U.S. CREDIT MARKETS CLOSE SHARPLY LOWER
Firm oil prices, a sharp stock price
fall and widespread fear that the dollar has much more room to
decline sent bond prices tumbling, dealers said.
    The key 7-1/2 pct Treasury bonds of 2016 fell 1-3/32 points
to close at 95-1/32 and a 7.94 pct yield that was up 10 basis
points from Monday and was 1987's highest closing yield.
    "Investors threw in the towel today. The long bond seems
headed for eight pct within the next few days," a trader said.
That would correspond to a price of about 94-3/8.
    Treasury bill rates increased two to eight basis points.
Notes prices declined 1/8 to 3/4.
    Bond traders said the main negative is recent instability
of the dollar and growing feeling that even concerted central
bank support will not be able to prevent a further sharp
decline in the U.S. currency.
    The dollar came under mild downward pressure early and
finished with modest net losses. The currency was largely
unaffected by generally supportive comments by Federal Reserve
Chairman Paul Volcker and Japanese Finance Minister Kiichi
Miyazawa.
    Miyazawa once again said he and Treasury Secretary James
Baker agree on the need for stable foreign exchange rates.
    Fed Chairman Paul Volcker told Congress that the dollar's
fall thus far should be "large enough, in a context of a
growing world economy and fiscal restraint in the U.S., to
support widespread expectations of a narrowing in the real
trade deficit in the period ahead."
    Despite favorable comments by Volcker and Miyazawa, there
appears to be broad agreement among currency and bond market
participants that a huge Federal budget deficit and a wide,
although narrowing, trade gap will further depress the dollar.
That could mean Japanese and other foreign investors will buy
fewer U.S. bonds or even start selling them.
    There has been no evidence of large-scale sales of U.S.
bonds by the Japanese. Some dealers said that these investors
actually purchased a modest amount of U.S. debt today, but they
focused on shorter maturities in the two-year area rather than
on long bonds.
    To the extent that overseas investors back away from the
U.S. bond market, dealers said that higher yields will be
needed to lure others to take their place.
    A late Federal funds rate rise contributed slightly to the
bond market retreat. After averaging 6.20 pct yesterday, funds
opened at 6-1/8 pct and traded between 6-1/16 and 6-1/4 pct.
    The Federal funds rate rise occurred despite the Fed's
unexpected direct supply of temporary reserves. The Fed
arranged two-day System repurchase agreements with funds
trading at 6-1/8 pct.
    Treasury bill rates increased largely in response to the
higher funds rate. Rates on new three and six-month bills rose
two and seven basis points from Monday's auction averages to
close at 5.55/54 pct and 5.70/69 pct. Year bills at 5.81/80 pct
were up eight basis points from yesterday's close.
    Among notes, the 6-3/8s of 1989 dropped 1/8 to 99-9/16,
with the 7-1/4s of 1996 down 3/4 at 97-3/8.
 Reuter
