Government securities prices ended lower yesterday as worries about the strength of the economy and the dollar combined to keep buyers on the sidelines.
The 30-year bond ended down more than 1/4 of a point, to yield 7.32%.
Strong news on the manufacturing sector of the economy and the potential for another dose of robust figures later in the week sent Treasuries lower.
The National Association of Purchasing Manager's index for April rose to 57.7% from 56.7% in March. Economists had forecast that the index would be unchanged.
The threat of continued turmoil in global foreign exchange markets also weighed on investors' minds. Dollar volatility raises inflation fears because the cost of imported goods rises. Investors also see a declining dollar as hampering the attractiveness of dollar-denominated assets.
The dollar approached its all-time low against the yen on Friday, sending the Treasury market reeling. Quick intervention by the Federal Reserve to bolster the dollar stemmed the tide, however. the dollar closed yesterday at 101.55 yen.
"Strong news on the economy and dollar weakness left people with few reasons to buy the market," said Fred Leiner, fixed-income market strategist at Continental Bank. "In the face of upcoming supply, the market continues to come upon negative factors."
Leiner said the Fed's interventions reminded the fixed-income market that the Fed's moves to a tighter interest-rate policy did not strengthen the dollar. One avenue by which a tighter monetary policy is supposed to slow U.S. economic growth -- the Fed's desired goal -- is by making exports more expensive and less competitive over time, thereby dampening U.S. export growth.
Amid signs that the U.S. economy continues to gain steam and fears that the Federal Reserve will again boost short-term interest rates, dealers and investors are increasingly looking ahead to next week's quarterly refunding auction of three-year and 10-year notes. The Treasury will announce the sizes of the offerings tomorrow.
Last week's five-year note auction drew poor demand, reflecting negative sentiment in the credit markets that may carry over into next months' quarterly refunding, analysts said, noting that the prospect of taking on new supply has put dealers on the defensive and kept retail investors on the sidelines.
"Primary dealership are still having trouble distributing the two-and five-years sold last week, and the thought of taking on more supply is making the market nervous," aid one head government trader at a New York primary dealership.
Market players are also wary of economic reports due out later in the week, including April employment, March leading indicators, and March factory orders. Expectations center on an increase of about 175,000 for nonfarm jobs in April, but forecasts include the temporary loss of about 70,000 trucking jobs due to the Teamster's union strike.
The Treasury Department said its net market borrowing needs in the April to June quarter this year are expected to be $8.0 billion, with a $40 billion cash balance on June 30.
The Treasury also said its estimated net market borrowing needs for the July to September quarter are expected to be in a range of $55 billion to $60 billion, with a $40 billion cash balance at the end of September.
The Treasury will not be selling 30-year bonds during the current quarter's refunding because the department adopted a policy last year of selling the long-bond only during alternate quarters. It sold $11.0 billion of 30-year bonds in its refunding for the January-March quarter.
The $8.0 billion April-June estimate of borrowing needs is well below the $15 billion-to-$20 billion that Treasury projected on Jan. 31. At the time, Treasury officials assumed a $30 billion cash balance at the end of the April-June quarter.
Actual net market borrowing in the quarter ended March 31, 1994, was $53.4 billion, while the end-of-quarter cash balance was $44.6 billion. On Jan. 31, the Treasury had estimated net market borrowing for the January-March quarter to be $45 billion with a $20 billion cash balance on March 31.
Net market borrowing and budget receipts were greater than expected, the Treasury said, while outlays were lower than the department had estimated in January, resulting in the higher-than-expected cash balance on March 31.
The Treasury did not say whether any of its borrowing estimates include allowances for activities of the Resolution Trust Corp. to resolve failed or troubled thrifts.
The Treasury sold $22.87 billion of three-month and six-month bills at higher rates yesterday. The three-months incurred an average rate of 4.00$, up from 3.85% in the previous auction on April 22 and the highest since the 4.08% average of March 30, 1992. The six-month bills drew a 4.41% rate, up from 4.25% and the highest since the 4.50% average on Nov. 25, 1991.
In futures, the June bond contract ended down 1/32 at 104.15.
In the cast markets, the 5 1/2% two-year note was quoted late Monday down 3/32 at 99.15-99.16 to yield 5.76%. The 6 1/2% five-year note ended down 7/32 at 99.06-99.08 to yield 6.67%. The 5 7/8% 10-year note was down 10/32 at 91.15-91.19 to yield 7.07%, and the 6 1/4% 30-year bond was down 9/32 at 86.30-87.02 to yield 7.32%.
The three-month Treasury bill was up six basis points at 4.00%. The six-month bill was up eight basis points at 4.49%, and the year bill rose four basis points at 5.11%.
Corporate Securities
Kmart Corp. said it plans to reduce its debt load to $3.3 billion from $3.5 billion by the end of this year.
In a press release, the company said a targeted stock offering of shares in four operating units will contribute to the $200 million to $300 million reduction in the retailer's debt.
Kmart Chairman Joseph Antonini said Kmart has not priced the offerings or set a target for proceeds expected from the sale of minority stakes in its Sports Authority, Builders Square, Borders/Waldenbooks, and OfficeMax units.
Kmart, in a series of four offerings, plans to sell to the public 20% to 305 of the equity in each of these specialty retailers.
The offerings will be issued sequentially beginning as soon as late June, assuming shareholders approve the plan at a June 3 annual meeting. All four offerings would be completed by late fall, the company said.
Kmart initially considered spinning off the specialty retailers, but instead adopted to retain a majority stake and control of the units, the release said.
Each of the four retailers except Waldenbooks posted an increase in same-store sales in 1993, and collectively, the four units posted $6.12 billion sales and $152 million earnings last year. Waldenbooks same-store sales were flat in the period.
The Builders Square unit is the only one of the four that has not met the company's internal goal of a 205 return on equity. Builders Square posted about 10% return on equity last year, the release said.
Kmart last week said first-quarter earnings will come in well below the 12 cents a share operating income posted in the first quarter of 1993.
In the first quarter, total revenues were dampened by slow sales in the last four weeks of the quarter.
Donaldson, Lufkin & Jenrette Securities Corp. is expected to manage the OfficeMax offering, with Goldman, Sachs & Co. managing the other three.
In the secondary market for corporate securities, spreads of investment grade issues widened by 1/8 to 1/2 of a point, while high-yield spreads generally widened by 1/2 a point.Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 4.00 3.83 3.736-Month Bill 4.46 4.34 4.121-Year Bill 5.11 4.86 4.832-Year Note 5.76 5.57 5.563-Year Note 6.11 5.93 6.015-Year Note 6.67 6.46 6.627-Year Note 6.74 6.54 6.7710-Year Note 7.07 6.85 7.1330-Year Bond 7.32 7.14 7.41Source: Cantor, Fitzgerald/Telerate
