Treasury market activity virtually ground to a halt and prices ended little changed yesterday as investors awaited today's June employment report.
The benchmark 30-year bond ended down 3/22, to yield 7.60%.
The jobs report will provide the market with its first comprehensive look at the economy's performance last month and present players with more evidence of the pace of growth in the second quarter.
Fixed-income market observers generally expect the figures to show that employment conditions continued to improve in June.
"The employment report will prove to the market and the Fed that the economy remains strong," said Michael Strauss, chief economist at Yamaichi International Inc.
A Bond Buyer survey of economists found a consensus estimate of an increase of at least 285,000 in nonfarm employment. A good number of them believe jobs could show an increase of 300,000 or more.
The increase would come on the back of a 191,000 increase in employment for May. The civilian unemployment rate is projected to rise to 6.2% in June from 6.0% in May.
The employment report is crucial to the market, analysts said, stressing that it is one of the main reasons believed to have delayed any change in monetary policy at this week's meeting of Federal Reserve policymakers.
"It is critical for the Fed to see the upcoming employment report, inflation numbers, and retail sales for June before another tightening is implemented," said Anthony Karydakis, senior financial economist at First Chicago Capital Markets Inc.
"On balance, there is a good chance of another incremental tightening step in the course of the next several weeks, unless the above-mentioned economic reports challenge strongly the premise that there is a need for one."
Wall Street analysts said they believe the June employment report will be a deciding factor in the Fed's monetary policy decisions. Agreeing that it would have been out of character for the central bank to tighten credit before the release of an employment report, observers said the central bank would rather have the job numbers in hand before making any decisions.
However, some analysts warn that the jobs report should be interpreted cautiously and that market players should avoid overreacting to possible statistical quirks.
Karydakis, for example, expects nonfarm payrolls to advance at least 300,000 in the latest month, as a result of two special factors that will probably boost the June gain considerably. For one, Karydakis said that based on a pattern that he says has emerged in the last several years, a late survey week for June strongly argues for an oversized gain in that month's payrolls. Given that this year's June survey week included an extra day -- the 18th -- there is a strong risk of an above-trend gain in the survey.
Second, the extension of the school year in parts of the Northeast due to severe winter weather is also likely to boost payrolls by at least 35,000 to 40,000 as a result of teachers being picked up in this year's June survey, he said.
Much of the bond market's attention will be on the unemployment rate, which nose-dived to 6.0% in May from 6.4% in April. The sharp decline caught investors off guard and resulted in feverish selling.
Matthew Alexy, senior market strategist at CS First Boston, pointed to the Bureau of Labor Statistics' assertion that the May decline was probably an overstatement of reality. In addition, he said, Fed officials were careful not to assign much weight to the 6.0% jobless rate.
One possible reason for volatility in recent unemployment reports is the belief among many economists that the rate is not a very reliable indicator. The way the household survey is conducted was altered early this year in an effort get a better read on the overall employment sector. The problem, analysts said, is that the Labor Department continues to use the same seasonal factors, which fail to accurately reflect the changes in the survey procedure.
"This series is still in its infancy; only five months of data has been made public," Alexy said. "What's more, comparisons between the current series and any previous measures of labor market slack are imprecise at best."
Also on traders' minds as the week draws to a close is the upcoming meeting of the Group of Seven industrialized nations in Naples. Treasury market players will pay keen attention to any talk of interest rate policy.
A number of Wall Street observers have subscribed to a scenario in which the Fed would coordinate a tightening of credit with rate cuts by both the Bank of Japan and the Bundesbank. They believe that raising U.S. interest rates at the same time two other G-7 members nations ease policy would avoid a potential meltdown in the global marketplace. In futures, the September bond contract ended up 4/32 at 101.20.
In the cash markets, the 6% two-year note was quoted late yesterday down 1/32 at 99.26-99.27 to yield 6.08%. The 6 3/4% five-year note ended down 1/32 at 99.13-99.15 to yield 6.87%. The 7 1/4% 10-year note was down 2/32 at 99.20-99.24
to yield 7.28%, and the 6 % 30-year bond was down 3/32 at 84.04-84.08 to yield 7.60%.
The three-month Treasury bill was down two basis points at 4.33%. The six-month bill was up one basis point at 4.88%, and the year bill was unchanged at 5.40%.
Corporate Securities
Moody's Investors Service Inc. said it placed the ratings of Dime Savings Bank under review for possible upgrades and Anchor Bancorp's rating under review for a possible downgrade.
About $200 million of securities are affected, Moody's said.
The rating agency said the action was prompted by Wednesday's agreement by Dime Bancorp and Anchor Bancorp to merge their holding companies and banking operations.
In its review, Moody's said it will consider any operating efficiencies achieved, the combined entity's core profitability, and overall asset quality. Ratings affected are Dime Savings Bank's B1 deposit rating, B3 preferred stock rating, and B3 rating for other senior obligations as well as Anchor Bancorp's Ba3 senior unsecured note rating.
The combined banking operation, which will be called Dime Savings Bank of New York, FSB, will have total assets of approximately $20 billion and total deposits of nearly $13 billion with 94 branches in New York State and New Jersey and five in Florida. This includes Anchor's previously announced acquisition of Lincoln Savings Bank, expected to close next month. Dime and Anchor anticipate the merger will result in a restructuring charge of approximately $50 million. The transaction, subject to shareholder approval, is expected to close in early 1995.
Dime Savings Bank controls assets of approximately $9.3 billion, while Anchor Bancorp has assets of about $10 billion, Moody's said.
Fitch Investors Service lowered Viacom Inc.'s $3 billion shelf registration for senior debt to BB-plus from BBB-minus, and BB-minus from BB-plus for subordinated and preferred stock.
Concurrently, Viacom's new $1.07 billion 8% exchangeable subordinated debentures are rated BB-minus. Paramount Communications Corp.'s outstanding $800 million senior debt is rated BB-plus and $231.4 million of subordinated debt is rated BB-minus. The action is in response to completion of the merger between Viacom and Paramount, Fitch said, noting that the credit trend is stable.
Fitch also said the downgrade reflects weakened debtholder protection measures resulting from the merger, uncertainty surrounding the timing and proceeds from planned asset sales, operational and product integration issues, and the potential liability represented by the contingent value rights, or CVRs, issued to holders of Paramount common stock.
In the primary market for corporate securities, Mississippi Power & Light issued $25 million of general and refunding bonds due July 1, 2004, via sole manager Bear, Stearns & Co.
In the secondary market for corporate securities, spreads of investment grade issues ended mostly unchanged, while high-yield issues generally ended 1/2 of a point lower.
