Bond Market Anticipates Calm After Last Week's Turmoil
BOND traders will be looking for signs of steadiness this week, following last week's turmoil in United States financial markets. And barring the unexpected, they will likely find it, experts say. Shifts in bond prices and bond yields are expected to be quieter.
``We see the bond market stabilizing in the days ahead,'' says Dennis Jarrett, chief technical analyst for the investment house Kidder, Peabody & Co. in New York. ``The latest round of economic news [including last week's unemployment report] is not negative for bonds.''
The bond market overreacted to concerns about inflation following the Federal Reserve Board's decision to hike interest rates in early February, Mr. Jarrett says. The inflation rate remains low, he says. Moreover, economic growth in the United States should remain moderate.
Last Friday's unemployment report eased concerns among some bond traders, Jarrett says. The Labor Department announced that the unemployment rate fell two-tenths of a point in February to 6.5 percent; nonfarm payrolls expanded by 217,000 people. Other government statistics, the leading indicators, suggested only modest economic growth for 1994.
The fall in bond prices and rise in their yields in the last few weeks have been driven by apprehension that the US economy is growing too fast, as well as rising concerns about a trade war with Japan. Bond prices and yields move inversely.
The bond market is notorious for scowling at what most people consider upbeat economic news. Thus, evidence of solid economic growth is perceived by bond traders as pushing up inflation and interest rates and driving down bond prices. On Oct. 15 last year, yields on 30-year US Treasury bonds fell to a 21-year low of 5.79 percent. Yields moved up to about 6 percent in November as the economy began to grow. By February, the rate had climbed above 6.5 percent. Late last week, the yield reached the 6.83 percent range.
``The bond market is now trying very hard to stabilize,'' says Arnold Kaufman, editor of ``The Outlook,'' a market report published by Standard & Poor's Corporation in New York. ``There just wasn't much inflation to be found in Friday's unemployment report.''
BILLIONS of dollars have poured into bonds since the late 1980s. At the end of 1993, more than $500 billion had been invested just in bond mutual funds, according to the Investment Company Institute (ICI) in Washington, a trade group. The flow of investments into bond funds fell slightly at the end of 1993, as interest rates began to rise; but in January they were back at their more usual levels of last year, notes Betty Hart, a spokeswoman for the ICI. Investors are seeking out funds that provide good total return while offering a degree of safety, such as municipal bonds or US government issues.
Mr. Kaufman says if the Fed were to hike interest rates again soon - as is widely expected - the effect would probably be to ``help steady the [bond] market,'' unlike the first rate hike Feb. 4, when bond and stock markets went into a tizzy.
Kaufman says he sees the 30-year bond soon reaching 7.25 percent. But rates will start to ease downward later in the year.
Not all forecasters anticipate rising rates. Richard Hokenson, chief economist for investment house Donaldson, Lufkin & Jenrette Inc. in New York, says concerns about a renewal of inflation are ``overstated.'' He predicts yields on long-term treasury bonds moving downward to 5.75 percent by the end of the year and falling into the low 5 percent range in 1995.
One factor that may be pointing toward lower rates is gold. Gold is trading at around $378 an ounce, down 3 percent since early February. ``Gold, as an inflation hedge, is not as important a factor as it was decades ago,'' when there were fewer investment vehicles, Jarrett says. Yet, if inflation is really a threat to either the US or global economies today, ``one would have expected that gold prices would be moving up,'' he says. That is not yet happening.