/8 point from late Monday. The average yield to maturity was 5.59 percent, down from 5.62 percent.

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