AP Business Writer
CHICAGO (AP) -- U.S. financial markets began their gradual return to work following a two-day shutdown Thursday, with a sharp increase in bond prices reflecting investors' uneasiness about a worsened economic outlook.
Trading was subdued and relatively light as futures activity resumed on the Chicago Board of Trade and Chicago Mercantile Exchange, where one broker called it "hollow trading" in the absence of any trading on still-closed New York markets.
The jump in bond prices indicated that investors, nervous about the economy even before Tuesday's terrorist attacks in New York and Washington, are seeking safe haven investments. But the lack of volatility reflected increasing hopes that the Federal Reserve will lower rates for the eighth time this year.
"This is going to be a test," said Gary Thayer, chief economist for the A.G. Edwards and Sons stock brokerage, adding that the rise in bond prices was to be expected under the circumstances
"We still have a lot of uncertainties out there, and we're probably going to see some very tentative trade for a while," he said. "I don't think anyone's going to want to make big commitments."
The atmosphere at the Chicago Merc was subdued but trading proceeded normally following an early flurry of activity when traders drove the eurodollar and most foreign currencies higher against the dollar.
Many traders tucked small American flags in their jacket pockets as they returned to the trading floor. Security guards lined up at the doors of the building and required those entering to show IDs or sign in as visitors.
The market observed a moment of silence at noon Eastern time in memory of the victims of the attack. The trading floor's usual din became a hush, and traders' hands, normally engaged in a flurry of hand signals, were stilled.
Stock markets are still closed until at least Friday, but the resumption of electronic and open outcry trading on Chicago's venerable commodities exchanges came as a welcome sight to a financial community paralyzed for two days following the attacks on the World Trade Center and the Pentagon.
"It's very different today," said William Dalenberg, who trades euro-dollars at the Merc. "Everyone's still grieving. ... Everyone's very cautious, I think, about getting into the market."
The Chicago exchanges resumed most of their regular trading in commodities, silver, gold, and some financial instruments related to foreign currencies and interest rates. Trading in U.S. stock-related products remained closed along with the New York Stock Exchange and Nasdaq and other stock markets.
U.S. government bonds, which also resumed trading Thursday among bond dealers and their customers, surged. The Federal Reserve and other central banks made massive amounts of cash available to the financial system in a move to restore confidence in investors.
The spike in short-term bonds also suggested that investors believed the Fed would move quickly to ease short-term interest rates in order to further reassure investors and prop up lenders at a time when massive reconstruction efforts lay ahead. The Fed has already lowered interest rates seven times this year to stimulate the economy.
"In some ways that's good news because historically a steep yield curve typically foreshadows stronger economic growth in the future, mainly because the profitability of lenders increases because they borrow short term and lend long-term," said David M. Jones, chief economist for Aubrey G. Lanston & Co., a government bond dealing firm.
The Treasury's two-year note was more than a point to yield 2.95 percent, well below its previous yield of 3.49 percent late Monday, the last day of regular trading before the attacks occurred. Long-term Treasurys rose but by a lesser degree. The 10-year note was up nearly 1 3/4 point to yield 4.64 percent, down from 4.84 percent Monday.
On the CBOT, grain and soybean contracts were higher.
Corporate bonds rose to a far lesser degree, signaling that investors fear that companies may have a harder time making profits amid a difficult economic environment, said David Lindsay, bond portfolio manager at Fleet Investment Advisors in Boston.
"The flight to quality trading appears to be going on," Linsday said. "Investors are afraid that all of this will make the economy weaker and more difficult for companies."
The Chicago Board Options Exchange and Chicago Stock Exchange remained closed Thursday in conjunction with other equity markets. Like the New York markets, they plan to open no later than Monday and could resume trading on Friday.