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Whitewater Rumors Sink Bond Prices

March 11, 1994

Market Overview

* Rumors about the Whitewater affair sent Treasury bond prices plunging in their biggest one-day drop of the last two years. Interest rates on 30-year bonds soared to nearly 7%.

* Gold prices jumped more than $8 an ounce as the dollar fell against other major currencies amid concern that the Clinton family real estate controversy could affect the presidency.

* Stocks were shaken too, pushing the market lower in active trading. The Dow industrials dropped 22.79 points to 3,830.62.

Credit

A rash of rumors about the Whitewater affair triggered a worldwide selloff of Treasury bonds.

The rumors, later denied, eroded foreign and domestic investor confidence in the already-fragile market, intensifying a monthlong price plunge touched off by the Federal Reserve Board's hike in short-term interest rates Feb. 4.

The price of the Treasury's main 30-year bond plummeted 1 11/16 points, or $16.88 per $1,000 in face value, the biggest one-day price plunge in at least two years.

Its yield, which moves in the opposite direction, rose to 6.98% from 6.83% on Wednesday. Thursday's yield was the highest since May 28, when it was also 6.98%.

Meanwhile, gold surged as some investors sought a safe haven. That, in turn, further pummeled bonds, because gold tends to gain on fears of rising inflation. Inflation undercuts the value of bonds and other investments that pay a fixed return.

"We're all kind of scratching our heads," said Nick Kinas, a government bond trader at Bank Leumi Trust Co. of New York. "You're having some turmoil in Washington at this point, and people are getting a little antsy."

The rumors behind much of the selling apparently stemmed from a newsletter by Johnson Smick, a Washington-based consulting firm, that raised questions about where Deputy White House Counsel Vincent Foster committed suicide. The newsletter, widely read among financial traders, suggested that Foster's body may have been moved from a Virginia apartment to the suburban Washington park where it was discovered.

Foster's death is among the issues to be examined by Robert B. Fiske Jr., the special counsel investigating the Whitewater affair.

White House and police officials dismissed the Johnson Smick report and other rumors as ridiculous. But the damage to the markets was done.

Currency/Gold

Gold prices shot up. On the New York Commodity Exchange, gold for current delivery closed at $387.30 a troy ounce, up $8.10 from Wednesday.

Analysts said gold, often considered a safe haven, rose as other U.S. financial markets slipped. The initial boost encouraged investment funds to buy still more gold, further driving up its price.

The dollar was hurt both by fears of political instability due to the Whitewater affair and by a slower-than-expected decline in German interest rates.

On Wednesday, the German central bank cut money market rates by a tiny 0.03 of a percentage point. On Thursday, the Bundesbank president, Hans Tietmeyer, said it would continue to scrutinize growth in the German money supply, an indicator of inflation.

"The Bundesbank is going to continue to be miserly with (short-term) rate cuts," said Angelo Evangelista, a vice president at Bank of Boston, referring to the Bundesbank's main tool for influencing money market rates. If German rates stay high, they will support a stronger mark.

Hence, the dollar on Thursday dropped to its lowest level against the mark since Oct. 29, trading at 1.682 marks in New York, down from 1.706 on Wednesday.

The dollar also finished at 105.20 Japanese yen, down from 105.85 on Wednesday.

Stocks

The market declined broadly as interest rates leaped, but prices finished well above their lows for the day. The Dow, down 22.79 points at the close, had been down about 40 points at midday.

With the stock market on pins and needles over possible further Fed moves on interest rates, it is highly vulnerable to rumors, including Clinton-related rumors, analysts said.

But while losing stocks topped winners 2 to 1 on the New York Stock Exchange, some experts were surprised that the damage wasn't far worse, given the surge in bond yields.

The Russell 2000 index of smaller stocks lost just 1.02 points to 265.42.

Among Thursday's highlights:

* Many financial stocks fell as interest rates rose. Citicorp dropped 3/4 to 38 1/4, Federal National Mortgage gave up 3/4 to 81 1/4, Golden West lost 7/8 to 37 7/8 and Countrywide Credit fell 1/2 to 24 5/8.

* Utility stocks also led the market lower. American Electric Power fell 1/2 to 33, SCEcorp eased 3/8 to 17, US West dropped 7/8 to 39 3/8 and BellSouth was off 7/8 at 54 1/8.

* Among industrials, paper and lumber stocks tumbled for a second day, in the wake of International Paper's warning that paper prices remain weak. IP slumped 2 to 69 1/2, Georgia-Pacific dropped 1 3/8 to 68 5/8, Scott Paper shed 1 5/8 to 44 1/2 and Weyerhaeuser lost 1 5/8 to 44 1/2.

* On the up side, gold stocks rose with the metal. ASA added 1 to 46 7/8, American Barrick gained 1 to 25 1/4, Placer Dome added 3/8 to 23 3/4 and Hemlo rose 1/2 to 10.

In foreign markets, London's FTSE-100 index fell 12.8 points to 3,233.9, while Frankfurt's DAX index gained 25.01 points to 2,141.10. In Mexico City, the Bolsa index slid again, losing 26.94 points to 2,506.14.

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