Treasuries soared yesterday as more bond investors came around to the view that the Federal Reserve may not raise interest rates before its next meeting of policymakers.
Favorable economic figures and a stronger U.S. dollar yesterday were added to the list of reasons why the central bank can hold off on tightening monetary policy between now and the Aug. 16 Federal Open Market Committee meeting.
There still remains a wide divergence of opinions as to whether the Fed will act soon to rein in credit again or will sit back and continue to monitor the economy's performance. But yesterday's developments brought some long-absent buyers back to the market.
Previously jittery retail buyers funneled back into the bond market as improved fundamentals, brighter investor sentiment, and a better technical outlook combined to lift Treasuries across the yield spectrum.
The 30-year bond ended up more than 1 1/4 points, to yield 7.53%. At times, the long bond was up almost two points.
"There was broad-based retail buying," said Tony Crescenzi, head of fixed income at Miller, Tabak, Hirsch & Co. "There was the sense that if this is the beginning of a sustainable move, accounts don't want to be left out."
The rally took hold as an early morning bout of short-covering was met by speculative and retail buying. Dealers covered short positions in response to a weaker-than-expected June retail sales report and a largerthan-anticipated jump in weekly jobless claims.
John Canavan, analyst at Stone & McCarthy Research Associates Inc., said the market generally found itself too short going into the reports and had to scramble to cover positions set in fear of strong economic news. "Dealers were shorter than they wanted to be, and they were forced to buy back positions," Canavan said. "That's what got the rally started."
Retail sales in June rose 0.6% while May retail sales were revised to down 0.4% from down 0.2%. Most analysts had expected a 0.8% increase in the overall June sales figure.
Separately, an increase of 19,000 initial claims for state unemployment insurance in the week ended July 9 lent additional support to the market. The increase exceeded analysts' expectations.
Both reports helped ease fears of strong economic growth and an immediate tightening of monetary policy, which have plagued the bond market since it saw last Friday's upbeat June employment report.
Added impetus to settle outstanding positions came at midday when the U.S. dollar stabilized and rose against the Japanese yen and German mark. The greenback ended the New York trading session at 98.57 yen and 1.5547 marks, compared with 98.25 yen and 1.5420 marks late Wednesday.
Governments stabilized through the afternoon, and it became clear that the upside was the path of least resistance. Larger accounts got involved and propelled prices toward long-standing technical resistance levels, observers said.
Samual Kahan, chief economist at Fuji Securities Inc., said the retail sales report in particular provided the first comprehensive view of demand pressures in the national economy in June and gave the bond market some indication of whether the slowdown in spending in recent months continued last month.
"There is no sin in having growth in the economy," Kahan said. "It's above-trend growth that's a problem, and the retail sales report shows the economy is only growing at a steady pace at best."
Getting a read on the current pace of spending was crucial to long-term bond investors, who have been reluctant to establish large positions amid signs that the economy continues to grow apace, he said.
Coupled with this week's round of favorable inflation reports, players said they are gradually becoming a shade more bullish on the bond market's prospects.
"It's still a bear market, but things are starting to look a bit better," said Stone & McCarthy's Canavan.
In futures, the September bond contract ended up more than a point at 102.22.
In the cash markets, the 6% two-year note was quoted late Thursday up 10/32 at 99.30-99.31 to yield 6.01%. The 6 3/4% five-year note ended up 21/32 at 99.19-99.21 to yield 6.83%. The 7 1/4% 10-year note was up more than a point at 100.01-100.05 to yield 7.22%, and the 6 1/4% 30-year bond was up more than 1 1/4 points at 84.26-85.30 to yield 7.53%.
The three-month Treasury bill was down 12 basis points at 4.37%. The six-month bill was down 15 basis points at 4.83%, and the year bill was down 12 basis points at 5.32%.
Corporate Securities
Bonds issued by R.H. Macy & Co. stole the spotlight as Macy's and Federated Department Stores Inc. said they reached an agreement in principle on a merger that will create the largest department store group in the United States.
Macy's 14.5% coupon junk bonds maturing in 1998 have traded up two points to 69, and the company's 14.5% coupon bonds maturing in 2001 traded up by two points to 31, a trader said.
In a joint press release, the companies said the merged entity would have annual revenues of more than $13 billion and more than 300 department stores in virtually every major market in the United States.
Subject to a definitive merger agreement approved by the boards of both Macy's and Federated, the companies will file a joint plan of reorganization with the U.S. Bankruptcy Court for the Southern District of New York. The joint plan, which is subject to the approval of Macy's creditors and the court, is expected to be filed by Aug. 1, the companies said.
Macy's, which had hoped to return to public ownership under its current management, ended six months of opposition to Federated and agreed to create a company encompassing chains such as Bloomingdale's, Burdine's, Lazarus, and Bullock's as well as Macy's.
The plan now has the support of all major creditors, including the official committee representing Macy's bondholders, the companies said.
The proposed joint plan envisions Macy's emerging from Chapter 11 in January 1995, the companies said. Creditors would receive a combination of cash, debt, and equity in the new Federated/Macy's entity, with a total distributed value of about $4.1 billion.
Macy's and Federated said four members of the current Macy's board, including Macy's chairman and chief executive Myron E. Ullman, will be nominated to the Federated board.
Ullman also will join a newly formed office of the chairman as deputy chairman, with responsibilities that will include aiding the merger transition, the companies said.
The three-member office of the chairman will include Federated chairman and chief executive Allen Questrom and Federated president and chief operating officer James M. Zimmerman.
Macy's said it has consulted with Cyrus R. Vance, court-appointed mediator in the Macy's ease, who endorsed yesterday's action. Vance asked that all parties avoid further comment until a plan is filed with the court, and the companies agreed.
The companies said further details of the business agreement will be provided by the companies at a future time, when Federated and Macy's managements have concluded their formulation of a specific plan.
Yesterday, in the secondary market for corporate securities, spreads of investment-grade issues narrowed by 1/2 to 3/4 of a point, while high-yield issues generally ended 1/2 a point higher.
In the primary market, Associates Corp. issued $300 million of notes due July 15, 1997, via lead manager JP Morgan Securities Inc., and Supervalu Inc. issued $150 million of notes due 1999 via Goldman, Sachs & Co.Treasury Market Yields Prev. Prev. Thursday Week Month 3-Month Bill 4.50 4.34 4.21 6-Month Bill 4.99 4.88 4.65 1-Year Bill 5.46 5.42 5.15 2-Year Note 6.18 6.06 5.83 3-Year Note 6.50 6.38 6.18 5-Year Note 6.99 6.88 6.65 7-Year Note 7.18 7.11 6.7110-Year Note 7.38 7.28 7.0830-Year Bond 7.67 7.59 7.40 Source: Cantor, Fitzgerald/Telerate
