Treasury prices plunged more than a point yesterday as the continued deterioration in the dollar undermined morale in the financial markets.
Late in the day, the 30-year bond was off 1 1/8 points and yielded 7.44%. Intermediate prices fell even more, with the 10-year note off 1 1/4 points to yield 6.68%.
Late in the day, the dollar was quoted at 1.4010 marks, down from 1.4300 Friday, and just slightly above today's low of 1.3990, even though central banks undertook two rounds of dollar purchases.
"The markets have treated the central banks with outright disdain," said Ward McCarthy, a managing director at Stone & McCarthy Research Associates in Princeton, N.J.
The dollar's decline battered the stock market as well as the bond market. The Dow Jones industrial average closed 25.93 points lower at 3,228.17, after declining 50 points on Friday.
"The market was swept with a crisis of confidence in just the last couple of days," Mr. McCarthy said.
He added that recent events were disturbingly similar to what happened in 1987, when a drop in the dollar led to lower bond prices and eventually a blow-up in the stock market.
"The mistakes of 1987 are being repeated, and that's contributing to the recent market chaos," Mr. McCarthy said.
In 1987, administration officials talked the dollar down in hopes of boosting exports and whittling down the huge Japanese trade surplus, while this time, the administration would prefer a lower dollar in hopes of exporting enough to get the economy back on its feet, he said.
But Mr. McCarthy said it would take more than a cheaper dollar to offset the Bundesbank's tight monetary policy and its flattening effects on European economies.
"The Bundesbank's policy is just squeezing the life out of global economic growth and bashing the dollar just isn't going to help," he said.
The dollar's weakness raises a number of fears in the Treasury market.
For one thing, it has convinced many Treasury traders the Fed will put easing plans on hold for now, since another cut in short-term rates would certainly weaken the dollar further. That is bad news for the short end, where many traders had already priced in the next Fed ease.
At the same time, traders at the long end worry the dollar's slide will scare away foreign investors and ignite inflation by raising the prices of imported goods.
But economists and even some traders said the market's worries about the impact of the lower dollar seemed exaggerated.
"I don't think it totally precludes them from easing," a note trader said. "It just means they need a stronger argument to ease."
Charles Lieberman, a managing director at Chemical Securities, said he had not expected any change in policy until after the August jobs report comes out on Sept. 4.
"Two weeks is a long time and if the employment report is quite weak, then I think the Fed will ease monetary policy, especially if the dollar has begun to find a firmer footing," he said.
Mr. McCarthy questioned whether inflation was really a worry right now.
"Conventional wisdom says with the dollar so weak, you'll get a resurgence of inflation," Mr. McCarthy said. "I think that's ridiculous in the current environment. Deflation is the enemy, not inflation."
"Short-term, what is a threat is that overseas accounts may dump Treasuries because of the currency losses they could suffer," he added.
Traders said the market's over-bought condition was another factor in yesterday's sell-off.
The intermediate sector of the curve fared the worst, with seven-and 10-year notes both off more than a point.
"It's the most expensive part of the curve and it's taking the biggest shellacking," a Treasury trader said. He estimated that intermediate yields could rise another 10 to 15 basis points.
The September bond futures contract closed 31/32 lower at 104 23/32.
In the cash market, the 7 1/4% 30-year bond was 1 3/32 lower, at 97 18/32-97 22/32, to yield 7.44%.
The 6 3/8% 10-year note fell 1 7/32, to 97 21/32-97 25/32, to yield 6.68%.
The three-year 4 5/8% note was down 7/32, at 99 15/32-99 17/32, to yield 4.79%.
In when-issued trading, the two-year note to be sold today was yielding 4.28% and the five-year note to be auctioned tomorrow was bid at 5.73%.
Rates on Treasury bills were higher, with the three-month bill up six basis points at 3.14%, the six-month bill up eight basis points at 3.26%, and the year bill 11 basis points higher at 3.44%.
Treasury Market Yields
Monday Week Week
3-Month Bill 3.19 3.11 3.25
6-Month Bill 3.33 3.24 3.35
1-Year Bill 3.56 3.36 3.57
2-Year Note 4.21 4.06 4.22
3-Year Note 4.79 4.62 4.66
5-Year Note 5.70 5.49 5.63
7-Year Note 6.23 6.03 6.15
10-Year Note 6.68 6.52 6.66
15-Year Bond 7.07 6.92 7.03
30-Year Bond 7.44 7.35 7.51
Source: Cantor, Fitzgerald/Telerate