The surprisingly robust June employment report did a job on the Treasury market Friday, sending prices sharply lower as investors dumped securities.
The jobs report showed that the economy continues to grow at an above-average pace and rekindled fears of a near-term credit tightening by the Federal Reserve.
"The employment report indicates the economy is unambiguously strong," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. "It shows the economy will expand at 4% for the rest of the year, creating jobs along the way."
June nonfarm payrolls rose by 379,000, far more than the 285,000 increase anticipated in a Bond Buyer survey of economists. Private sector jobs rose by 369,000, including a 102,000 gain in retail jobs and a 34,000 gain in manufacturing jobs.
May nonfarm payrolls were revised to show an increase of 252,000 jobs from a previously reported increase of 191,000. The June civilian unemployment rate was unchanged from May at 6%.
So strong were the statistics that speculation in the bond market turned from whether the Fed would raise interest rates to when it will. The pivotal question for the market is whether the employment figures in and of themselves will encourage the Fed to tighten credit conditions for the fifth time this year.
While players were mixed on the timing of such a move -- with some holding the central bank would like to see this week's inflation numbers first -- most agreed that the Fed will probably tighten sooner rather than later.
"The news tells the Fed that once again they are dead wrong on the economy," said Michael Strauss, chief economist at Yamaichi International America Inc. "We've got payroll employment up sharply for the fourth consecutive month, and the Fed has got to tighten credit again to maintain a restrictive policy stance."
Strauss said Friday's jobs figures support his view that the economy grew by 4.5% in the second quarter of 1994, a growth rate far in excess of the Fed's 2% goal. Like many Wall Street economists, Strauss believes the central bank has fallen behind in its need to drain liquidity from the economy, a development that continues to pose problems for the fixed-income markets.
"Growth continues to come in stronger than what the market can handle," Strauss said. "Retail will need to sell paper over time, and there's no reason to bottom fish."
Friday's deluge sent the yield on the 30-year bond to the highest level seen during the Clinton presidency. The yield on the benchmark issue rose to 7.71%, the highest return since Nov. 9, 1992, when the long bond closed at 7.74%. The 30-year bond closed Friday's session down more than 3/4 of a point, to yield 7.68%.
The short end of the Treasury market took the brunt of the selling on the belief that the Fed is now more likely to tighten before the Aug. 16 Federal Open Market Committee meeting. With the short end leading the declines, the yield curve flattened considerably. The spread between the yield on the two-year note and 30-year bond narrowed to 146 basis points Friday from 152 basis points late Thursday.
Treasury Market Yields Prev. Prev. Friday Week Month3-Month Bill 4.45 4.28 4.206-Month Bill 4.99 4.81 4.671-Year Bill 5.52 5.48 5.162-Year Note 6.22 6.15 5.823-Year Note 6.53 6.46 6.145-Year Note 7.01 6.93 6.597-Year Note 7.22 6.97 6.66310-Year Note 7.40 7.31 7.0030-Year Bond 7.68 7.60 7.30
Source: Cantor, Fitzgerald/Telerate
Robert Brusca, chief economist at Nikko Securities Co., said there is a good chance the central bank will tighten credit sometime this week after the release of the June inflation series. Judging from the way the Fed has operated in recent months, the central bank is more likely to shift monetary policy in response to inflation reports than to news about the employment sector, Brusca said.
Another scenario is one where the Fed holds steady until Chairman Alan Greenspan's Humphrey-Hawkins testimony, at which time Greenspan would have the opportunity to set the stage for the next rate increase and provide a justification for it, Brusca said.
Treasuries briefly came off their lows Friday in response to a slightly lower reading for the Columbia University's Center for International Business Cycle Research leading inflation index. Market sources reported that the index was 109.2 for June and that the May number had been revised down to 109.3 from 110.8.
However, the market again moved lower as the dollar fell to a new 1994 low against the German mark. On Friday, the dollar weakened to 1.5585 marks and 97.81 Japanese yen in currency markets.
In futures, the September bond contract ended down more than a point at 100.18.
In the cash markets, the 6% two-year note was quoted late Friday down 3/32 at 99.18-99.19 to yield 6.22%. The 6 3/4% five-year note ended down 17/32 at 98.27-98.29 to yield 7.01%. The 7 1/4% 10-year note was down 27/32 at 98.25-98.29 to yield 7.40%, and the 6 1/4% 30-year bond was down 28/32 at 83.08-83.12 to yield 7.685.
The three-month Treasury bill ended up 12 basis points at 4.45%. The six-month bill was up 11 basis points at 4.99%, and the year bill was up 11 basis points at 5.52%.
Corporate Securities
Standard & Poor's Corp. said it assigned an A-plus rating to Seoul, Republic of Korea's pending issue of $300 million of notes due 2004.
The rating outlook is negative, the agency said.
Standard & Poor's said the rating reflects Seoul's diversified economic base and strong economic growth as well as its good budgetary performance and moderate debt levels. The direct election of mayors, who are currently appointed by the national government, is scheduled for 1995 and could unleash demand for more extensive municipal services, but that would be tempered by the continuation of the national government's close and supportive involvement in municipal affairs, Standard & Poor's said.
Seoul has long been a focus of governmental, educational, and cultural activities, and in recent decades has become South Korea's primary center of commerce and finance. Almost a quarter of the Korean population lives in Seoul, and gross domestic product per capita is broadly on a par with the Korean average. With a comparatively high concentration in services, Seoul is not as vulnerable to adverse external developments as are centers of manufacturing, the rating agency said.
Standard & Poor's said Seoul's financial performance has been strong, as evidenced by sizable operating surpluses and a high proportion of ownsource financing of capital spending. Rapid growth, however, has created major infrastruture needs that will require an appreciable acceleration in capital spending over the next few years, resulting in some weakening in Seoul's financial position.
At the end of 1993, debt was about 5.3% of the city's GDP and just over 90% of revenues, Standard & Poor's said. While city resources are considerable, flexibility is limited because of the national government's heavy involvement in setting tax bases and rates.
The rating agency said movement toward greater local autonomy, a part of South Korea's political liberalization process, has been very modest thus far. Even as the devolution of political power to localities continues, however, over the medium term the national government is likely to retain close supervisory and regulatory authority.
The outlook on the rating is negative because of the negative outlook assigned to the Republic of Korea's rating as a result of heightened tensions on the Korean peninsula stemming from North Korea's noncompliance with demands for inspection of its nuclear facilities, Standard & Poor's said.
In Friday's secondary market for corporate securities, spreads of investment-grade issues narrowed by 1/8 to 1/4 of a point, while high-yield issues generally ended unchanged.
