NEW YORK — Bond prices veered sharply downward Wednesday as traders appeared to feel that December's strong employment growth would reduce chances for lower interest rates. Short-term interest rates rose.
The drop in long-term bond prices helped trigger a decline on Wall Street, where the Dow Jones industrial average had its biggest one-day drop in history, falling 39.10 points to 1,526.61.
The Labor Department said the civilian jobless rate fell to 6.9% in December, its first time below 7% in nearly six years. The report said a rebound in manufacturing helped create 237,000 new jobs in December.
Bond Prices Hurt
Growth in employment hurts bond prices because, among other things, it lessens the likelihood that the Federal Reserve will ease monetary policy to promote economic growth. Lower interest rates make existing securities more valuable.
Traders seemed to hesitate before reacting to the employment news because the prices in the credit markets have been rallying for such a long time, said Stan Jonas, the chief of institutional financial futures trading for Shearson Lehman Bros.
Henry Kaufman, chief economist for the investment firm Salomon Bros., said the December employment news "reduces significantly the chances for a discount-rate cut within the very near future."
The discount rate, the fee that the Fed charges on loans to banks and savings institutions, has stood at 7.5% since May.
Another financial market analyst, Maria Ramirez of Drexel Burnham Lambert, said: "These job numbers do not create any kind of concern at the Fed that the economy is pulling back from its recent growth rate and perhaps implies the economy does not require any additional stimulus by the Fed."
In the last of three auctions slated this week that together total $26.05 billion in securities, the Treasury sold $4.75 billion in 20-year bonds Wednesday at an average yield of 9.43%. It was the lowest yield on this type of bond since they were first sold in 1981. There were reports that Japanese investors bought many of the bonds.
In the secondary market for Treasury securities, prices of short-term governments fell 9/32 point from late Tuesday, intermediate maturities dropped from 1/2 point to 1 1/16 points and long-term issues were off 1 5/16 points, according to Salomon Bros.
The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.
In corporate trading, industrials dipped 1 point in active trading and utilities were off 1 1/8 points in moderate dealings.
Among tax-exempt municipal bonds, revenue bonds were down 1 point in moderate trading and general obligations were down 1 point in heavy activity.
Yields on three-month Treasury bills bounced up 17 basis points to 7.17%. Six-month bills were up 15 basis points at 7.22% and one-year bills went up 16 basis points to 7.21%. A basis point is one-hundredth of a percentage point.
Yields on 30-year Treasury bonds rose to 9.32% from 9.17% late in Tuesday's session.
The federal funds rate--the interest on overnight loans between banks--traded at 7.75%, up from 7.688% late Tuesday.
In the stock market, many blue chips that have been big winners in recent months took a drubbing. International Business Machines fell 6 3/4 to 148 7/8, McDonald's 2 5/8 to 76, Merck 2 1/2 to 139 and General Electric 2 1/2 to 70 3/4.
Pennzoil, which had jumped 19 3/4 on Tuesday, dropped 8 1/2 to 74 1/2 in a session of wide swings. Texaco was down 3/8 at 30 3/8.
Beatrice led the active list, down 4 at 43 on turnover of more than 6 million shares. The company said it received a revised buy-out proposal from the investment firm of Kohlberg Kravis Roberts & Co. that would lower the proportion of cash to be paid in the deal.
One stock that moved against the trend was Polaroid, which rose 1 to 44 1/2. Eastman Kodak said it would stop making instant cameras and film in competition with Polaroid following a court ruling in a patent case. Kodak shares lost 1 3/8 to 48 5/8.