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Prices Off, Interest Rates Up

May 1, 1989

NEW YORK (AP) _ Interest rates rose and bond prices weakened early today as an unexpectedly strong economic assessment from the nation’s purchasing managers touched off a wave of selling.

The credit market’s benchmark 30-year Treasury issue tumbled 1/2 point, or $5 for every $1,000 face amount. Its yield, which moves inversely to price, rose to 8.97 percent from 8.92 percent late Friday.

A monthly survey by the National Association of Purchasing Management indicated economic growth regained momentum in April mainly because export orders rose by the highest rate since December.

The purchasing managers’ index, which measures new orders, production, vendor deliveries, inventory and employment, went up to 53 percent in April after falling to 50.4 percent in March. Last month’s growth rate was roughly the same as the first quarter’s pace.

″The purchasing management report caught people off guard,″ said Kevin Flanagan, money market economist at Dean Witter Reynolds Inc. ″The market probably realizes that the Fed won’t ease credit as quickly as previously thought.″

Recent signs of slower economic activity had raised hopes in the financial markets that the central bank would loosen its grip on credit, leading to lower interest rates. Bond prices improve when interest rates go down.

Traders apparently were preoccupied with the purchasing managers’ report and showed little reaction to news from the Commerce Department today of a decline in construction spending during March, Flanagan said.

Spending on projects dropped 0.3 percent in March, following even larger declines of 0.8 percent in February and 0.7 percent in January. The new decline pushed activity down to a seasonally adjusted annual rate of $413.5 billion.

In the secondary market for Treasury securities, prices of short-term securities were down by 3-32 point to 5-32 point, intermediate governments fell 5-32 point to 11-32 point and long-term maturities slumped from 1/2 point to 17-32 point, according to Telerate Inc., a financial information service.

The movement of a point equals 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, fell 2.22 to 1,130.52.

Corporate issues advanced. Moody’s Investment Grade Corporate Bond Index, which measures total return on a portfolio of 80 corporate bonds with maturities of five years or longer, was off 0.37 to 304.12.

Yields on three-month Treasury bills jumped to 8.85 percent as the discount rose 6 basis points to 8.56 percent. Yields on six-month bills rose to 9.11 percent as the discount rose 6 basis points to 8.61 percent. Yields on one- year bills rose to 9.24 percent as the discount gained 5 basis points to 8.56 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, paid at maturity.

The federal funds rate, the interest on overnight loans between banks, was quoted at 913-16 percent, unchanged from late Friday.

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