It was a lackluster day in Treasuryland yesterday as trading ground to a halt ahead of what is widely believed to be the week's most important economic release: retail sales.
"It's an important number for the market and an important number for the Federal Reserve," said Fred Leiner, bond market strategist at Continental Bank.
The retail sales report will provide the market with its first comprehensive view of demand pressures in the national economy in June and offer the bond market an idea of whether the slowdown in spending in recent months continued last month.
Getting a read on the current pace of spending is crucial to long-term bond investors, who remain reluctant to establish large positions in the market amid signs that the economy continues to grow apace. Validating investors' fears is the fact that fixed-income observers generally believe the June sales figures will substantially unwind the 1.3% cumulative decline in April and May.
Volume in the Treasury market dropped off steadily throughout yesterday's session following the release of an as-expected June consumer price index as players moved to the sidelines ahead of the Commerce Department's potentially damaging release.
The benchmark 30-year bond closed up almost 1/8 of a point, to yield 7.67%.
Economists polled by The Bond Buyer generally expect sales to rise 0.7% for June. Excluding the volatile automobile component, sales are also expected to increase by 0.7% in the month.
"Such a report would confirm that any slowing of the economy at this point has been minimal," said Dana Johnson, head of market analysis at First Chicago Capital Markets Inc. "We are anticipating a 0.8% gain in sales, which would be indicative of well-maintained final demands."
Today's economic release will help set the tone for the market going into next week, particularly because the less-than-spectacular June inflation reports left bond market players with little to go on.
The Labor Department reported that the consumer price index rose 0.3% in June, in line with market expectations. Excluding the frequently volatile food and energy component, the CPI also increased 0.3%.
Despite the fact that the report conformed exactly to expectations, market players were disappointed the CPI did not come in lower, as did yesterday's producer price index. U.S. government securities posted healthy gains Tuesday as unexpectedly low readings on June producer prices eased fears of an immediate tightening of monetary policy.
"People were hoping the CPI would surprise us with a decline the same way the PPI did," Leiner said.
To the extent that the June CPI report did not indicate any further improvement in inflation, the report provided more fuel to market players' fears that the strong economy will eventually produce higher inflation and prompt the Federal Reserve to boost short-term rates, he said.
Still, analysts said the figures will probably allow the Federal Reserve to keep rates steady until the Aug., 16 Federal Open Market Committee meeting.
In futures, the September bond contract ended up 5/32 at 100.31.
In the cash markets, the 6% two-year note was quoted late Wednesday up 2/32 at 99.20-99.21 to yield 6.18%. The 6 3/4% five-year note ended up 5/32, at 98.30-99.00 to yield 6.99%. The 7 1/4% 10-year note was up 5/32 at 98.29-99.01 to yield 7.38%, and the 61/4% 30-year bond was up 3/32 at 83.13-83.17 to yield 7.67%.
The three-month Treasury bill was down five basis points at 4.50%. The six-month bill was down six basis points at 4.99%, and the year bill was down five basis points at 5.46%.
Comcast Corp.'s junk-rated bonds tumbled 2 1/2 points yesterday on news that the company made a $2.2 billion bid for QVC Inc., a more attractive offer than the one previously made by CBS Inc.
CBS said yesterday it will not pursue its proposed acquisition of QVC in the aftermath of Comcast's surprise offer.
News of the Comcast bid, coupled with the withdrawal by CBS, drove the company's debt down. Comcast's 10 5/8% senior subordinated debentures were bid at 94 and offered at 95, dropping 2 1/2 points.
CBS said it will commence a cash tender offer for up to 3.5 million of its common shares at a price of $325 a share, or approximately $1.1 billion in the aggregate. CBS said it expects to begin the offer by July 25 and close it on or about Aug. 25.
CBS also said that immediately following the self-tender offer, it will effect a five-for-one stock split, paying a stock dividend of four new shares on each outstanding common stock. The company said it intends to continue its regular cash dividend of $2 a share annually, or 40 cents a share quarterly, on the split shares.
The offer from Philadelphia-based Comcast, which came just hours before the CBS and QVC boards were to meet separately to vote on their merger, was for a 22% premium on the $36 a share closing price for QVC. Comcast said it would pay a combination of $37 a share in cash and $7 of Comcast securities for a combined value of $44 a share.
Additionally, Loews Corp., which owns about 3 million CBS shares, will tender all of its shares, CBS said. CBS said it expects to begin the offer by July 25, and to close it about Aug. 22.
Prior to Comcast's announcement, the CBS-QVC deal appeared to be moving rapidly toward quick approval, with both boards expected to endorse the deal formally Wednesday.
Laurence A. Tisch, chairman, president, and chief executive officer of CBS, said in a statement: "While we believe the QVC merger represented an opportunity, we have every confidence that CBS will remain aggressive, future-oriented, and highly competitive. We have demonstrated our appetite for new directions and will continue to pursue new business opportunities as appropriate."
The CBS-QVC deal was first unveiled June 30 and would have created an entertainment/home-shopping giant with strong ties to the cable television industry and Hollywood studios.
Duff & Phelps Credit Rating Co. said it placed the securities of Comcast Corp. on Rating Watch, with a downward bias as a result of the company's bid to acquire QVC.
Comcast's senior subordinated debentures are rated B-plus and its convertible subordinated debentures are rated B. Comcast has about $4 billion of long-term debt outstanding Duff & Phelps said.
Comcast has very little flexibility within its current rating for debt-financed acquisitions, Duff and Phelps said. An acquisition of this size, if completed as proposed, would have a significant negative impact on the credit quality of Comcast's fixed-income obligations, the rating agency said.
Comcast was a strong supporter of QVC's failed bid for Paramount Communications and now has bid for QVC, indicating its staunch desire to acquire additional programming assets, Duff & Phelps said. The review will focus on the likelihood of further investments and Comcast's plans for financing its investments, the rating agency said.
Following the recently announced Maclean Hunter acquisition, Comcast will be the third-largest cable television operator in the United States, with about 3.5 million subscriberS. The company provides cellular services in the Northeast to an area with a population of 7.4 million.
In addition to its core cable and cellular operations, Comcast has significant holdings in several communications companies, including Nextel, Teleport, QVC, Turner Broadcasting, Primestar Partners, and several United Kingdom cable TV operations, Duff & Phelps said.
In the secondary market for corporate securities, spreads of investment-grade issues narrowed by 1/8 of a point, while high-yield issues generally ended unchanged. Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 4.50 4.34 4.218-Month Bill 4.99 4.88 4.851-Year Bill 5.46 5.52 5.152-Year Note 6.18 6.06 5.833-Year Note 6.50 6.38 6.185-Year Note 6.99 6.88 6.657-Year Note 7.18 7.11 6.7110-Year Note 7.38 7.28 7.0830-Year Note 7.67 7.59 7.40
Source: Center, Fitzgerald/Telerate
