Bond price falls in sell-off, interrupting market rally Retreat attributed to tax law rumor

September 10, 1993|By New York Times News Service

NEW YORK -- After a stunning rally that took the yields on long-term Treasury securities to their lowest levels in 25 years, the bond market paused yesterday for a bout of selling that knocked the price of the 30-year bond down almost one and a half points and sent its yield up to 5.96 percent.

But traders and analysts said this retreat was not yet a signal that the rally is over. Instead, it appeared to be just a chance for investors to catch their breath and lock in some profits. The sell-off also sent short-term and intermediate rates higher.

"The fundamentals are still in place for lower bond yields," said Edward McKelvey, a senior economist at Goldman Sachs & Co.

These fundamentals include low inflation and slow economic growth, as well as a strong demand for Treasury bonds and notes by investors seeking higher yields and by cities and towns that need them for the escrow funds used to pay off the old high-interest rate debt they are refinancing.

The price of the 6.25 percent, 30-year bond was down 11 4/32 points.The 5.96 percent yield, which moves in the opposite direction, jumped up from 5.86 percent Wednesday.

The yield on the 10-year note climbed from 5.22 percent to 5.34 percent, while the yield on the 2-year note ended at 3.86 percent, up from 3.74 percent.

Yesterday's selling was not set off by anything that would disturb the positive economic backdrop for interest rates. Instead, it was sparked by a rumor, which was then denied, that the Clinton administration was considering imposing a withholding tax on the interest earned by foreigners on U.S. securities.

The rumor, which some traders said began circulating in Tokyo, apparently grew out of an announcement that Rep. Charles B. Rangel, D-N.Y., was holding a hearing on such a bill in two weeks.

The fact that a rumor of legislation, which many traders quickly dismissed as unlikely, could spark such selling is an indication of the nervousness of many traders and investors, with prices this high and yields this low.

But it does not mean that the buying will not resume. "We aralready starting to see buyers at these levels for two- and five-year notes," Ronald Connors, government trading manager at Bear Stearns & Co., said.

K? The rumor, Mr. Connors said, "was just an excuse to sell."

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