The market remains at a cross-road, liable to move up or down depending on the outcome of trade and currency market fluctuations, traders and analysts said on Friday.
At least temporarily, the bond market is moving in tandem with the dollar, they said. Reports on the German economy expected tomorrow and on Wednesday could have as much of an impact on the market as the various U.S. economic reports coming out this week, given that dynamic.
The dollar approached its all-time low againts the yen on Friday, sending the Treasury market reeling. Quick intervention by the Federal Reserve before noon bolstering the dollar stemmed the tide, however, and the benchmark 30-year bond ended down 13/32 to yield 7.29%.
A weak dollar hurts the Treasury market, making U.S. securities less valuable to foreign investors.
Given the increasingly smaller share of Treasury securities owned by foreigners, the dollar's machinations do not always affect the bond market as they did last Thursday and Friday, according to John Rothfield, economist and foreign exchange market analyst at First Chicago.
"Only on rare occassions is the dollar impacting the bond market like this," Rothfield said. He cited the late 1970s and 1987 as two examples.
"I doubt if we're in one of those episodes now, but on particular days there can be that influence," Rothfield said.
Before Friday's Fed intervention, many investors believed that the Clinton Administration was tacitly allowing the dollar to weaken against the yen to put pressure on Japan in the current trade imbroglio.
"We see the dollar trending down, and some of the hedge funds putting more pressure on," one currency trader said Friday. "The intervention is seen as temporary and ultimately unsustainable. Basically, the market doesn't think their heart is in it for a stronger dollar."
At First Chicago, analysts see little support for the bond market prior to the next move by the Fed to raise short-term rates, expected on May 17 at the next meeting of the Federal Open Market Committee.
"Over the next two to three weeks, the dollar could fall 3% to 5% against the yen and have a sustained impact on the market," Rothfield said. "We don't think the market will stabilize until the next tightening up to 4%."
Other economists agreed and said they expected the dollar to continue falling. "Given that the Bank of Japan is not capable of doing much due to their holidays, the market will really test the metal of the central banks," one economist said. Despite Friday's intervention, the economist said, "all they've done is stop the bleeding for now."
With the dollar playing a prominent role, the market could react in unexpected ways to this week's economic figures. If Friday's employment report for April is strong, it could bolster the dollar and help the long end of the market.
"Provided the inflation element is still benign, a nice employment report could help the dollar," Rothfield said. That would probably depress the short end of the market, however, and flatten the yield curve, he said.
German central bank officials may lower rates Wednesday, further aiding the dollar. But if Wednesday's report on the pace of manufacturing orders in Germany shows continued growth, that could make a rate cut difficult and push the dollar down, economists said.
In last Friday's trading, the dollar fell to 100.70 yen, near its post-war low of 100.40, early on. Combined with a big upward revision in personal income and spending for February, the weak dollar sent the Treasury market spiraling down. The 30-year bond was off almost one point to yield 7.33%, following Thursday's dramatic two-point drop.
The dollar quickly rebounded to almost 102 yen, though, amid rampant rumors of Fed buying. That allowed the Treasury market to shrug off a strong housing starts number along with a rise in the Chicago purchasing managers index. The 30-year was down only about 1/4 at 10:30 to yield 7.28%.
The rumors were confirmed less than an hour later, as Treasury Secretary Lloyd Bentsen issued a brief statement. The Fed's support against the yen and German mark "is in line with our previously articulated policy which recognizes that excessive volatility is counterproductive to growth," Bentsen said.
The 30-year hit a yield of 7.26% as the dollar crested at 102.20 yen and 1.6685 German marks.
The good times faded quickly, though. The dollar dropped back and the 30-year fell back to yield 7.31%.
Speaking later on CNBC, Fed governor John LaWare indicated that the central bank's move the bolster the dollar was prompted by the currency market's volatility, but was not designed to push the value of the dollar toward a set target.
The rest of the day was uneventful and the 30-year was down 13/32 to yield 7.29% by the end of the day, while the 10-year note ended down 9/32 to yield 7.03%. At the short end, the three-month bill was down one basis point to yield 3.94% while the year bill was up six basis points to yield 5.07%.
Corporate Securities
Standard & Poor's Corp. said Friday that it placed ratings of Bankers Trust New York Corp. on review for a possible downgrade. BT has a senior rating of AA and has about $5.6 billion of debt outstanding, the rating agency said.
Standard & Poor's said it is concerned about losses in the bank's trading area and subsequent earnings volatility.
"Proprietary trading results have proven to be volatile in periods of market turbulence despite good risk control capabilities.... S&P will review whether such volatility is consistent with the current very high ratings," the agency said in a release.
The review will probably not lead to a downgrade below AA-minus at the senior level, the rating agency said.
In the secondary market on Friday, spreads in the investment grade market narrowed sporadically despite generally rising yields. Prices of below investment-grade bonds were down 1/4 to 1/2.
Late in the day, R.H. Macy & Co. released details of its bankruptcy reorganization plan. During the day, traders said Macy's bonds had fallen three to four points, anticipating grim news for holders of subordinated bonds in the plan.
