Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, September 4, 1993 TAG: 9309040023
SECTION: BUSINESS PAGE: A-4 EDITION: METRO
SOURCE: Associated Press
DATELINE: NEW YORK LENGTH: Medium
Bond investors saw signs of sluggish economic growth as an indication that inflation will remain tame - a plus for bonds.
By the end of an abbreviated pre-holiday trading session, the price of the Treasury's 30-year issue had rocketed up 1] points, or $13.75 per $1,000 in face value. Its yield, which moves in the opposite direction, plunged to 5.94 percent from 6.04 percent late Thursday. Yields on 10-year Treasury notes plunged to 5.29 percent, the lowest level on any 10-year security since 1967.
Falling rates have made interest-sensitive investments - like bonds - less rewarding, which has steered money into stocks and helped sustain this summer's advance on Wall Street.
This milestone could have broad implications for everyday borrowers and investors. Should homeowners rush to refinance their mortgages? Will investors see their interest income decline?
Some questions and answers:
\ Q: Why would a weak employment report push interest rates lower, and what kind of opportunity does this present for homeowners seeking to refinance their old mortgages?
A: Yields in the Treasury market, where the government sells securities to investors to finance the federal deficit, tend to decline in reaction to news of anemic economic growth.
When investors heard Friday's reports, they reasoned that it reduced the likelihood that the Federal Reserve would raise interest rates, a move that can further stifle economic growth.
That view boosted demand for already-sold Treasury securities, whose value can be hurt by higher interest rates elsewhere.
The market for Treasury securities, where traders buy and sell bonds in the hope of profiting from price movements, may seem far removed from typical Americans. But, economists say, consumers could expect to see the impact of Friday's yield decline as early as next week.
For example, interest on 30-year, fixed-rate mortgages could fall to around 6.85 percent by next week, according to Paul Havemann, vice president at HSH Associates, in Butler, N.J., a publisher of mortgage information. They are now at 6.93 percent.
That would make it even more alluring for homeowners considering prepaying their old mortgages with lower-interest loans.
\ Q: Other than a mortgage, how can I save money on loans?
A: One way is to take out a long-term bank loan at today's low rates and use the proceeds to pay off credit cards, which can charge interest rates of 15 percent or even higher.
\ Q: What about income from savings and other investments where yields are based on interest rate? Could that decline?
A: Yes. Interest rates on certificates of deposit could fall as early as Tuesday, according to James Fitzgibbons, chief investment strategist at Tokai Bank. Rates on a two-year CD, for example, could drop to 3.75 percent from their current level of about 3.85 percent.
\ Q: Already many investments are earning low yields that barely keep pace with inflation. Should savers look for better returns elsewhere?
A: It depends on how much risk you can afford.
Millions of Americans this year have ploughed their money into mutual funds in search of higher yields - particularly bond funds - and the new drop in yields is expected to accelerate that trend.
The funds offer relatively attractive yields. But if the trend toward lower interest rates reverses and rates start heading higher, the value of these funds could fall and investors will lose money.
If rates on newly sold Treasury securities rise by 1 percentage point, an investor in a bond mutual fund could lose 5 to 10 percent of the principal, Fitzgibbons said.
by CNB