Treasury bonds climb as interest rates decline

January 02, 1992|By Kenneth N. Gilpin | Kenneth N. Gilpin,New York Times News Service

NEW YORK -- Treasury bond prices moved higher Tuesday and long-term interest rates fell again in light pre-holiday trading, as dealers closed their books on what for most was a highly profitable year.

Retail accounts seeking to lock in higher yields were responsible for most of the day's purchases, traders and analysts said.

But thin trading exaggerated the size of the gains, which amounted to more than half a point on some longer-dated issues.

"The magnitude of the moves is not of much significance," analysts at MMS International, an economic information and service company, noted in their daily market commentary. "Nevertheless, the flattening of the yield curve that has been seen lately should remain a prominent feature of trading in the new year."

For most of last year the bulk of the drop in interest rates came in short-term securities, where rates moved sharply lower in response to persistent easing moves by the Federal Reserve Board. Bond yields, by contrast, remained stubbornly high.

As recently as Dec. 11, the spread, or difference, between yields on two-year Treasury notes and 30-year bonds stood at 2.79 percentage points, the widest of the year.

Since then, however, the yield curve has flattened somewhat, especially after the Fed lowered its discount rate Dec. 20 by a full percentage point, to 3 1/2 percent.

At that time, the spread was 2.76 percentage points. At the close of business yesterday, the difference stood at 2.64.

The steepness of the yield curve and the steady decline in short-term rates throughout the year were a boon for primary dealers in government securities.

"It has been the kind of market in which you could translate the decline in rates into profitability," said William N. Griggs, a managing director at Griggs & Santow Inc., a New York financial consulting firm. "I am sure some of the dealers did better than others. But everyone did well."

The Federal Reserve Bank of New York, which monitors the financial condition of the primary dealers, provides a snapshot of the way the firms are doing each November.

At that time the New York Fed said that pretax profits through August were about $600 million, about the same amount earned during the first eight months of 1990.

The sense that more firms were doing better was underscored by the Fed's figures. Through August, 80 percent of the primary dealers were reporting pretax profits, compared with 70 percent a year earlier.

New Year's Eve trading in the cash market for government securities stopped at 2 p.m. All financial markets were closed yesterday.

At the close of trading, the Treasury's 8 percent 30-year bonds of 2021 were offered at a price of $107.25, up more than half a point, to yield 7.39 percent, compared with 7.44 percent late Monday.

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