A sharp decline in the price of oil from the 10-year high reached on Thursday snapped a three-session losing streak in the bond market. Treasury bond prices rose slightly, retracing some of the losses incurred earlier in the week as oil prices rose. Bond prices fall when oil prices rise because of the potential for higher energy prices to lead to higher inflation throughout the economy.
Stock-market weakness and strength in the dollar were also factors in the rally, bond market analysts said. There was no economic news.
Morgan Stanley Dean Witter
economist Bill Sullivan said, it's common to see the bond market reverse whatever has been the trend for the week on Friday, as traders close out money-making positions.
The benchmark 10-year Treasury note ended up 4/32 at 100 3/32, dropping its yield 1.7 basis points to 5.737%. Shorter-maturity yields fell by similar amounts.
The 30-year Treasury bond gained 7/32 to 107 26/32, lowering its yield 1.5 basis points to 5.700%. At the
Chicago Board of Trade
, the December
Treasury futures contract added 9/32 to 100 6/32.
Amid an economic data drought that will last through the first half of next week, oil has taken center stage in the bond market. Its rise to the highest levels since the Gulf War has bond traders debating whether they should focus on its potential to lead to higher inflation, or on the prospect for expensive oil to stall the economy, an outcome that would favor bonds. After all, while oil is just off a 10-year high, Treasury yields are just off their lowest levels of the year.
Even though bond prices have fallen on days when oil went up, and went up today as oil fell, the relatively small size of the moves in bond prices reflects ambivalence about oil,
economist John Youngdahl said. "The fact that the market does better on weakness and not particularly badly on strength suggests there's not much call for a sharp decline in bond prices for the time being," he said.
Bond investors seem willing to tolerate high oil prices until they see a marked change for the worse in inflation, Youngdahl said. Which could happen as soon as next week, which will bring the August editions of the
Consumer Price Indices.
While the annual growth rates for the PPI and CPI have risen sharply over the last year due to rising energy prices, the annual growth rates for the core PPI and core CPI, which exclude factor energy and food, have held fairly steady.
"Everybody's comfortable because it hasn't leaked through to the core," Morgan Stanley Dean Witter's Sullivan said.
The bond market also takes comfort from oil's status as a "geopolitical commodity," Sullivan said. High energy prices have the potential to cripple the global economy, an outcome that in the long run would hurt oil-producing countries. As a result, "forces will come to bear to push prices lower over time."
At the same time, Sullivan said, "you can't say it doesn't have some negative effects. It's a cost of doing business. At some point it's going to leak through to other segments of the economy."
Currency and Commodities
The dollar rose against the yen and the euro. It lately was worth 106.10 yen, up from 105.12. The euro was worth $0.8664, down from $0.8718. For more on currencies, see
Crude oil for October delivery at the
New York Mercantile Exchange
slumped to $33.60 from $35.39.
Bridge Commodity Research Bureau Index
fell to 229.78 from 230.21.
Gold for December delivery at the
fell to $276.80 an ounce from $277.70.