The Treasury market swerved off the road yesterday as comments by Federal Reserve chairman Alan Greenspan suggested that the central bank may hit the brakes again soon.
The 30-year bond was down more than 3/4 of a point, to yield 7.54%.
Greenspan, in his semiannual Humphrey-Hawkins testimony before a Senate panel, indicated that the Fed is still concerned over the pace of economic growth.
Admitting he is uncertain if policymakers have moved quickly enough to hamper future inflation growth, Greenspan said the Fed would not stand by and allow the economy to give up the gains that have been made on inflation, which bond market players took as a sign the Fed will again raise interest rates.
"I think the word 'inflation' was said one too many times," said Anthony Karydakis, senior financial economist at First Chicago Capital Markets Inc. "Greenspan placed a lot of emphasis on inflation, and that made for some uncomfortable headlines."
Greenspan said it was an "open question" whether the Fed's actions have been sufficient to curb inflationary pressures. However, most market participants don't see the Fed raising interest rates until the Aug. 16 Federal Open Market Committee meeting.
Greenspan also sent the U.S. dollar lower with a statement that the weak dollar has inflationary implications. The dollar was quoted late yesterday at 98.72 Japanese yen and 1.5645 German marks, compared with 99.25 yen and 1.5680 marks late Tuesday in New York.
While Greenspan indicated the door was wide open for another tightening, he did not suggest that a move to raise in short-term rates is imminent, Karydakis said. Still, Greenspan's reminder that the Fed will stand firm in its mission to keep inflation under wraps caught some in the market off guard, he said.
After recent economic figures pointed to a slowdown in growth and prompted several days of rallying, Greenspan's testimony was more hawkish than some expected and triggered heavy selling, fixed-income observers said.
"The market was disturbed that Greenspan didn't support the view that the Fed is on hold with his comments," a market strategist said. "Now people are not so sure that rates will remain at current levels, and we're experiencing some selling."
Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., said the market interpreted the testimony to mean Greenspan does not believe that the Fed has reached neutrality in its interest rate policy. Pointing to the bond market's muted reaction to weak economic statistics early yesterday, Wesbury said investors remain preoccupied with the near-term direction of Fed policy.
"The market has been able to focus on little else," he said.
A plunge in new construction for multifamily homes helped cause U.S. housing starts in June to fall 9.8% to a seasonally adjusted annual .rate of 1.351 million units, the Commerce Department reported yesterday.
The Treasury announced yesterday it plans to raise a combined $12.95 billion in new cash next week with the sale of $17.25 billion of two-year notes and $11.0 billion of fiveyear notes.
The balance of the proceeds will be used to redeem $15.29 billion of maturing notes.
The two-year notes, to be sold Tuesday, July 26, will be dated Aug. 1 and will mature July 31, 1996. The five-year notes, to be sold Wednesday, July 27, will be dated Aug. 1 and will mature July 31, 1999.
The Federal Reserve holds $1.63 billion of the maturing securities for its own account. The Fed also holds $700 million of maturing securities as agent for foreign and international monetary authorities.
In future, the September bond contract ended down 31/32 at 102.20.
In the cash markets, the 6% twoyear note was quoted late Wednesday down 6/32 at 99.31-100.00 to yield 5.99%. The 6 3/4% five-year note ended down 14/32 at 99.21-99.23 to yield 6.81%. The 7 1/4% 10-year note was down 21/32 at 100.02-100.06 to yield 7.22%, and the 6 1/4% 30-year bond was down 27/32 at 84.24-84.28 to yield 7.54%.
The three-month Treasury bill was up three basis points at 4.38%. The six-month bill was up six basis points at 4.86%, and the year bill was up nine basis points at 5.33%.
Corporate Securities
Against the backdrop of improved conditions for U.S. fixed-income markets, a number of corporate treasurers brought their offerings to market yesterday.
Avco Financial Services Inc. priced $200 million of notes, due July 15, 1999, and priced at par to yield 7.25%, according to lead underwriter Merrill Lynch & Co.
The noncallable issue was priced 50 basis points more than comparable Treasuries and rated A2 by Moody's Investors Service and A by Standard & Poor's Corp.
Columbia/HCA Healthcare Corp. issued $200 million of medium-term floating-rate notes, due July 28, 1997, priced at par through lead manager Merrill Lynch & Co.
The notes float and pay monthly at 15 basis points more than the onemonth London interbank offered rate. At the issuer's option, the spread may be reset annually. The issue is puttable annually and is rated A3 by Moody's and BBB-plus by Standard & Poor's.
A $200 million issue of Peco Energy Capital LP cumulative monthly income preferred shares was priced with a dividend yield of 9%, according to lead underwriter Goldman, Sachs & Co.
The eight million shares were sold at $25 each. The issue's size was increased from five million shares. The issue is noncallable for five years and rated Baa2 by Moody's and BBB by Standard & Poor's.
In the secondary market for corporate securities, spreads of investment-grade issues widened by 1/2 to 3/4 of a point, while high-yield issues generally ended 1/2 point lower.
