Treasuries ended narrowly mixed yesterday as a two-day meeting of Federal Reserve policymakers adjourned without any announcement of a change in monetary policy.
The silence of the Federal Open Market Committee indicated that the central bank has left interest rate policy unchanged for the time being, analysts said. The central bank's federal funds rate target stands at 4 1/4%.
While it was widely believed that the Fed wouldn't raise interest rates at this meeting, some position-squaring occurred during the session as accounts speculated about the outcome.
"Everything points to steady policy at this point," said William Sullivan, director of financial markets research at Dean Witter Reynolds Inc.
The Treasury's benchmark 30-year bond ended down 3/32, to yield 7.59%.
Market activity virtually ground to a halt yesterday as players remained on the sidelines. Because there was considerable speculation about a possible tightening to shore up the flagging U.S. dollar and rein in growth, bond market players were on the defensive as they anxiously awaited news from the FOMC.
The belief that the central bank is still in a tightening mode further fueled talk of a rate hike yesterday. The Fed has tightened credit four times this year and market observers generally agree that the central bank will boost rates again soon.
"I think the Fed will tighten during the summer of 1994," Sullivan said. "The only question is when."
Some Wall Street analysts said tomorrow's June employment report will be the deciding factor in the Fed's monetary policy decisions. Most agreed it would be out of character for the central bank to tighten credit before the release of an employment report. The Fed, Sullivan said, would rather have the job numbers in hand before making any decisions.
Michael Strauss, chief economist at Yamaichi International Inc., said a strong jobs report could be just enough to push the Fed over the edge. "A booming payrolls report will be reason enough for [the Fed] to reinstate the tightening process," he said.
Friday's employment report will provide bond investors with their first comprehensive view of the economy's performance in June. On the back of a 191,000 increase in nonfarm payroll employment for May, economists are forecasting a hefty gain in June nonfarm jobs of at least 250,000. A good number of economists believe jobs could show an increase of 300,000 or more.
The dollar continued to lose ground yesterday against the Japanese yen, sending Treasuries lower as dealers and retail accounts closed out remaining positions in the market. Late in the day, the greenback was quoted at 98.90 yen, though it fell below 98.00 early in the session.
In futures, the September bond contract ended down 4/32 at 101.16.
In cash markets, the 6% two-year note was quoted late yesterday up 3/32 at 99.27-99.28 to yield 6.06%. The 6 3/4% five-year note ended up 4/32 at 99.12-99.14 to yield 6.88%. The 7 1/4% 10-year note was up 3/32 at 99.21-99.25 to yield 7.28%, and the 6 1/4% 30-year bond was down 3/32 at 84.07-84.11 to yield 7.59%.
Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 4.34 4.25 4.216-Month Bill 4.88 4.72 4.651-Year Bill 5.42 5.43 5.132-Year Note 6.06 6.10 5.753-Year Note 6.38 6.38 6.085-Year Note 6.88 6.86 6.517-Year Note 7.11 6.89 6.5610-Year Note 7.28 7.22 6.9330-Year Bond 7.59 7.50 7.25
Source: Cantor, Fitzgerald/Telerate
The three-month Treasury bill was down five basis points at 4.34%. The six-month bill dropped three basis points to 4.88%, and the year bill was down three basis points at 5.42%.
Corporate Securities
Debt issued by Salomon Inc. lost ground yesterday on news that the company expects to post a loss in the second quarter due to losses at its Salomon Brothers brokerage unit.
Yield spreads to U.S. Treasuries for Salomon debt widened by about 10 basis points as the firm projected a $200 million loss for the quarter. Salomon's loss is expected to be part of an overall drop in brokerage industry earnings relative to the first quarter, analysts said.
Late yesterday, the firm's 6 7/8% notes were quoted at bid-ask yield spreads of 120 to 125 basis points above comparable Treasuries, widening from a range of 110 to 115 on Tuesday.
In a press release, the firm said the loss will primarily be attributable to client-driven businesses at its brokerage unit. Salomon Inc. said such businesses were adversely affected by inventory-related losses, particularly in fixed-income markets, and by declines in underwriting activity and customer trading volume.
Salomon said losses were also recorded in proprietary trading businesses. The firm wasn't more specific in its press release on those trading losses, but did say they will be partly offset by good results at the Phibro Division, the firm's commodities trading business.
Moody's Investors Service said it confirmed Salomon Inc.'s A3 senior debt rating and Prime-2 rating for commercial paper, in light of the announcement yesterday.
The rating agency said that Salomon Inc.'s A3 rating reflects the volatility in earnings that the firm has experienced in recent quarters. Moody's added that Salomon Inc. continues to enjoy good financial health and a substantial capital base, despite losses in certain markets that have been highly volatile this year.
Salomon Inc. has a record of long-term profitability, although its focus on trading and its appetite for risk frequently lead to considerable fluctuations in results, Moody's said.
In a related developement, Standard & Poor's Corp. revised its ratings outlook for Salomon Inc. to negative from stable.
The rating agency also affirmed its ratings for Salomon Inc. as follows: A-minus for senior long-term debt, BBB-plus for subordinated debt, A-2 for short-term debt, and BBB for preferred stock.
About $14 billion of debt is affected, Standard & Poor's said.
Standard & Poor's said Salomon's subpar earnings performance thus far for 1994 reflects the firm's dependence on its fixed-income trading businesses, which are being hurt by turbulent market conditions.
While well within Salomon's ability to absorb, the losses highlight the volatility inherent in the firm's businesses. Such volatility is potentially more troublesome in an unfavorable environment, the rating agency said, noting that Salomon's credit strength continues to be supported by sound liquidity management.
The rating agencies currently anticipate that Salomon will adjust its operating strategies to limit loss exposure. However, a poor earnings report in the next quarter, should it occur, may prompt a ratings downgrade, Standard & Poor's said.
In the secondary market for corporate securities, spreads to Treasuries on investment-grade issues narrowed by 1/8 of a point, while high-yield issues generally ended unchanged.
