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Bonds climb; dollar falls
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October 15, 1999: 3:51 p.m. ET
Treasurys are haven in flight to safety; dollar mired by PPI, Greenspan
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NEW YORK (CNNfn) - Bond prices rose for the first time in five sessions Friday as investors fled a collapsing stock market for the relative protection of government securities.
But the dollar, already hammered following a speech by Federal Reserve Chairman Alan Greenspan, fell further after a government report suggesting rising inflation.
Just before 3:15 p.m. ET, the price of the benchmark 30-year Treasury bond rose 23/32 to 98-2/32. Its yield, which moves inversely to the price, fell to 6.26 percent from Thursday's 6.32 percent -- a two-year high.
The gain in bonds came immediately after the opening of U.S. equity markets when stocks fell dramatically, hit by a spike in wholesale inflation and a warning from Greenspan on stock risks.
The gains continued through the day as the Dow fell briefly below the psychologically significant 10,000 mark. Just before 3:15 p.m. ET, the Dow Jones industrial average was down 240 points, or 2.35 percent, at 10,045.
The stock sell-off followed news from the Labor Department that the Producer Price Index, a gauge of prices at the wholesale level, rose 1.1 percent in September, well above expectations. More importantly, the core figure -- which excludes food and energy -- climbed a greater-than-expected 0.8 percent.
Bond prices initially fell after the report, the latest in a batch of news suggesting rising inflation, which erodes the value of a bond's fixed income payments.
"This does imply we'll see higher CPI inflation," said Kathleen Camilli, chief economist at Tucker Anthony, looking ahead to next Tuesday's September Consumer Price Index. "The bond yield will move up as long we continue to see greater-than-expected data."
But the initial drop in bonds was tempered by the fact that most of the PPI gains came from a one-time surge in tobacco prices.
"These headline figures are ... misleading as most of the acceleration in PPI inflation during September was due to the one-shot cigarette price hike which went into effect at the beginning of the month," Credit Suisse First Boston wrote in an e-mail to clients.
Stocks were jolted initially in part by Greenspan, who in comments at a banking conference late Thursday warned of what he saw as a potential bubble in U.S. asset prices.
"At a minimum, risk managers need to stress test the assumptions underlying their models and set aside somewhat higher contingency resources -- reserves or capital -- to cover the losses,'' Greenspan said.
While Greenspan has warned of stock risks before, most famously in his "irrational exuberance" speech of 1996, Charles Reinhard, chief market strategist at ABN Amro, said things are different this time.
"This is very different, because the equity market is actually about 28 percent overvalued compared to our models right now," Reinhard said.
Separately, the Federal Reserve said industrial production fell 0.3 percent in September. Industrial capacity, meanwhile, dropped to 80.3 percent in September from 80.7 percent during August. The report had no apparent market effect.
Dollar weaker
The dollar, already hard-hit by Greenspan's comments, continued to fall after the strong PPI report.
Just before 3:15 p.m. ET, the U.S. currency slipped to 105.39 yen from 107.82 Thursday, a 1.88 percent drop in the dollar's value.
It cost $1.0885 to buy a euro, up from $1.0777 Thursday, a 1.02 percent fall in the dollar's value.
Both the Greenspan comments and the strong PPI are bad for the dollar as investors, wary about stock market weakness, move out of dollar-denominated securities.
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