clarinews@clarinet.com (BRENDAN MURPHY, UPI Business Writer) (02/10/90)
NEW YORK (UPI) -- U.S. Treasury prices rose Friday on a government report that showed January core inflation at a modest 0.1 percent, adding to satisfaction at completion of the Treasury's $30 billion quarterly refunding in good form despite earlier fears of foreign investor indifference. The Labor Department's producer price index rose a high 1.8 percent overall. But analysts said core inflation -- excluding food and energy costs which were pushed up by cold weather -- rose just 0.1 percent. Inflation nibbles at bond returns, so the low core rate braced Treasury prices. ``We finally made it by this tough price figure,'' said chief economist David Jones of Aubrey G. Lanston & Co, expressing market relief. He said bond prices and yields were likely to hold steady in the short run. The new benchmark 30-year bond, the 8 1/2 of 2020, closed Friday at 101 25/32 for a yield of 8.34 percent, against its par value of 100 and an average yield of 8.50 when auctioned a day before. That represented a gain of about 1 3/4 points or $17.5 for each $1,000 face value. Thursday's auction of $10 billion in the long bonds, the main event of the week, boosted morale. Yield was well up from the 7.87 average in the November refunding, but lower than some pessimists had feared. Bond prices fall as bond yields -- market-set interest rates -- rise. ``The auction went well, considering the size and the tentativeness going into the bidding,'' said money market analyst William V. Sullivan Jr. of Dean Witter Reynolds Inc. ``The market has continued to trade up.'' ``In retrospect,'' commented ``Credit Market Comment,'' a Smith Barney newsletter, ``it can be said that the market cleared the week's hurdles in impressive fashion. One could sense an improvement in psychology which bodes well for the market's prospects now that the auctions have been swallowed.'' The pre-auction bond market was preoccupied by fears investors might stay away in droves. That happened in the dismal sale last month of 40-year bonds issued by the Resolution Funding Corp., a federal S&L bailout agency. But three- and 10-year notes sold briskly and an attractive yield on 30-year bonds brought in bids totaling $76.4 billion for the $30 billion sale. Bearish sentiment, ironically, helped assure the auction's success. ``We pushed those yields up to levels that attracted investors, both domestic and foreign,'' explained Jones of Aubrey G. Lanston. Now the outlook is cheerier than it has been for weeks. Salomon Brothers' advisory ``Comments on Credit'' contended, ``A significant new bear bond market is unlikely to emerge ... the stage is now being set for a bond market rally.'' It cited economic slowing and Fed firmness. Ten-year Treasury notes closed at 101 11/32 to yield 8.30 percent, against par of 100 and an average yield of 8.59 percent at auction. Five-year Treasury notes closed at 97 27/32 to yield 8.27 percent, against 95 29/32 and 8.50 percent last week. Three-year Treasury notes closed at 100 12/32 to yield 8.23 percent, against 100 and 8.43 percent when auctioned Tuesday. Two-year notes closed at 99 26/32 to yield 8.23 percent, against 98 1/32 and 8.26 percent. Six-month Treasury bills ended at a discount rate of 7.69 to yield 8.10 percent, against 8.04 percent a week before. Three-month T-bills finished at a discount rate of 7.76 to yield 8.02 percent against 7.94 percent. Shearson Lehman Hutton Inc.'s index of long-term Treasury bonds was up 16.33 points for the week, or 1.26 percent, to close at 1,311.01. The Federal funds rate remained at 8 3/16 percent, just over the current perceived Federal Reserve target rate of 8 1/4 percent. The Fed funds rate, what banks charge each other for overnight loans, underlies most other rates.