A sharp increase in commodities prices weighed on the Treasury market yesterday, knocking prices sharply lower across the board.
The 30-year bond closed down 1 3/8 points Monday, to yield 7.43%.
The Commodity Research Bureau's index of commodities prices rose more than 4 1/2 points yesterday on higher agriculture and precious metals prices. The CRB closed up 4.67% to 238.36.
Players fear the persistent increases in this important inflation indicator could be an omen of price pressures in the national economy.
Yesterday, surging commodity prices put added pressure on a market that was already weak. Traders began pushing prices lower early in the session, nervous that investors will not have much interest in this week's auctions.
Short and intermediate securities were hit the hardest, with that section of the market also facing a flood of new issuance this week.
"People are having a hard time dealing with higher commodities prices in a week when new supply is hitting the market," said Donald Fine, chief market analyst at Chase Securities Inc.
The Treasury Department will sell $17 billion of two-year notes Tuesday and $11 billion of five-year notes Wednesday.
The market's ability to absorb supply will set the tone for trading in the near term as dealers gauge retail interest for government securities and their own aptitude for distributing the paper, market observers said.
The five-year auction, players agree, will be critical to the market's ability to stabilize. Bond investors remember all too well the difficulty the market has had in absorbing new coupon securities since the Federal Reserve began tightening monetary policy in February, they said.
In terms of the five-year issue, primary dealers worry that the bond market's rally last week may have pushed short-term Treasury yields to unattractive levels.
"People seem to think the market will tank if the five-year auction doesn't go well, and that has created selling pressure in the center of the yield curve," said one head of fixed-income at a New York primary dealership.
Reducing the chances for solid bidding for fresh supply this week has been the persistent increase in commodities prices. Though few market analysts see recent increases in the CRB index and the Journal of Commerce's measure of commodities prices as harbingers of mushrooming inflation, bond investors say they will continue to monitor movements in these important inflation indicators.
"It tells you the best of the inflation news is over," said Michael Strauss, chief economist at Yamaichi International America Inc.
In futures, the June bond contract ended down more than a point at 103.20.
In the cash markets, the 5 1/2% two-year note was quoted late Monday down 9/32 at 99.08-99.09 to yield 5.89%. The 6 1/2% five-year note ended down 21/32 at 98.31-99.01 to yield 6.73%. The 7 1/4% 10-year note was down more than 1 1/4 points at 100.12-100.16 to yield 7.17%, and the 6 1/4% 30-year bond was down 1 1/4 points at 85.27-85.31 to yield 7.43%.
The three-month Treasury bill was up two basis points at 4.25%. The six-month bill was up seven basis points at 4.77%, and the year bill was up 12 basis points at 5.21%.
Corporate Securities
U.S. corporate bond prices generally weakened in thin activity yesterday due at least partly to worries about oversupply in the markets.
Traders said many participants were sidelined ahead of U.S. Treasury auctions scheduled for this week. In addition, an article in the Wall Street Journal today said the corporate market may have trouble absorbing a glut of high-yield issues.
In the primary market, a $100 million issue of K-III Communications Corp. senior notes, due June 1, 2004, was priced at par to yield 10.25%.
The issue is noncallable for five years and is rated Ba3 by Moody's Investors Service and BB-Minus by Standard & Poor's Corp. The issue will be sold through underwriters led by Merrill Lynch & Co. On a fully-diluted basis, approximately 88.4% of K-III Communication's stock is owned by Kohlberg Kravis Roberts & Co., a New York investment company.
Market sources said the following issues are expected to be priced sometime this week: Echostar Communications is expected to issue $335 million of debt due 2004 through Donaldson, Lufkin & Jenrette Securities Corp. Kindercare Learning Centers is expected to issue $150 million of senior notes due 2004 via Merrill Lynch.
In the secondary market for corporate securities, spreads of investment grade issues widened by a 1/2 to a point, while high-yield issues generally ended unchanged.
Rating News
Standard & Poor's said it affirmed its ratings of Delta Air Lines Inc. as follows: BB, senior debt; BB-Plus, equipment trust certificates; and B-plus, subordinated debt and preferred stock.
Standard & Poor's revised Delta's outlook to positive from stable, reflecting potential benefits from the company's recently announced cost-cutting program.
About $7.4 billion of securities is affected, the rating agency said.
Standard & Poor's said Delta's Leadership 7.5 program is the most ambitious cost-cutting initiative yet attempted in the U.S. airline industry . While the company will be hard pressed to reach its full goal of $2 billion [a 20% reduction] in annualized savings by mid-1997, Delta will probably achieve significant expense reductions, Standard & Poor's said.
Delta brings several advantages to this initiative: its largely non-union work force, which allows flexibility to implement productivity related changes; its historically good labor relations; and growing realization by management and labor industry-wide that low-cost competition is a permanent fact of life in the domestic market, Standard & Poor's said.
Delta's planned initiatives may be grouped into three categories:
* those that management can, in theory, impose independently - about 60% of the total targeted savings;
* those that require a negotiated agreement with either the pilots' union or, as a fallback, with another airlines to form a short haul joint venture - about 15% of the total;
* those that require cooperation or acceptance by other airlines [marketing agreements], travel agencies [revised commissions], or passengers [reduced service on some flights] - together about 25% of the total.
In a report, Standard and Poor's said the number of BBB-rated health care providers grew 15% faster than any other rating category over the last decade.
The growth was due to increased investor acceptance of BBB new issues, the ability of BBB category issues to trade more favorably than unrated paper, as well as the health care industry's deteriorating credit quality, Standard & Poor's said.
In 1993, Standard and Poor's said it assigned the BBB category to more than 37% of health care providers rated by the agency.
There is great variety in the BBB category, so that credit quality varies much more widely than in other investment grades, Standard & Poor's said. Nevertheless, operating margins are stronger and liquidity levels are significantly higher today than in 1990, reflecting a more challenging environment.
The BBB facilities are smaller, both in terms of admissions or revenue base, and have a greater dependence on Medicare and Medicaid payments than the rest of the investment-grade category. Treasury Market Yields Prev. Prev. Monday Week Month 3-Month Bill 4.25 4.24 3.836-Month Bill 4.77 4.80 4.341-Year Bill 5.21 5.35 4.862-Year Note 5.89 5.98 5.573-Year Note 6.26 6.35 5.935-Year Note 6.73 6.82 6.467-Year Note 6.79 6.88 6.5410-Year Note 7.17 7.22 6.8530-Year Bond 7.43 7.44 7.14
