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Bonds recoil as stocks rise
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April 14, 1999: 3:35 p.m. ET
Reports of curtailed Japanese buying, Conoco float help push T-prices lower
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NEW YORK (CNNfn) - Treasury bonds continued on their downward course Wednesday, dragged lower by a jittery advance on Wall Street, competition from a massive corporate float and troubling news from Japan.
By 3:00 p.m. ET, the benchmark 30-year Treasury bond sank 6/32 of a point in price to 96-7/32, yielding 5.50 percent.
A tepid mid-session spurt of bond buying proved short-lived, leaving the long bond back in the red after blue-chip stocks regained their own upward momentum.
Instead, traders looked suspiciously toward the stock market's gains. Resurgent confidence in stocks has starved the bond market of both funds and investor interest, leaving trading activity thin and demand weak.
Moreover, a $4 billion pricing of 7-year corporate debt from oil giant Conoco (COC) added to bonds' woes by heaping additional supply onto the already-groaning market. Five- and 10-year government paper suffered the worst from the float, which met with immediate strong demand from investors in the form of a reported $10 billion in advance orders.
The AAA/A- Conoco paper will consist of $1.35 billion in five-year bills priced at about 90 basis points above the equivalent Treasury issue, $750 million in 10-year debt priced at 122 basis points above the equivalent Treasurys, and $1.9 billion in 30-year bonds priced 135 points above the long bond.
No help from overseas
Bond traders got another helping of bad news from Japan, where the leading financial daily newspaper Nihon Keizai Shimbun confirmed that several of Japan's big life insurance firms are planning to trim their overseas bond portfolios.
Japanese financial institutions are major buyers of Treasury bonds, with the life insurance sector alone making up an estimated 30 to 50 percent of the country's total Treasury buying.
Rumors of the policy change contributed to Tuesday's bond sell-off, in which 30-year Treasurys plunged 23/32 of a point in price and yields soared 7 basis points.
Dollar on the run
The Japanese bond news also kept the dollar in retreat from the yen, sending the U.S. currency down nearly a full yen to 118.67 yen, a two-week low.
Japanese financial institutions must sell yen for dollars before buying U.S. bonds. If that inflow weakens, demand for dollars will also lessen.
In an unusual turn, the dollar hasn't gotten its traditional April bounce against the yen as Japanese investors return to overseas securities after parking their funds at home for the local fiscal new year April 1. Instead, a flood of overseas capital has bought into yen in order to buy Japanese stocks, which currently are making strong sustained gains.
Euro gets a lift
The euro regained its footing against the dollar, edging up to $1.0796 as concerns over the Balkan conflict eased, at least temporarily.
On Tuesday, the European currency stumbled on news that Yugoslav troops had briefly entered neighboring Albania, but the losses proved as short-term as the incursion.
Alison Montgomery, currency economist at I.D.E.A., said the Balkan crisis has kept the dollar in mind for European traders as a safe haven, but in the longer view the euro would probably remain weak even without the added flight to quality.
In particular, she noted that the recent European interest rate cut was deeper than expected, raising concerns about whether the European economy may be in even more trouble than economists and investors had suspected.
"The school of thought that we're favoring over the medium term is that the 50 basis-point cut . . . will be positive for growth going forward," she said. "But the other school of thought is, 'Is 50 basis points telling us that growth in Europe is a lot worse than people in the market had expected?' "
"I think that school of thought, coupled with the continued uncertainty in Yugoslavia, is going to keep downward pressure on the euro for now." 
-- by staff writer Robert Scott Martin
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