T-bond yields hit low for 2nd straight week

February 20, 1993|By Bloomberg Business News

NEW YORK -- For the second straight week, U.S. Treasury bond yields dropped to a record low amid expectations that President Clinton's plan to cut spending and raise taxes will cause interest rates to fall.

Mr. Clinton's economic package, unveiled at Wednesday's State the Union address, would cut the federal budget deficit to $206 billion by 1997. That's below the record deficit of $290 billion racked up in 1992.

By the close of the New York cash market Friday, the 30-year Treasury bond was offered at a price of 101 18/32, up 7/32, to yield 7 percent. The rise was equivalent to about $2.50 for $1,000 of face amount.

That was the lowest closing yield since the Treasury regularly began selling 30-year bonds in 1977. The old record low was set Thursday, surpassing Wednesday's yield of 7.10 percent.

In response to the bond market rally this week, 30-year, fixed-rate mortgages fell to 7.65 percent, the lowest level in 20 years, according to the Federal Home Loan Mortgage Corp.

The Clinton plan means two things to bond investors: a weaker economy and less Treasury debt. Both portend lower interest rates and higher bond prices.

"You can't bet against this market right now," said James Hale, an analyst at MMS International. "It's so strong." Bond yields are sure to break below 7 percent next week, Mr. Hale said.

Even news during the week of a strengthening economy did nothing to derail the rally. A stronger economy typically means higher interest rates and lower bond prices. But instead, bond yields have fallen 10 basis points in the week and about 65 basis points since Mr. Clinton was elected. A basis point is one-hundredth of a percentage point.

Expectations that deficit reduction means a weaker economy ahead are now more important than the current recovery, said Fred Leiner, market strategist at Continental Bank.

"The economy doesn't matter at the moment," Mr. Leiner said. "Who cares what inflation did in January? We're talking about changing fiscal policy by about $500 billion in the next four years. It doesn't really matter if [the consumer price index] was up 0.5 percent last month." Mr. Clinton's plan to cut spending and raise taxes will total about $324 billion over four years, including his economic stimulus program.

The Labor Department reported Thursday that consumer prices rose 0.5 percent in January. Economists surveyed by Bloomberg Business News had expected a 0.2 percent increase.

Labor also said initial unemployment claims dropped 19,000, to 321,000, in the week ended Feb. 6. Claims were expected to show an increase of 3,000 to 343,000.

The Commerce Department said the trade gap narrowed to $6.953 billion in December. The gap was expected to widen to $8.3 billion.

"The economic and inflation data is going to take a back seat" to Mr. Clinton's program, said Kevin Flanagan, money market economist at Dean Witter Reynolds. "We're going to look at high taxes as bad for the economy."

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