The Treasury market lost ground yesterday as the U.S. dollar's fall to a new post-World War II low unnerved investors worried about their dollar-denominated assets.
Accounts lightened their holdings of U.S. government securities as the dollar fell firmly below 100 yen, its lowest level in almost 50 years. Against the deutsche mark, the dollar hit a new 1994 low of 1.5903 marks.
In response, the Treasury's benchmark 30-year bond closed down more than 1/4 of a point Tuesday, to yield 7.49%.
Persistent weakness in the dollar continues to dissuade inflation-conscious investors from holding onto Treasuries or buying new supply.
"The weak dollar was the big story Tuesday and has been the predominant factor in the market this week," said Elias Bikhazi, money market economist at Deutsche Bank Securities Corp.
The lack of interest in dollar-denominated investment instruments was evidenced by lackluster demand for the Treasury Department's two-year note auction, market observers said.
The Treasury sold its $17.01 billion of two-year notes on Tuesday at a yield of 6.04%. The Treasury accepted $1.44 billion of noncompetitive tenders, up slightly from the last two-year auction. The bid-to-cover ratio was 2.64.
The latest wave of market jitters reflects investors' fears that the sliding dollar will force the Federal Reserve to raise interest rates sooner than expected. That notion was supported by a New York Times article yesterday, which reported that Fed officials have privately signaled their willingness to do just that.
"Investors are ducking from the market and policy instability which a teetering dollar portends," said David C. Munro, chief U.S. economist at High Frequency Economics. Munro believes the Fed will boost rates in coming weeks to restore stability to global foreign exchange markets.
No significant news on the economy arose to inspire trading, leaving players to follow movements in the currencies and commodities markets. Traders said activity was dominated by speculative players. Meanwhile, retail accounts remained on the sidelines to avoid volatility.
Market players paid little attention to news that the U.S. trade deficit widened to $8.40 billion in April from a revised $6.87 billion in March.
While other financial markets took their lumps yesterday, investors in precious metals proved to be the winners as prices posted sizable gains.
Weakness in the dollar and the bond market only strengthened the precious metals. Declining commodities prices were shrugged off.
Gold, because it is a dollar-denominated commodity, traditionally enjoys a spurt of buying interest when the dollar weakens. In response to the weak currency, metals prices rose. Gold reached a high of $397.90 in the August contract, while July silver hit $5.625.
Concerns over the market's ability to absorb new Treasury supply are expected to continue into today's session as dealers prepare for $11 billion in five-year notes.
In futures, the September bond contract ended down 15/32 at 102.13.
In the cash markets, the 5 7/8% two-year note was quoted late Tuesday down 5/32 at 99.25-99.26 to yield 5.97%. The 63/4% five-year note ended down 10/32 at 99.24-99.26 to yield 6.79%. The 7 1/4% 10-year note was down 10/32 at 100.08-100.12 to yield. 7.19%, and the 6 1/4% 30-year bond was down 11/32 at 85.08-85.12 to yield 7.49%.
The three-month Treasury bill was up one basis point at 4.27%. The six-month bill was up six basis points at 4.75%, and the year bill was up eight basis points at 5.23%.
Corporate Securities
Corporate securities generally slid 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.
Standard & Poor's Corp. said it assigns its B-minus rating to Chattem Inc.'s $75 million senior subordinated notes due 2004.
The implied senior rating is B-plus, the rating agency said.
Standard & Poor's said the rating reflects Chattem's good niche business positions in branded over-the-counter pharmaceuticals and specialty chemicals, and its weak financial profile. Proceeds will be used to repay bank debt incurred to fund a 1993 $110 million special dividend and to finance the acquisitions of pHisoDerm and Benzodent.
The company has grown through brand acquisitions and internal product development and is expected to continue pursuing this strategy in the future, Standard & Poor's said. The recently completed pHisoDerm purchase was larger than most earlier acquisitions, but is in line with the company's policy of acquiring underperforming niche brands with favorable characteristics.
The rating agency said management has a good track record of improving the sales and profitability of acquired brands through increased advertising and promotion and cost reduction measures. While Chattem generally competes in relatively small markets, competition is still intense and competitors include larger, financially stronger companies, Standard & Poor's said.
As a result of the 1993 special dividend, cash-flow protection measures are weak, as evidenced by expected earnings before interest, taxes, depreciation, and amortization coverage of only about two times in 1994, Standard & Poor's said. Although debt is likely to remain at current levels for at least the intermediate term, the rating assumes that coverage will gradually improve as earnings grow. Adequate flexibility is provided by a recently negotiated bank facility and modest debt amortization requirements, Standard & Poor's said.
Since financial measures are somewhat weak for the rating, Standard & Poor's expects improvement in Chattem's operating performance. If results are weaker than expected, the rating could be lowered, Standard & Poor's said.
Quebec's government filed with the Securities and Exchange Commission a shelf offering for up to $2.2 billion in debt securities and warrants.
Together with previous offerings, the Canadian province may now issue as much as $3.5 billion of the debt securities. according to the shelf registration.
Proceeds will be used for general purposes, including providing loans to public institutions or governmental enterprises and agencies.
No underwriters were named in the offering.
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.
