NEW YORK -- Interest rates surged yesterday, with the yiel on the 30-year Treasury bond rising above 7 percent.
Although 7 percent is not an important number economically, it can be seen as the psychological threshold between a market rally and a sell-off, especially given new concerns about inflation, worries about the fate of President Clinton's economic program and guessing over whether the Federal Reserve Board will raise short-term interest rates to combat renewed inflation.
Inflationary concerns were increased by a sharp rise in the price of gold, which jumped $8 an ounce yesterday and is up $40
"The name of the game today was panic with a capital P," said Jay Goldinger, a bond trader at Capital Insight in Los Angeles. "The problem with the market is that the gold rally has hit the market hard, and retail buyers are scared."
A separate jump in the Commodity Research Bureau index of commodities, another inflation barometer, added to the selling in the bond market, forcing yields higher.
Treasury prices also came under pressure from the hangover from last week's $35 billion Treasury auction. The quarterly auction was disrupted by disturbing reports on April inflation and left dealers with debt securities they might not have wanted. One way to discard these securities was to cut prices.
In trading yesterday, the price of the 7 1/8 percent 30-year bond maturing in February 2023 was off 22/32, to 101 11/32, as the yield jumped to 7.02 percent, from 6.96 percent.
Prices fell and yields rose on Treasury notes as well, but not as sharply.
"I think the markets are very emotional," said William Dudley, an economist at Goldman, Sachs & Co. He said the bond market had overreacted to the surprisingly sharp increase in both consumer and producer prices for April and the speculation that followed on whether the Federal Reserve, instead of easing interest rates to help a sluggish economy, might have to raise them.
The Fed's policy-making committee met yesterday in Washington and added to the apprehension.
"I think we go another month, and then we get better inflation news and the fear of Fed tightening will go away," Mr. Dudley said. He said Goldman, Sachs still thinks the economy is weak, that there are no fundamental inflationary pressures and that the yield on the long bond will fall below 6.5 percent.
Mr. Goldinger also said the market is overreacting. "There is a fear of inflation, but it's mostly an anticipatory fear. The economy is not different than it was a month ago.
"I think yields are going to steady here," he added, "There is no question that sentiment is bearish. Can yields go to 7.10 percent? Sure they can. But you can't get carried away, because the economic fundamentals have not changed."
Mr. Goldinger's remarks reflect a consensus that the bond market rally of 1993 may be over for now but that if it is, it does not mean that interest rates are going to rise much.
A key reason for this view is that the economy is weak -- it grew at a 1.8 percent annual rate in the first quarter -- and will not create inflationary pressures. The other factor is that even if inflation exceeds last year's 2.9 percent rise, analysts do not expect it to be much higher.