News that the economy added more than one-quarter million jobs last month triggered a powerful sell-off in the Treasury market Friday, sending bond prices into a tailspin.
The newly gloomy mood in bonds spread to other financial markets, weakening U.S. stock prices and the dollar. Behind the sell-off were renewed fears that the Federal Reserve Board would act to contain inflation arising from the employment strength by pushing up interest rates as early as Aug. 16.The price of the Treasury's main 30-year bond plummeted 1 13/32 points, or $14.06 per $1,000 in face value. Its yield, which moves in the opposite direction, jumped to 7.54 percent from 7.40 percent late Thursday.
The market's shortest-term maturities suffered even sharper setbacks, with yields on six- and one-year Treasury bills jumping about one-fifth percentage point.
Reaction was swift to the Labor Department's morning report that the economy created 259,000 new jobs in July, about 60,000 more than consensus forecasts and in excess of even the highest expectations.
The price of the 30-year bond immediately plunged nearly 1 point, reflecting a swift reversal in sentiment from recent hopes that economic growth had slowed markedly in the second half of 1994.
In recent weeks, reports of slower sales of goods ranging from houses to cars prompted wide speculation that the economy had cooled from its robust pace of late last year.
The reports had dampened expectations of an imminent hike in interest rates and contributed to a modest rally in Treasury bonds, which tend to grow in value during periods of stable rates.
But the July job growth reported Friday was viewed as likely to prompt the Federal Reserve to boost the federal funds rate - the interest on overnight loans between banks - by at least one-quarter percentage point in order to contain inflation pressures arising from a strong economy. The hike is widely expected by the Fed's next policymaking meeting on Aug. 16.
Bond rates move in anticipation of such hikes because of the need to offer competitive returns to investors.
"The market was hoping for a report that was soft enough that it made it clear the Fed didn't have to tighten monetary policy further," said William Dudley, senior economist at Goldman, Sachs & Co.
"This was strong enough to call into question that the economy was slowing," he said.
Dudley said the market's reaction was amplified by nervousness over a wave of fresh supply next week, when the Treasury undertakes it semiannual auction of roughly $40 billion in new three-, 10- and 30-year bonds.
Prices of short-term Treasuries tumbled 15/32 point to 5/8 point and intermediate maturities fell 7/8 point to 1 1/8 points, the financial information service Telerate Inc. reported.
The Lehman Brothers Daily Treasury Bond Index, reflecting price movements on bonds with maturities of a year or longer, fell 10.03 to 1,213.19.
Yields on three-month Treasury bills soared to 4.56 percent as the discount shot up .13 percentage point to 4.46 percent. Six-month yields jumped to 5.08 percent as the discount soared .19 point to 4.90 percent. One-year yields went up to 5.56 percent as the discount soared .21 point to 5.28 percent.
Yields are the interest bonds pay by maturity, while the discount is the interest at which they are sold.