NewsWire--SEPTEMBER 10, 1996
TOPIC: Interest
Rates
SOURCE: "Bonds
Slide as Investors Brace for Jobs Report," Wall Street
Journal, C15.
SYNOPSIS:
Bond yields rose and bond prices fell on Thursday, September 5
as the consensus developed that employment numbers due out on
Friday, September 6 would indicate a drop in unemployment. While
this would appear to be good news for the economy, it also suggests
the potential for inflation and gives the Federal Reserve more
reason to increase interest rates at their upcoming meeting.
The article stresses the important role of inflationary expectations
in setting interest rates and bond prices. The accompanying chart
illustrates the current upward sloping yield curve and the general
rise in interest rates during the last four weeks. A table provides
comparative yields on a variety of bond classes. This is useful
for examination of the default risk premium (DRP, pp. 126, 128).
[The current unemployment statistic, released on Friday morning,
was 5.1%, even lower than consensus expectations. As a result,
bond prices fell even more during Friday's trading.]
DISCUSSION QUESTIONS:
1. Explain why investors and traders are
so interested in the monthly employment report. Why is this information
particularly interesting to the bond market?
2. Describe the shape and recent movement
of the Treasury Yield Curve. Which term structure theories are
consistent with this shape?
3. Use the data in the Yield Comparison
table to determine the default risk premiums (DRPs) between Treasury
issues and (i) High Quality corporate issues and (ii) Medium Quality
corporate issues. Do this for both the 1-110 year maturities
and the 10+ year maturities. Briefly discuss your findings.
Return to news index
|
