Fed moves fail to lower rates of 10-year bills

May 09, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- The government's hope for lower interest rates clashed yesterday with the private market's reaction to emerging economic trends, and the result was sharply higher rates on the quarterly refinancing of $11.75 billion in 10-year Treasury notes from three months ago.

Yesterday's auction was the second part of a three-day refinancing of a record $37 billion in government securities that began Tuesday with the shortest-term bills and ends today with 30-year bonds.

Rates on the 10-year notes immediately after the midday auction were 8.07 percent, slightly lower than had been widely expected on Wall Street. Enthusiasm spread, and the yield fell to 8.03 percent by the end of the session.

But even if the rates were less than had been expected in the financial markets, they were still up from the 7.85 percent the 10-year notes yielded at the close of the February auction. The increase has come despite recent moves by the Federal Reserve to reinvigorate the economy by cutting the discount rate, a blunt signal it wants other rates to fall.

The Fed's reduction succeeded in pushing down rates on short-term debt, most notably the prime rate that commercial banks charge on loans to their best customers. It largely failed, however, to affect longer-term obligations, ranging from the 10-year Treasuries auctioned yesterday to the common 30-year fixed-rate mortgage, which has steadily risen in the aftermath of the Persian Gulf war.

"The point is, the Fed controls short-term rates, not long-term," said Richard Berner, chief economist for Salomon Brothers.

"The bond market is going to be influenced by two things -- inflation and what is happening to the economy," he added. "Now there are signs the economy is emerging from a recession" and there are widespread concerns over whether inflation will diminish.

Indeed, the Fed's cut in rates last week -- just as some gauges such as unemployment appear to be bottoming -- has prompted some skittish investors to question whether the Fed may be laying the groundwork for an over-stimulated economy, Mr. Berner said.

Moreover, recent figures concerning inflation have appeared benign largely because of reductions in the prices of food and energy. The so-called "core rate" of inflation, which ignores fuel and food because of their volatility, has remained about 7 percent, said William Griggs of Griggs & Santow, an investment advisory firm.

The sheer size of the refunding has also caused some concern. Tuesday's auction was for $13.5 billion in three-year notes, and both yesterday's and today's are for $11.75 billion each.

"It was a lot to swallow," said Raymond Stone, a partner of Stone & McCarthey, a New Jersey economic consulting firm. Results showing particularly heavy purchases from the New York Federal Reserve District suggested, Mr. Stone said, that Japanese buyers had returned to the market, easing the gridlock.

Similarly robust auctions are likely in the near future. Mr. Griggs estimated that $250 billion in government debt must be refinanced between the beginning of July and the end of March.

"We don't think you can do that in an economy that has come out of recession, and that still has inflation, without getting higher rates," he said.

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