Treasuries posted small losses yesterday as the market consolidated after five consecutive sessions of gains.
Activity was held to a minimum as virtually no news emerged to influence trading. The 30-year bond ended down more than 1/4 of a point, to yield 7.25%.
"The market simply took a breather after a decent performance in recent days," said Elias Bikhazi, money market economist at Deutsche Bank Securities Corp. He noted that the bond market remains mired in pre-summer doldrums ahead of Friday's producer price index report.
Treasuries got off to a weak start yesterday, pressured by continued volatility in the Japanese and European bond markets. But the market stabilized through the morning as investors pulled cash out of those markets and invested the funds in Treasuries.
U.S. government securities continued to benefit from improved sentiment among investors and traders. After the recent rally, players have grown more confident that the market has established a near-term bottom. For example, traders are reporting healthy two-way flow in the market as some retail accounts take profits and others line up to purchase the securities.
Factors that analysts see as providing support for bonds are: the stable U.S. dollar; 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.
A New York Times report Monday asserting that at least three Federal Reserve Board governors believe inflation is under control and that economic growth is slowing has proved to be another source of support for the market.
The story underscored the fact that participants are reevaluating their market positions now that the Fed seems to be waiting for the July meeting of the Federal Open Market Committee before tightening credit any further, players said.
"We have an economy that is gradually improving but not booming, and the market is holding in well," said Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp.
Overall, bond traders are becoming more optimistic about 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 strength 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 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 greater demand for U.S. government bonds and other dollar-denominated investments.
Time 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.
Still, participants generally agree that the lack of buy-side demand recently for government-backed paper -- both in the primary and secondary markets -- is weighing on the outlook for Treasuries.
Analysts said larger accounts are looking for a more stable interest rate environment and assurances that the economy is not overheating before entering the market.
The next piece of potentially market-moving news is the Labor Department's PPI release. Expectations center on moderate increases in the PPI of 0.2% overall and 0.3% excluding food and energy. In April, the PPI fell 0.1% overall while it edged up 0.1% with food and energy factored in.
In futures, the June bond contract ended down 14/32 at 105.30.
In the cash markets, the 5 7/8% two-year note was quoted late yesterday unchanged at 100.06-100.07 to yield 5.75%. The 6 3/4% five-year note ended down 2/32 at 100.30-101.00 to yield 6.51%. The 7 1/4% 10-year note was down 6/32 at 102.03-102.07 to yield 6.93%, and the 6 1/4% 30-year bond was down 11/32 at 87.25-87.29 to yield 7.25%.
The three-month Treasury bill was down two basis points at 4.21%. The six-month bill was down two basis points at 4.65%, and the year bill was up two basis points at 5.13%.
The primary market for corporate debt had another active day as two large issues were priced.
Underwriters led by CS First Boston priced a $500 million two-part issue of notes for J.C. Penney Co.
Corporate Securities
The first tranche, consisting of $225 million of notes due June 15, 2004, was priced as 7 3/8s at 99.48 to yield 7.45%. The tranche was priced 50 basis points above comparable Treasuries.
Both tranches are noncallable and are rated A2 by Moody's Investors Service and A-plus by Standard & Poor's Corp.
A $400 million two-tranche issue of Western Atlas Inc. debt was priced through underwriters led by Merrill Lynch & Co.
The first tranche, consisting of $250 million of notes due June 15, 2004, was priced as 7 7/8s at 99.829 to yield 7.90%. The tranche was priced 95 basis points above comparable Treasuries.
The second tranche, consisting of $150 million of debentures due June 15, 2004, was priced as 8.55s at 99.571 to yield 8.59%. The tranche was priced 125 basis points above comparable Treasuries.
Both tranches are noncallable and rated Baa3 by Moody's and BBB by Standard & Poor's.
In the secondary market, spreads of investment grade issues narrowed by 1/8 to 1/4 of a point, while high-yield issues generally ended unchanged.
Rating News
Moody's revised the near-term rating outlook for International Business Machines Corp. and its financially supported subsidiaries to stable from negative.
About $24 billion in debt is affected by the revised outlook.
Driving the change in outlook, Moody's said, is IBM's stronger operating results and debt reduction that indicate that management's turn-around efforts have begun to pay off.
Notwithstanding IBM's progress in achieving short-term goals, Moody's cautioned that it still views the company as a credit in transition. IBM's ratings could be pressured over the itermeediate termm by the impact of intesen industry competition, short4ened product life cycles, and the company's continuing restructing efforts, the rating agency said.
Moody's said that IBM and its financially supported subsidiaries are now rated Prime-2 for short-term debt, A3 for senior unsecured long-term term debt, and Baal for preferred stock.
