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Bond juts up on Fed rate cuts
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October 15, 1998: 6:42 p.m. ET
30-year Treasury bond leaps, dollar dips on stealth Fed move to stem credit crunch
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NEW YORK (CNNfn) - U.S. Treasury prices spiked and the dollar tumbled against two major currencies Thursday afternoon after the U.S. Federal Reserve cut two key interest rates by a quarter point each.
The move, which analysts variously called "significant" and "surprising," led the 30-year benchmark Treasury issue up 1-1/32 in price to 108-9/32 with the yield, which moves in the opposite direction, falling back below the key 5-percent barrier at 4.96 percent.
Citing caution by lenders and "unsettled conditions" in the financial market, the Fed Board of Governors notched down the inter-bank Fed funds rate by a quarter point to five percent. The Fed already lowered that rate by a quarter point two weeks ago.
The Fed also lowered the discount rate -- or the rate at which the Fed lends to banks in its role as lender of the last resort -- by 0.25 point to 4.75 percent.
Analysts said the cut in the discount rate suggests the Fed Open Market Committee will favor yet another cut in short-term rates at its regularly scheduled meeting on Nov. 17.
The moves, coming outside a regularly scheduled meeting of that Fed policy making panel, were meant to show markets the Fed is not going to sit idly by as the nation's economy slows, said Preston Martin, a former Fed vice chairman (279K WAV or 276 AIFF).
Still, the rate cut sparked conjecture among analysts that the Fed may see a drag on the U.S. economy that other market watchers may not see.
"There is a lot of speculation out there about what prompted the move," Michelle Laughlin, a bond market analyst at Prudential Securities, said. "Some have said there may be another hedge fund blow-up out there."
Bond market activity has been tight, with liquidity drying up in the aftermath of woe at large hedge funds, such as Long-Term Capital Management.
But analysts said that Fed Chairman Alan Greenspan so far hadn't warned of any credit crunch looming. Still, some of the nation's top banks and brokerages have been sweltering amid the hedge fund-related crisis.
"It was days ago Greenspan told Congress there was not a credit crunch in the economy," said William Sullivan, money market strategist at Morgan Stanley Dean Witter (330K WAVor 330K AIFF).
As hedge funds reposition their holdings, market players have sat on the sidelines until they can get a better fix on the direction of the Treasury issues -- drying up liquidity.
On Wednesday, BankAmerica reported a stunning 78-percent plunge in net income in its third quarter, due in part to losses at the New York hedge fund D.E. Shaw.
Signs of relief that the Fed hopes to inject into credit markets cropped up almost immediately Thursday.
First Union and Chase Manhattan each cut their prime lending rates by a quarter point to 8.0 percent, and other big institutional lenders were expected to follow suit.
Rate cuts bites into dollar, though
The move, however, sent the dollar tanking because lower interest rates decrease the lure of U.S dollar-denominated assets like bonds.
A cheaper dollar is likely to boost U.S. exports abroad, a key engine for economic growth, but could hamper a rebound of other export-driven economies around the world.
The dollar was off 2.86 pfennings to 1.6110 German marks. Bundesbank president Hans Tietmeyer quelled recent debate about a rate cut in Germany on Thursday.
The chief of the German central bank said rate cuts can hurt the economy of the cutting country, and the world economy overall. Many analysts expected that Germany won't cut rates ahead of the launch of the euro currency next year.
And while Japan is the world's most high-profile laggard economy, analysts rule out a rate cut there, because its interest rates are already among the lowest in the world, at 0.25 percent.
The dollar fetched 115.72 Japanese yen, down 2.88 yen, in late trading on Thursday.
-- by staff writer Jamey Keaten
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