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Inflation News Sends Bond Prices Soaring

March 16, 1994|From Times Staff and Wire Reports

Market Overview * News of low wholesale inflation last month sent long-term bond prices soaring Tuesday, but caution ahead of a second inflation report today tempered the enthusiasm.

* The stock market failed to shake inflation worries and finished mixed.

Credit

The bond market also got some unexpected help from the Federal Reserve Bank of New York, which bought Treasury securities to meet a seasonal need to replenish banking system reserves.

The Treasury's key 30-year bond yield dropped to 6.87% from 6.95% on Monday. Its price, which moves in the opposite direction, rose 29/32 point, or $9.06 per $1,000 in face value.

The Commerce Department reported that inflation at the wholesale level jumped 0.5% in February, but bond traders dismissed the increase because it was attributed almost entirely to soaring prices for heating oil in response to the unusually cold winter.

Instead, market participants focused on a 0.1% increase in the so-called core producer price index--excluding volatile energy and food prices.

Analysts said the inflation report should ease pressure on the Federal Reserve Board to raise interest rates again soon.

A perception of reduced pressure on the Fed spurred bond buying and pushed up prices, because higher rates on new securities would hurt the value of already-sold bonds.

But the market view that inflation is under control was far from unanimous. In a separate report, the Fed said industrial production rose 0.4% in February, its ninth straight advance.

In addition, the weekly Johnson Redbook report showed retail sales increased a sharp 5.8% in the first two weeks of March from the February average.

Both reports seemed to point toward inflationary economic growth.

Also giving a lift to bond prices, the central bank bought an estimated $3.5 billion to $4 billion in Treasury securities in its seasonal operation to add to banking system reserves, said Marilyn Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp.

Other News

The government's wholesale price report sent stock prices up, but profit taking in blue chips and other technical factors set in by noon. Analysts cited the other less-well-known signs of inflation that kept investors cautious and quick to sell.

The Dow Jones industrial average closed off 13.39 points at 3,849.59. The blue chip indicator hovered near Monday's close of 3,862.98 but was knocked down in midafternoon by computer-generated sell programs before recovering ground at the close, traders said.

In the broader market, advancing issues outnumbered decliners by about 9 to 8 on the New York Stock Exchange. Big Board volume totaled 303.26 million shares.

Broader indexes didn't fare as badly. The NYSE's composite index lost 0.02 to 258.99. The Standard & Poor's 500-stock index dropped 0.38 to 467.01.

However, on the plus side, the Nasdaq composite index of mostly smaller companies gained 0.71 to 793.51.

Among the market highlights:

* Bank stocks closed mostly higher after the Federal Deposit Insurance Corp. reported record commercial bank earnings in 1993. Citicorp gained 1/2 to 40, First Chicago gained 2 1/4 to 49 3/4 and First Interstate rose 1 to 69 1/2.

* Kemper, the insurance and mutual fund concern, gained 4 3/4 at 61 3/4 on the NYSE, a day after GE Capital Corp. announced a $2.2-billion bid for the company. General Electric, parent of GE Capital, was down 3/8 at 104 7/8.

* Perrigo lost 5 to 22 3/8 after a securities analyst downgraded his earnings forecast for the drug maker.

* AT&T, which joined a consortium building the first undersea fiber-optic system linking Vietnam, Thailand and Hong Kong, gained 1 1/8 to 52 3/8.

* Time Warner added 1 to 40 on rumors that Seagram's will make a takeover bid.

Elsewhere, gold prices rose on the New York Comex, closing at $386.90 an ounce, up 50 cents from Monday. Silver finished up 1.5 cents at $5.462 an ounce.

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