The U.S. Treasury's August refunding package next week is expected to total $40 billion of new government debt with an outside chance for a slightly larger offering, Wall Street economists said.
Most economists said they believe that the Treasury Department this afternoon will unveil a $40 billion package, which will raise about $10.5 billion of new cash. The package will probably contain $17 billion of three-year notes, $12 billion of 10-year notes, and $11 billion of 30-year bonds. In addition, the Treasury will probably auction $10 billion of cash management bills on Aug. 12 to settle with the refunding on Aug. 15 and mature Sept. 22.
While most Wall Street economists are looking for a $40 billion package, some believe that the government will sell $17.25 billion three-year notes to keep that auction in line with recent increases in the two-year note and year-bill auctions. The Treasury last year embarked on a plan to reduce its reliance on long-term debt to facilitate lower yields and reduce its borrowing costs.
A $40 billion total would be unchanged from six months ago, when the TreasUry last sold the full gamut of refunding issues. The Treasury now sells long bonds only twice a year, having shifted from a quarterly cycle last year. The next 30-year bond offering will be in February 1995.
The Treasury is expected to conduct the three-year auction next Tuesday, the 10-year note sale next Wednesday, and the bond offering next Thursday.
"It's likely to be a real boring refunding offering because most people agree on the size and on the terms of the package," said Samuel Kahan, chief economist at Fuji Securities Inc.
The only potential surprise could be for the Treasury to offer a bond maturity of less than the usual 30 years. Many fixed-income market observers are setting their sights on a 29 3/4-year maturity.
The shorter maturity would reflect the Treasury's decision to move to semiannual bond auctions and help provide greater liquidity in the strips market, according to Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp.
Another potential quirk in an otherwise routine refunding package would be a decision to reopen the 7 1/4% 10-year note. The issue, which has traded "special" in the overnight repurchase agreements market and amassed significant scarcity value in recent months, is widely thought to be on the verge of a reopening to increase liquidity in the intermediate to long sectors of the bond market.
"I think we'll see a reopening on the 10-year," said Kahan, citing as reasons the Treasury's ability to lower the price by one-quarter of a point and add liquidity to an issue often used in hedging and stripping activity.
Other analysts, however, believe the market's strong performance in recent sessions has pushed yields lower across the maturity spectrum and restored a sense of yield parity in the government bond market. At this point, they say, there is little reason to reopen the 10-year.
Michael Moran, chief economist at Daiwa Securities American Inc., said this week's higher price on the 10-year issue -- 101.00 late yesterday -- reduced the chances for a reopening. The Treasury doesn't "like to reopen an issue when it's so high above par value," Moran said. "That's true of the 10-year currently."
Supply is gradually moving to the forefront this week and taking its positions as one of the most formidable challenges currently facing the bond market. Market observers agree that in the face of solid economic growth in the United States and investors' high inflation expectations, absorbing supply is a worry.
"A worst case scenario in the market, which is undergoing a surge of new supply, would be a solid July employment report and the risk of an adverse PPI reading for the month," said Steven Ricchiuto, chief economist at Barclays de Zoete Wedd Securities Inc. The producer price index is scheduled for release by the Labor Department next week.
In fact, Ricchiuto said, the refunding package is only part of the market's upcoming supply bubble. Shortly after the refunding, the Treasury market will have to absorb the August two- and five-year note offerings.
Treasury market prices generally ended marginally higher yesterday as participants continued to bide time ahead of Friday's employment report.
The 30-year bond ended the session down 2/32, to yield 7.39%.
Activity yesterday was generally light and dominated by short-term speculative and technical traders attempting to stir up some volatility in the bond market. Retail accounts continue to keep idle funds close to the vest ahead of a number of crucial economic reports and Treasury auctions in the next two weeks, players said.
Still, observers remain somewhat optimistic about the market's better performance late last week and this week. Despite a somewhat steady stream of robust reports on the economy and lingering fears of inflation, Treasuries have held their ground this week.
"The market has been adjusting to the perception that the Fed won't move in August," said Mickey Levy, chief financial economist at NationsBanc Capital Markets Inc. "That belief continues to help the market."
But 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.
The jobs report 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.
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.
Optimistic that the bond market is on the verge of breaking out of its bearish state, retail accounts came off the sidelines Friday. Their optimism stemmed from the belief that key economic reports due this week will support the notion that growth is slowing and halt the relentless rise in interest rates.
Should the reports support the slower growth scenario being played out in the national economy, particularly the employment report, 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%.
In the futures market, the September bond contract ended up 1/32 at 104.20.
In the cash markets, the 6 1/8% two-year note was quoted late Tuesday up 2/32 at 100.09-100.10 to yield 5.95%. The 6 7/8% fiVe-year note ended up 1/32 at 100.18-100.20 to yield 6.72%. The 7 1/4% 10-year note ended up 3/32 at 100.00-101.04 to yield 7.08%. The 6 1/4% 30-year bond ended down 2/32 at 86.08-86.12 to yield 7.39%.
The three-month Treasury bill ended unchanged at 4.42%. The six-month bill closed unchanged at 4.90%. The year bill also ended down three basis points at 5.33%.
Racing to beat the Treasury's refunding announcement and a potentially damaging employment report, corporate treasurers rushed into the primary market yesterday.
More than $700 million in straight corporate debt was priced.
In the day's largest deal, W.R. Grace & Co. sold $300 million of 10-year notes to yield 8.024%, according to lead manager J.P. Morgan Securities Inc.
The noncallable issues were priced at 99.793 and bear a coupon of 8%. They were rated Ban3 by Moody's Investors Service and BBB-minus by Standard & Poor's Corp.
Tjiwi Kimia International Finance Co. issued $200 million of guaranteed senior junk notes to yield 13.25%, according to lead manager CS First Boston. The noncallable issues were priced at par and rated B1 by Moody's and BB by Standard & Poor's.
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 Prey. Prey. Tuesday Week Month 3-Month Bill 4.42 4.50 4.29 6-Month Bill 4.90 4.97 4.81 1-Year Bill 5.33 5.51 5.45 2-Year Note 5.95 6.08 6.10 3-Year Note 6.24 6.40 6.41 5-Year Note 6.72 6.87 6.90 7-Year Note 6.87 7.05 7.12 10-Year Note 7.08 7.24 7.29 30-Year Bond 7.39 7.53 7.58 Source: Cantor, Fitzgerald/Telerate