The Treasury market ended lower yesterday, following the path of least resistance as concerns over a weak U.S. dollar and new supply put bondholders on the defensive.
The benchmark 30-year bond closed down more than 1/8 of a point, to yield 7.45%.
The dollar fell in overseas trading as speculators reacted to a report by the Conference Board that predicted the greenback could fall by 10% in the next 18 months. The report, coupled with a general distaste for U.S. currency among foreign investors, sent the dollar to 101.90 yen yesterday, down from 102.80 late Friday, and to 1.5995 German marks, down from 1.6105.
Concerns over the market's ability to absorb new Treasury supply was another force behind yesterday's modest price declines. The short end came under pressure early in the New York session as dealers began setting up for the upcoming monthly note auctions. The Treasury is selling $24 billion of bills and another $28 billion of notes this week.
"The big sell-off in the dollar overnight fueled some inflation concerns at the long end, and supply fears held the short end back," said Tony Crescenzi, head of fixed income at Miller, Tabak, Hirsch & Co.
Some traders said the dollar slippage and Conference Board forecasts suggested a rising inflationary environment, heightening fears that the Federal Reserve will raise short-term rates again soon.
Those fears were strengthened by reports that Bear Stearns & Co. is telling clients that the Fed will probably raise the federal funds rate again in early July and that a "neutral" fed funds rate is around 5%.
No fresh news arose to inspire trading, leaving players to follow movements in the currencies and commodities markets. Traders said activity so far has been dominated by speculative players. Meanwhile, retail accounts remained on the sidelines to avoid volatility.
Primary dealerships setting up for the auctions this week were the main force behind the market's poor performance at the short end, players said. Participants said dealers are placing pressure on short-dated Treasuries this week to make the short and intermediate sectors of the market more attractive to potential buyers.
"Dealers were unwilling to test the upside ahead of the action," Crescenzi said. "That gives you the impression that the auctions may be difficult."
A relentless drop in commodities prices prompted some bond investors to cover short positions yesterday, but the sporadic bouts of buying failed to boost prices.
The Commodity Research Bureau's index of 21 futures prices closed down 4.51 points to 234,87.
Michael Strauss, chief economist at Yamaichi International America Inc., said market players discounted the decline in commodities due to the magnitude of recent increases in the CRB index. Yesterday's drop merely retraces some of the recent gains, he said.
"The realities of the bond market outweighed the CRB because all we're doing is retracing the large increases we've seen recently," Strauss said.
Conference Board chief economist Gail Fosler yesterday released the results of a trend line analysis that projects a 10% decline in the dollar over the next 18 months. Published in the latest issue of Standard & Poor's CreditWeek, Fosler's report predicts that the dollar will fall below 1.50 German marks by the end of 1995.
In order for the dollar to appreciate to the 1.80-mark level, Fosler said real U.S. long-term rates would have to be two percentage points higher than German rates. That means that against the backdrop of current German inflation and interest rate levels, the U.S. Treasury's 10-year issue yield would have to exceed 8%, almost a full percentage point higher that it is now, she said.
The problem with such a scenario is one of sponsorship and the all too apparent lack of foreign demand for U.S. government and corporate securities. U.S. government and corporate securities. Without the help of funds flowing out of other markets into U.S. investments, fixed-income observers continue to argue that the bond market will have a difficult time recovering recent losses.
Treasury market prices weakened Friday as the dollar plunged two pfennigs in less than half an hour Friday in response to the Conference Board report. As the dollar sank against the German mark, government bond prices fell with it, traders said.
Fosler went on to say an apparent truce in U.S.-Japanese trade relations and recent stability in domestic financial markets give rise to a new round of dollar optimism. Yet she expects the dollar to sink versus the Japanese yen and stagnate against the German mark, suggesting that the greenback's strength is more myth than reality.
In futures, the September bond contract ended down 2/32 at 103.28.
In the cash markets, the 5 7/8% two-year year note was quoted late Monday down 3/32 at 99.30-99.31 to yield 5.89%. The 6 3/4% five-year note ended down 5/32 at 100.01-100.03 to yield 6.72%. The 7 1/4% 10-year note was down 9/32 at 100.17-10.21 to yield 7.15%, and the 6 1/4% 30-year bond was down 5/32 at 85.19-85.23 to yield 7.45%.
The three-month Treasury bill was unchanged at 4.19%. The six-month bill was up three basis points at 4.64% and the year bill was up three basis points at 5.17%.
Corporate Securities
Corporate securities generally slid as players took a wait-and-see approach to trading.
Weak retail demand for paper and a general reticence among issuers to take their bond deals public has stalled the primary market and reduced liquidity in the secondary.
One corporate deal was priced. JPS Automotive Products Corp. issued $180 million of senior notes due June 15,2001, said lead manager Donaldson, Lufkin & Jenrette Securities Corp.
The issue has been given a coupon of 11.125% and priced at par. The noncallable issue is expected to be rated B2 by Moody's Investors Service and B by Standard & Poor's Corp.
Dashing expectations for active trading, few Philip Morris Co. bonds changed hands yesterday following news that the company's chairman and chief executive resigned, traders said.
In the secondary market for corporate securities, spreads of investement-grade issues widened by 1/8 to 1/4 of a point, while high-yield issues generally ended mixed.Treasury Market Yields Prev. Prev. Monday Week Month 3-Month Bill 4.19 4.19 4.166-Month Bill 4.64 4.66 4.641-Year Bill 5.17 5.16 5.112-Year Note 5.89 5.87 5.753-Year Note 6.23 6.20 6.075-Year Note 6.72 6.65 6.487-Year Note 6.76 6.69 6.5310-Year Note 7.15 7.05 6.9030-Year Bond 7.45 7.35 7.21 Source: Cantor, Fitzgerald/Telerate
