Bond Prices Fall On Nervousness Over Refunding --- Traders Fret That Japanese Won't Buy U.S. Issues; Dollar Also Takes Toll
NEW YORK -- A falling dollar and increasing nervousness about how much Japanese investors will buy in this week's Treasury refunding pushed bond prices lower in light trading.</br></br>Prices of some actively traded 30-year Treasury bonds fell almost 1 1/4 points, or nearly $12.50 for each $1,000 face amount, after falling about 1 1/2 points Friday. The two-day loss erased all the gains made last Thursday when Federal Reserve Board Chairman Paul Volcker confirmed that the Fed was pushing up short-term interest rates to help stabilize the dollar.</br></br>Traders said the bond market was rife with rumors about how active Japanese investors would be in the government's quarterly refunding operation, which begins today. As the dollar continued to fall against the yen yesterday, some analysts speculated about whether Japanese investors would participate in the refunding auctions at all.</br></br>"There's no reason for anyone, American or Japanese, to buy bonds right now," said Lawrence A. Kudlow, chief economist at Bear, Stearns & Co. "Economic activity is picking up, the inflation rate is rising, and there's no clear evidence that the U.S. is prepared to defend the dollar at its current level. For a foreign investor, there's a currency risk as well as an inflation risk in buying bonds."</br></br>But another analyst, who requested anonymity, said he believes Japanese will be buyers in the refunding. "It makes a lot of sense for them to be in it, and it also makes sense for them to pooh-pooh it beforehand," he said. "It's to their advantage to do the most surprising thing. So if the market has been beat up, and everyone's pessimistic, then they collectively have enough size to buy a lot of bonds, cause a short-covering rally and make some nice profits."