Bond traders are coming to work this morning with a cheerier view of the market's prospects now that the economy is beginning to bear the mark of slower growth.
The notion that the pace of economic growth may moderate in the months ahead gained credence last week as reports of slower activity came in, analysts said.
Three examples came from the Commerce Department, which reported its index of leading indicators was unchanged. Consumer spending spending slipped 0.1%, and the nation's factories received fewer new orders in April.
Aside from developments in the economy, fixed-income investors are encouraged by renewed strength in the U.S. dollar. This could result in better demand for U.S. government bonds and other dollar-denominated investments.
"There have been some new developments that have improved the market's prospects, and we are seeing genuine demand for Treasuries," said William Sullivan, director of financial markets research at Dean Witter Reynolds Inc.
Among the factors Sullivan sees as providing support for bonds are: renewed retail interest as portfolios switch out of European bond markets into Treasuries; the improved technical state of the government bond market; and central banks' buying of Treasuries, particularly by the Federal Reserve.
Time, said Sullivan, is also on the bond market's side. This week offers few hurdles for the market in the way of economic reports or note auctions. "The market has turned in a very impressive performance so far in June, and that should continue because there aren't any real challenges this week," he said.
Market players were heartened by the Treasury market's solid performance Friday, weathering the effects of a volatile May employment report. With the jobs report out of the way, players are turning their attention to this week's producer price report.
Treasury market prices ended higher across the board Friday, after sharp swings in the wake of the May employment report.
The 30-year bond closed up more than 3/4 of a point, to yield 7.27%.
Healthy retail buying was the primary force behind the bond market's ability to bounce back from sharp declines. Widespread talk that the Federal Reserve was buying intermediate Treasuries under the table also boosted the market.
The Labor Department reported Friday morning that 191,000 jobs were added to the nation's payrolls in May, a smaller increase than many economists had expected. But the smaller-than-expected increase in May nonfarm jobs was accompanied by a sharp upward revision to the April increase.
Meanwhile, the unemployment rate unexpectedly plunged to 6.0% in May from 6.4%. Most analysts had predicted unemployment would hold steady or perhaps rise slightly. On the wage front, average hourly earnings jumped 6 cents in May to $11.11.
While the figures contained some disturbing elements, they were not decisive enough to change investors' near-term outlook.
The increase in hourly earnings raised some red flags, said Dean Witter's Sullivan, and provided one of the most compelling pieces of evidence yet of mounting wage pressures.
Still, traders said, retail accounts believe they have a window of opportunity in coming weeks for prices to stage a bear market rally.
"I expect the bond market to slowly improve from here," said Donald Fine, chief market analyst at Chase Securities Inc. "The economy is growing steadily, and there are still no significant signs of overheating or inflation."
In futures, the June bond contract ended up more than a point at 105.24.
In the cash markets, the 5 7/8% two-year note was quoted Late Friday up 4/32 at 100.01-100.02 to yield 5.84%. The 6 3/4% five-year note ended up 8/32 at 100.18-100.20 to yield 6.60%. The 7 1/4% 10-year note was up 18/32 at 101.25-101.29 to yield 6.98%, and the 6 1/4% 30-year bond was up 27/32 at 87.20-87.24 to yield 7.26%.
The three-month Treasury bill was unchanged at 4.21%. The six-month bill was down two basis points at 4.70%, and the year bill was down three basis points at 5.22%.
Corporate Securities
Standard & Poor's Corp. revised its ratings outlook on Pacific Telecom Inc. to stable from negative. The revision follows the Federal Communications Commission's order resolving the restructuring of the Alaska communications market.
In addition, Standard & Poor's affirmed its BBB-plus rating on Pacific Telecom's senior unsecured debt and A-2 commercial paper.
About $440 million of debt is outstanding, Standard & Poor's said.
Standard & Poor's said the FCC order, effective July 1, 1994, maintains revenues neutrality in the near-term and, therefore, should enable the company to maintain its current financial profile. The goals of the FCC order are to promote competition and cost efficiency, and maintain universal service in the Alaska interstate telephone market, the rating agency said.
The order terminates the joint services agreement, which subsidized Alascom's and Alaskan local exchange companies' interstate long-distance costs, between AT&T and Alascom effective Jan. 1, 1996. AT&T is required to provide interstate service at integrated rates to and from Alaska under the same terms and conditions applicable to AT&T's services in the lower 48 states. Essentially, AT&T is designated the carrier of last resort, Standard & Poor's said.
In addition, in order to offset any near-term impact on Alascom's intrastate rates resulting from a potential decreased usage of Alascom switches by AT&T, AT&T will be required to make two $75 million payments on Jan. 1, 1994, and Dec. 31, 1995, respectively, the rating agency said. Additionally, for a 2 1/2-year transition period subsequent to Jan. 1, 1996, AT&T must purchase a fixed dollar amount of service from Alascom.
After the Joint Services Agreement ends, Alascom can offer interstate tolls independently from AT&T under its own tariff with no obligation to charge AT&T's integrated rates. Alascom also must provide common carrier services to other inter-exchange carriers under tariffs that reflect the current 86% frozen allocator [86% of Alascom's costs are allocated to interstate rates].
Regarding the Bush, Alaska's most rural area, Alascom will continue to have a facilities-based monopoly. Other carriers must use Alascom's facilities to provide service to and from this area. The related access charges to the Bush will be tariffed separately, so that Alascom's costs, including the costs of the satellite, are borne by all interstate carriers. If Alascom no longer desires to serve as monopoly provided to the Bush and no other carriers are willing to assume Alascom's responsibilities, the FCC could require AT&T to provide service, Standard & Poor's said.
There were no deals priced Friday in the primary market for corporate securities.
In the secondary market for corporate securities, spreads of investment grade issues narrowed by 1/2 to 3/4 of a point, while-high-yield issues generally ended unchanged.
Treasury Market Yields Prev. Prev. Friday Week Month3-Month Bill 4.21 4.26 4.256-Month Bill 4.70 4.78 4.781-Year Bill 5.22 5.30 5.392-Year Note 5.84 5.95 6.113-Year Note 6.19 6.29 6.435-Year Note 6.60 6.71 6.957-Year Note 6.63 6.75 7.0110-Year Note 6.98 7.10 7.3430-Year Bond 7.26 7.38 7.53 Source: Cantor, Fitzgerald/Telerate
