Activity in the corporate securities market heated up yesterday as issuers took advantage of stability in Treasuries and retail buyers emerged to scoop up cheap paper.
Against the backdrop of improving conditions for U.S. fixed-income markets, a number of corporate treasurers found the primary market ripe for their offerings. Just under $1 billion of straight corporate debt was priced yesterday.
"Less volatility in the government securities market and hopes that growth in the economy is beginning to level off has breathed new life in the corporates market," said one market observer.
The volatile Treasury market has held new-issue volume to a minimum in recent weeks, but improved market psychology has encouraged underwriters and investors to come off the sidelines and get involved in the market.
Last week "was bereft of new-issue corporate bond activity as corporate treasurers perhaps decided to wait out the deluge of macroeconomic data," said John G. Lonski, senior economist at Moody's Investors Service.
This week, however, bond market players have a cheerier view of the market's prospects now that the economy is beginning to bear the mark of slower growth.
The notion that the pace of economic growth may moderate in the months ahead gained credence last week as reports of slower activity came in, analysts said.
The largest straight debt offering came from General Motors Acceptance Corp., a unit of General Motors Corp. The company issued $300 million in notes due June 1, 1999, said lead manager Bear, Stearns & Co.
The notes were given a coupon of 7 1/8% and priced at 99.565 to yield 7.23%, or 75 basis points more than comparable Treasuries. The noncallable issue is rated Baal by Moody's Investors Service and BBB-plus by Standard and Poor's Corp.
Citicorp issued $250 million in subordinated notes due June 15 2006, said lead underwriter Citicorp Securities Inc.
The notes were given a coupon of 7 3/4% and priced at par, or 85 basis points more than comparable Treasuries. The noncallable issue is expected to be rated A3 by Moody's and A-minus by Standard and Poor's.
Sun Trust Banks Inc. issued $200 million of floating-rate notes due June 18, 1999, said lead manager Salomon Brothers Inc.
Priced at par, the notes float and pay quarterly at 18 basis points over the three-month London Interbank Offered Rate. The noncallable issue is expected to be rated A1 by Moody's and A-plus by Standard & Poor's.
First Bank NA, a unit of First Bank System Inc., issued $100 million of subordinated bank notes due June 15,2004, market sources said.
The notes were given a coupon of 7.55% and priced at 99.722 to yield 7.59%, or 68 basis points more than comparable Treasuries. The noncallable issue is expected to be rated A2 by Moody's and A by Standard & Poor's. Donaldson, Lufkin, & Jenrette Securities Corp. is lead manager.
In addition, Loral Corp. announced an offering of $500 million in senior debt.
The offering is a mix of intermediate and long-term securities and is being made pursuant to a shelf registration previously filed, the firm said. Lehman Brothers is lead manger of the offering, the firm said.
Still, many corporate analysts say issuance and secondary trading activity continue to come in below expectations.
"Corporate bonds exhibited early signs of the summer doldrums," said Michael Dahood, bond analyst at Mabon Securities Corp. "Trading activity was light and no definite trends in spreads emerged."
In the secondary market for corporate securities, spreads of investment-grade issues narrowed by 1/8 to 1/4 of a point, while high-yield issues generally ended unchanged.
Treasury Market
Treasury prices were boosted yesterday by a news report asserting that at least three Federal Reserve Board governors believe inflation is under control.
Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 4.16 4.26 4.336-Month Bill 4.64 4.78 4.931-Year Bill 5.11 5.30 5.522-Year Note 5.75 5.95 6.233-Year Note 6.07 6.29 6.565-Year Note 6.48 6.71 7.067-Year Note 6.53 6.73 7.1110-Year Note 6.90 7.10 7.4630-Year Bond 7.21 7.38 7.62
Source: Cantor, Fitzgerald/Telerate
Falling commodities prices further supported the notion that steady economic growth has not resulted in upward price pressures in the national economy.
The 30-year bond was quoted up more than 1/2 point to yield 7.21% at the end of yesterday's session.
The New York Times quoted three Fed officials as saying that economic growth is getting milder and that inflation is under control. Treasuries rallied in overnight activity with intermediate and long-term securities breaching resistance levels.
Participants are reevaluating their market positions now that the Fed seems to be waiting for the July meeting of the Federal Open Market Committee before tightening credit any further.
The Commodity Research Bureau's index of 21 key futures prices ended down 3.21 points to 228.84. Corn and soybean futures fell hard at the Chicago Board of Trade yesterday as heavier-than-expected rains fell in the Midwest over the weekend, players said.
Other factors that analysts see as providing support for bonds are: the stable U.S. dollar; renewed retail interest as portfolios switch out of European bond markets into Treasuries; the improved technical state of the government bond market; and central banks' buying of Treasuries, particularly by the Federal Reserve.
Time, analysts said, is also on the bond market's side. This week offers few hurdles for the market in the way of economic reports or note auctions. Market players were heartened by the Treasury market's solid performance Friday, when it weathered the effects of a volatile May employment report. Now that the market has fully digested the employment report, players are turning their attention to this week's producer price report.
Matthew Alexy, senior market strategist at CS First Boston Corp., said the May employment report leaves the market where it stood before the statistics became public. Those who thought the economy was strong won't lower their forecasts for gross domestic product, he said. "Instead they'll conclude that the rising aggregate-hours index endorses their view of the world," Alexy said.
On the other hand, he said, those who thought the economy might be cooling will stress the need for focus on spending patterns.
In futures, the June bond contract ended up 20/32 at 106.12.
In the cash markets, the 5 7/8% two-year note was quoted late Monday up 5/32 at 100.06-100.07 to yield 5.75%. The 6 3/4% five-year note ended up 14/32 at 101.01-101.03 to yield 6.48%. The 7 1/4% 10-year note was up 18/32 at 102.10-102.14 to yield 6.90%, and the 6 1/4% 30-year bond was up 17/32 at 88.06-88.10 to yield 7.21%.
The three-month Treasury bill was down five basis points at 4.16%. The six-month bill was down five basis points at 4.64%, and the year bill was down 10 basis points at 5.11%.
GovPX Quotes Agency Debt
GovPX Inc. added real-time quotations and trade information for agency securities as part of its basic service, effective immediately.
In a press release, GovPX said the figures reflect quotes, trade prices, related sizes, yields, spreads and trade volumes. GovPX said the company also provides on-the-run Treasury prices for quick reference.
GovPX said that later this year it will complete development of an indicative-pricing model that will generate real-time fair value prices for less liquid Treasury securities. GovPX said the company also plans to make prices available for zero coupon securities.
GovPx was formed in 1990 by primary dealers and four inter-dealer brokers of Treasuries to provide nonexclusive real-time distribution of Treasury securities quotations, trade prices, and related size and volume information.
