The corporate securities market came alive yesterday as issuers took advantage of the stability in Treasuries and retail buyers emerged to scoop up some of the undervalued bonds in the secondary market.
With the much-awaited tightening of monetary policy finally out of the way, a number of corporate treasuries found the primary market ripe for their offerings. Just under $1 billion of straight corporate debt was priced yesterday.
"The cloud of bearishness that has hovered over the corporate securities market for weeks was replaced by relief that the Fed finally raised rates," one corporate trader said. "Both the primary and secondary markets saw more activity than they have in a while."
The volatile government securities market held new issue volume to a minimum last week as the Treasury Department's monthly auctions met with tepid demand and investors avoided the fixed-income markets ahead of this week's Federal Open Market Committee meeting, said Peter Brown, corporate bond analyst at Citicorp Securities Inc.
But improved market psychology has encouraged underwriters and investors to come off the sidelines and get involved in the market. The aggressive tightening bolstered the Federal Reserve's credibility, market observers said. The central bank's statement suggesting that monetary policy was nearing neutrality has lifted retail buyers' spirits as the threat of future tightening is at least perceived as being greatly reduced, they said.
"Most people believe the Fed is not going to move again for a while," a second corporate securities trader said. "That has restored an element of calm to the fixed-income markets and brought some some key players back into the market."
The largest offering in the primary market yesterday was a long-awaited deal from Wal-Mart Stores Inc. The retailer issued $500 million of notes due May 15, 2004, said lead manager Goldman, Sachs & Co.
The notes were given a coupon of 7 1/2% and priced at par to yield 46 basis points more than comparable Treasuries. The noncallable issue is expected to be rated Aal by Moody's Investors Service and AA by Standard & Poor's Corp.
The financial sector of the corporate securities market saw two issues priced. One, $150 million subordinated notes from Chase Manhattan Corp., was priced as 8s at 99.455 at a spread of 100 basis points to comparable Treasuries. The notes are due May 15, 2004.
Rated Baal by Moody's and A-minus by Standard & Poor's, the issue will be sold through underwriters led by Donaldson, Lufkin & Jenrette Securities Corp.
In addition, AmSouth Bancorp issued $150 million of subordinated notes due May 15, 2004, said lead manager Salomon Brothers Inc.
The notes were given a coupon of 7 3/4% and priced at 99.389 to yield 7.84%, or 80 basis points more than comparable Treasuries. The noncallable issue is expected to be rated A3 by Moody's and A-minus by Standard & Poor's.
The utilities sector was represented yesterday by $115 million Connecticut Light & Power Co. first and refunding mortgage bonds. Due June 1, 2024, the issue was priced as 8 1/2s at 99.227 to yield 8.572% after competitive bidding won by Morgan Stanley & Co.
Noncallable for 10 years, the issue was priced to yield 120 basis points more than comparable Treasuries. It is rated Baal by Moody's and BBB-plus by Standard
& Poor's.
In the secondary market for corporate securities, yield spreads between corporates and TreaSuries narrowed marginally with most issues improving by 1/8 of a point. Market participants said corporates continued to hold gains scored Tuesday after the Fed tightened credit.
On Tuesday, the Fed raised the discount rate to 3.50% from 3% and allowed the federal funds rate to rise by 50 basis points to 4.25%.
In the high-yield sector, traders said prices were generally mixed with the higher quality bonds up about 1/4 percentage point and the lower tier credits up about an 1/8.
Treasury Market
Treasury market prices generally ended slightly higher yesterday, with the short and intermediate sectors rising and the benchmark bond posting a modest decline.
The 30-year bond ended down 1/8 of a point, to yield 7.27%.
Government securities stabilized after Tuesday's euphoric rally sent the benchmark bond soaring almost two points on a combination of short covering and outright buying.
But trading was choppy yesterday as investors monitored the weak U.S. dollar and upward pressure on commodities prices.
Bond market sentiment remained upbeat in the wake of the Fed tightening, but investors were troubled yesterday by the persistent weakness of the dollar and its failure to respond positively to the Fed's rate action.
The dollar traded lower against most currencies, which market players attributed to a lack of confidence in the Clinton Administration's international economic policies. Bond investors fear the lack of confidence could spill over into the Treasury market if foreign investors begin to shun dollar-denominated debt.
The dollar ended yesterday at 1.6570 German marks, down from 1.6715 marks in New York late Tuesday. The dollar also changed hands at 103.45 yen, down from 104.45 yen late Tuesday.
Rising commodities prices yesterday placed additional pressure on the bond market. The Commodity Research Bureau's index ended up 1.27 points to 230.80.
The Treasury announced yesterday it will sell $17.0 billion of twoyear notes on May 24 and $11.0 billion of five-year notes on May 25 to refund $14.907 billion of securities maturing May 31 and to raise about $13.100 billion in new cash.
Slated to be issued on May 31, the two-year notes will be sold in $5,000 denominations and the five-year notes will be sold in minimum denominations of $1,000.
In futures, the June bond contract ended up 6/32 at 105.10.
In the cash markets, the 5 1/2% twoyear note was quoted late Wednesday up 6/32 at 99.15-99.16 to yield 5.77%. The 6 1/2% five-year note ended up 8/32 at 99.18-99.20 to yield 6.58%. The 7 1/4% 10-year note was up 4/32 at 101.18-101.22 to yield 7.01%, and the 6 1/4% 30-year bond was down 4/32 at 87.18-87.22 to yield 7.27%.
The three-month Treasury bill was down four basis points at 4.27%. The six-month bill was down eight basis points at 4.66%, and the year bill was down 10 basis points at 5.15%.
