A welcome drop in commodities prices allowed the Treasury market to catch its breath and end slightly higher yesterday, following Wednesday's sharp sell-off.
The 30-year government bond closed up more than 1/4 of a point, to yield 7.35%.
In general, the same factors that moved the bond market lower this week, including higher oil futures prices, a weaker dollar, and a rising Commodity Research Bureau index, turned around and pushed the market higher yesterday.
"The bond market benefited from a combination of a stable dollar, a rollback of commodity prices, and the fact that the market was truly oversold," said William Sullivan, director of financial markets research at Dean Witter Reynolds Inc. "We were clearly in the plus column for all maturities."
Government bonds plunged Wednesday as commodities prices spiked higher in response to rising oil and agricultural prices. But downward pressure on commodities yesterday encouraged bond investors to buy back some of the securities they had sold.
The commodity Research Bureau's index of 21 futures prices closed down 1.33 points yesterday to 237.28. That was in sharp contrast with the index's three-point surge on Wednesday.
Although the Treasury market ended in positive territory yesterday, prices experienced extreme volatility as investors' attention shifted back and forth between movements in commodities prices, a number of economic reports, and statements made by Federal Reserve officials.
On the bullish side, strength in the futures markets and talk that the New York Fed was making unannounced purchases of two-year and five-year notes, presumably on behalf of customers, supported the market and allowed prices to recover from early losses, traders said.
The market also got a boost from the release of the Philadelphia Federal Reserve's June business survey. The diffusion index rose to 16.1% in June from 14.8%, in line with expectations. However, the price components were mixed with prices paid edging up to 28.7% from 27.4% while prices received fell to 11.0% from 12.1%.
On the bearish side, a barrage of economic releases sent Treasuries lower. A 2.6% increase in May housing starts and an 11,000 decline in the weekly initial unemployment claims were the primary forces behind the market's losses early in the session.
Comments by Fed Governor Edward Kelley were another source of concern for fixed-income investors. Kelley said the U.S. economy has "enormous vitality" and that "everything is in place to keep it that way in the future."
The big story for bond investors continues to be the inflation outlook. Upward pressure on commodities prices can only hurt a market already weakened by signs of mounting wage pressures and lingering fears of higher interest rates, observers said.
Many fixed-income observers agreed the market has begun to detect a gradual erosion in the positive inflation outlook that existed earlier in the year. While they don't see the return of the sort of hyper-inflation seen in the 1970s, analysts generally believe price pressures in the national economy are mounting.
Still, most say they are relying on the traditional inflation indicators - the consumer and producer prices indexes and capacity utilization - in making their forecasts, rather than relying on commodities prices. Recent volatility in commodities price indexes has made them less viable barometers of price pressures in the national economy, they said.
"It's difficult to fully subscribe to the notion that a broad-based pending inflation is being heralded by recent commodity price moves." said Matthew Alexy, senior market strategist at CS First Boston. "Dry weather impacting gains and the threat of military action against a nation which trades little with the outside world do not construct the typical ware-prices spiral that would certainly threaten to dismantle the bound market."
In futures, the September bond contract ended down 15/32 at 103.18.
In the cash markets, the 5 7/8% two-year note was quoted late Tuesday down 1/32 at 99.25-99.26 to yield 5.97%. The 6 3/4% five-year note ended down 8/32 at 99.29-99.31 to yield 6.75%. The 7 1/4% 10-year note was down 6/32 at 100.20-100.24 to yield 7.14%, and the 6 1/4% 30-year bond was down 10/32 at 85.30-86.02 to yield 7.42%.
The three-month Treasury bill was unchanged at 4.26%. The six-month bill was up three basis points at 4.81%, and the year bill was up four basis points at 5.34%.
Corporate Securities
Despite a rebound in Treasuries prices through the afternoon, the market for corporate securities generally slid lower as players took a wait-and-see approach to trading.
Weak retail demand for paper and a general reticence among issuers to take their bond deals public has stalled the primary market and reduced liquidity in the secondary.
One corporate deal was priced. American Telecasting Inc. issued 10-year senior discount junk notes to total approximately $100 million in proceeds, according to lead manager Alex. Brown & Sons.
In the secondary market for corporation securities, spreads of investment-grade issues generally widened by 1/8 of a point, while high-yield issues ended mixed.
Rating News
Standard & Poor's Corp. said it placed Venezuela's BB-minus Eurobonds on CreditWatch, affecting about $2.1 billion of foreign currency-denominated debt.
Standard & Poor's does not rate Venezuela's "Brady" bonds - US$19.9 billion of debt issued as part of the 1990 commercial bank rescheduling agreement - or its local currency-denominated debt, the agency said.
Standard & Poor's cited disarray in the Caldera Administration's economic policies, which were compounded by the deepening crisis in the financial sector and threaten the republic's credit standing.
Also, Standard & Poor's said, setbacks in implementing fiscal reform and privatization plans will make the government's targeted 2% budget deficit difficult to achieve this year.
Including the cost of bailing out the banks, Standard & Poor's said the consolidated public sector borrowing requirement probably will exceed 10% of Venezuela's gross domestic product, driving up public sector indebtedness and creating a drag on the macroeconomy.
At the same time, the Venezuelan banking crisis and political uncertainties have undermined investor confidence and contributed to a loss in the country's central bank reserves of almost $4 billion so far this year, Standard & Poor's said.
Venezuela's resources are still adequate to meet its obligations, although its external financial position has weakened considerably in recent months, the agency said.
A favorable term structure makes net public external debt manageable, even though it is substantial at about 150% of export earnings, Standards & Poor's said. Long-term debt service is under $5.0 billion this year, the agency said.
Standard & Poor's also noted that reserves total a sizable six months of goods and services import costs. Nevertheless, unless current trends are reversed, Venezuela's external finances and its credit standing will slip further in 1994, the agency said.
Standard & Poor's will be watching closely for the implementation of measures that would restore investor confidence, spark a macroeconomic recovery, and in turn stabilize Venezuela's credit standing at BB-minus, the agency said.
Key among these measures would be far-reaching fiscal reform, a comprehensive solution to the banking crisis, and a credible monetary policy, Standard & Poor's said.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 4.18 4.19 4.226-Month Bill 4.59 4.64 4.631-Year Bill 5.09 5.09 5.062-Year Note 5.77 5.75 5.703-Year Note 6.11 6.08 6.045-Year Note 6.60 6.51 6.497-Year Note 6.66 6.56 6.5610-Year Note 7.03 6.98 6.9430-Year Bond 7.35 7.26 7.23
