Bond Prices Rise as Dealers, Investors Are Cheered by Rate Drop, Fed's Move
NEW YORK -- Bond prices spurted yesterday as dealers and investors were cheered by a decline in short-term interest rates.</br></br>An injection of reserves by the Federal Reserve System into the banking network also encouraged traders. Some analysts were surprised by the move and said it might represent an easing of the Fed's credit hold. But many others insisted that the move was needed for technical reasons and that the Fed hasn't changed policy.</br></br>The interest rate on federal funds hovered between 8 1/8% and 8 3/8% yesterday, down from Monday's average of 8.57%. The funds rate, which is the rate on reserves that banks lend one another overnight, is watched closely for clues to changes in Fed policy. Prices of some actively traded Treasury bonds rose more than 1/2 point, or over $5 for each $1,000 face amount.</br></br>Much of the credit markets' focus yesterday was on the Fed's injection of reserves. The action "could possibly represent an easing move" by the central bank, said Donald E. Maude, chief economist at Refco Partners. He cautioned, however, that it is "premature to attach any definitive policy significance" to the Fed maneuver.</br></br>The economy's apparent sluggishness in recent months has boosted hopes that the Federal Reserve will ease credit conditions, paving the way for lower interest rates, in an attempt to stimulate business activity. This view was bolstered last week when Reserve Board Chairman Paul Volcker expressed concern about the lackluster performance of the nation's manufacturing industries.