Weaker-than-expected car sales in July supported the notion that the national economy is slowing and lifted Treasuries across the yield spectrum yesterday.
Economists, said the annualized selling rate for autos in July was 6.4 million units, well below the consensus forecast of 7 million. Wall Street observers embraced the news as evidense that the effects of higher interest rates and weaker consumer confidence have finally worked their way into the national economy. Lending further support to the bond market was the fact that the Treasury's refunding announcement contained no big surprises. The Treasury Department yesterday announced it would sell $40 billion of notes and bonds next week to raise about $10.4 billion in new cash and redeem $29.6 billion of securities maturing Aug. 16.
Government bond prices traded in positive territory for the better part of yesterday's session as more and more investors came around to the view that the economy is losing steam. The Treasury's 30-year bond closed up 7/32, to yield 7.37%.
"We've received a number of reports over the last couple of weeks that show the economy is experiencing some kind of slowdown," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. "Signs of softer growth are helping the market."
While some observers jumped on the market's performance as evidence of renewed bullishness, most said bond investors are more interested in seeing the July employment report before selling positions.
Tony Crescenzi, head of fixed income at Miller, Tabak, Hirsch & Co., said the market's attention remains focused on tomorrow's jobs report, which will provide the market with its first comprehensive look at the economy's performance in July. After the employment sector's surprisingly strong reading in June, bondholders are anxious to see if the economy is still creating jobs and fanning potential wage pressures, he said.
The central issue for the market this week is whether upcoming economic reports will support the notion that the economy is not overheating. Dealers stocked up on short-term and intermediate-term Treasuries last week in anticipation that soft news on the economy will attract larger accounts to step up and buy Treasuries.
Standing in the market's way of extending the recent rally is the jobs report, which players hope will show that the economy lost steam last month, keeping the Federal Reserve in its holding pattern and attracting more retail investors back into the market.
Should the report support the slower growth scenario being played out in the national economy, participants said that the bond market could extend recent gains,
Economists polled by The Bond Buyer generally expect nonfarm payrolls to increase by 200,000 in July, with most seeing the civilian unemployment rate rising marginally to 6.1%.
The Treasury's August refunding package will consist of $17 billion of three-year notes to be auctioned Aug. 9, $17 billion of three year notes to auctioned Aug. 10, and $12 billion of 10-year notes and $11 billion of 30 1/4% bonds to be auctioned Aug. 11.
To help redeem maturing securities, the Treasury said it would sell $7 billion of 38-day cash management bills on Aug. 11. The bills will be settled Aug. 15 and will mature Sept. 22.
The Treasury said it will not reopen any issues in this quarterly refunding. Many bond market observers had expected the Treasury to reopen the 7 1/4% 10-year note. The issue, which had traded special in the overnight repurchase agreements markets and amassed significant scarcity value in recent months, was widely though to be on the verge of a reopening.
The quarterly refunding package generally matched market expectations and raised few eyebrows in the government securities market yesterday, said Michael Strauss, chief economist at Yamaichi Securities Inc.
A senior Treasury official said the Treasury is issuing a 30 1/4-year bond rather than a 30-year bond to even out the coupon cycle for stripping activity.
If the Treasury did not do this "periodically," the market "could, over time, have a coupon imbalance," said Darcy Bradbury, Treasury deputy assistant secretary for federal finance. Bradbury would not clarify what future timing might be used.
She said the Treasury was "relatively indifferent" regarding whether to issue a 30 1/4-year bond or a 29 3/4-year bond this refunding. Bradbury noted that the Public Securities Association advisory committee requested the 30 1/4-year bond.
The Treasury yesterday announced it will continue its single-priced auction method for two- and five-year notes.
Bradbury said the results of the single-price auction technique so far "have been neutral to slightly positive."
The Treasury began the single-price note auction in September 1992 to broaden market participation and to see if the government could reduce financing costs by encouraging more aggressive bidding.
In the futures market, the September bond contract ended up 1/32 at 104.21.
In the cash markets, the 6 1/8% two-year note was quoted late yesterday up 3/32 at 100.11-100.12 to yield 5.92%. The 6 7/8% five-year note ended up 5/32 at 100.23-100.25 to yield 6.68%. The 7 1/4% 10-year note ended up 5/32 at 101.03-101.07 to yield 7.07%. The 6 1/4% 30-year bond ended up 7/32 at 86.14-86.18 to yield 7.37%.
The three-month Treasury bill ended down two basis points at 4.40%. The six-month bill ended down four basis points at 4.86%. The year bill also ended down three basis points at 5.31%.
Corporate Securities
Fitch Investors Service placed American Residential Mortgage Corp.'s BBB $100 million of senior debt, BBB senior debt shelf registration, and F2 commercial paper on FitchAlert with positive implications.
The action follows American Residential's announcement that a Chase Manhattan Bank subsidiary has agreed to acquire the company. There is approximately $380 million of commercial paper outstanding.
American Residential is the sole operations subsidiary of American Residential Holding Corp. and is engaged in the mortgage banking business.
Chase Manhattan Bank, through its subsidiary Chamres Inc., will begin a cash tender offer no later than Aug. 9 for all outstanding foreign shares of American Residential at $28.25 per share. The tender offer will be subject to, among other things, certain regulatory approvals and a minimum of 80% of American Residential's outstanding common shares being tendered.
Fitch rates Chase Manhattan Corp.'s senior debt A, which implies a senior debt rating of A for its banking subsidiary, Chase Manhattan Bank. In addition, Fitch rated the bank's certificates of deposit F1. Assuming completion of the transactions, American Residential's senior debt rating would be raised to A and its commercial paper rating increased to F1.
In yesterday's secondary market for corporate securities, spreads of investment-grade issues generally tightened by 1/8 of a point, while high-yield issues generally held steady. Treasury Market Yields Prev. Prev. Wednesday Week Month 3-Month Bill 4.40 4.45 4.34 6-Month Bill 4.86 5.02 4.88 1-Year Bill 5.31 5.54 5.42 2-Year Note 5.92 6.21 6.06 3-Year Note 6.19 6.48 6.38 5-Year Note 6.68 6.96 6.88 7-Year Note 6.85 7.13 7.11 10-Year Note 7.07 7.32 7.28 30-Year Bond 7.37 7.60 7.59 Source: Cantor, Fitzgerald/Telerate
