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Spokane, Washington  Est. May 19, 1883

Bonds Rebound From Budget Veto Emergency Action Taken To Avoid Default

Associated Press

Emergency government action to avoid defaulting on more than $100 billion in federal debt triggered rebounds in U.S. financial markets Monday.

The bond and stock markets initially dropped after President Clinton vetoed a bill raising the government’s borrowing ceiling. The veto aroused fears the government would miss payments on $102 billion in interest and principal due Wednesday and Thursday.

But the markets reversed course when the Treasury Department immediately disclosed plans to effectively expand its borrowing authority temporarily by drawing on two huge governmentrun retirement funds.

“There is a general relief that the Treasury is going to be paying principal and interest as planned,” said Vic Thompson, who oversees $80 billion of fixed-income securities at Boston’s State Street Global Advisors. “One of the few things standing in the way of the market has been, at least temporarily, removed.”

The price of the government’s benchmark 30-year bond, down nearly 1/2 point in early trading, was up 3/4 point, or $7.50 per $1,000 in face value, by late afternoon. Its yield, which moves in the opposite direction, was down to 6.27 percent from 6.33 percent late Friday.

“Once (investors) got the thought there was no immediate threat of a default, that brought the bid back to the market,” said Jim Kenney, head government securities trader at Prudential Securities Inc.

The stock market, which was influenced by a flurry of corporate merger actions, lagged the bond-market rebound. The Dow Jones industrial average, down in early trading, closed up 2.53 to a record 4,872.90. But some indexes were lower.

The dollar surged against the Japanese yen, rising more than 2 yen before retreating somewhat to fetch a closing 101.90 yen, up about 1 yen. It was mixed against other foreign currencies.

Even though the Treasury Department’s measures are temporary, most financial market investors still think there’s only a slim chance of a U.S. government default on its debt. But players are worried about the budget standoff’s short-term disruptive impact on the $4.9 trillion Treasury market, and in other markets that base their interest rates on U.S. government securities.

The stalemate already has resulted in postponement of the Treasury’s plans for issuing new debt this month. That means a variety of debt issues, from three-month bills to 10-year notes.

Over the long haul, most experts say the budget battle could be a positive, if the result is progress toward reducing the nation’s debt.

Indeed, once the confrontation is over, many bond investors seem hopeful that significant action will have been taken to shrink the deficit between income and outgo that has plagued the government’s status as a borrower for more than two decades.

“When all is said and done, a legitimate ‘deal’ is expected,” says Jeff Thredgold, chief business economist at the bank holding company Keycorp.

Meanwhile, the Treasury will take what Treasury Secretary Robert Rubin called “extraordinary measures” to avoid defaulting on government securities.

Over the next nine days, the Treasury will auction $136.95 billion in bills and notes to stay below the existing $4.9 trillion debt ceiling, Rubin said.

“These auctions will raise sufficient cash to enable Treasury to pay approximately $102 billion of principal and interest on outstanding debt coming due Nov. 15 and 16 and to discharge other governmental obligations,” the Treasury said in a prepared statement.

The statement said a final decision will be made late today about whether it will first convert into cash some of the Treasury security holdings in two government-employee funds.

This process, known as “disinvestment,” would be done if President Clinton and Republican leaders in Congress don’t reach a last-minute compromise on a temporary increase in the debt limit.