U.S. government securities prices ended higher yesterday after reports on producers prices, retail sales, and employment indicated moderate economic growth.
The Treasury's 30-year bond close up more than 1/4 of a point to yield 7.55%.
The Labor Department reported the producer price index fell 0.1% in April, in sharp contrast to forecast for an increase of 0.2%. Excluding food and energy, the PPI gained 0.1%.
Retail sales, meanwhile, slid 0.8% in April Economists had been expecting retail sales to post a 0.2% increase. March retail sales, meanwhile, were revised up sharply to show a 1.7% increase from an originally reported 0.4% gain.
Encouraged by the weak economic news, which some market players interpreted as an evidence that the Fed will not need to boost short-term rates aggressively, some participants covered short positions and others purchased Treasuries outright. Retail accounts came back into the market to take advantage of attractive yield levels brought on by the market's recent sell-off, players said.
"The numbers enhanced the view of those who think the Fed will be less aggressive in pushing up short-term rates," said Samuel Kahan, chief economist at Fuji Securities Inc.
But comments from San Francisco Federal Reserve President Robert Parry put a lid on the market's rally, traders said. Parry said that real short-term interest rates are still stimulating the economy and that achieving a "neutral" monetary policy might not be enough.
Parry's comments took the market back from highs reached on the weaker than expected economic news earlier today. Analyst said Parry's comments suggested he will probably be advocating a larger rate move at next week's Federal Open Markets Committee meeting.
Because the Fed has so far left rates unchanged, market observers believe the next tightening will probably come after the May 17 meeting of the FOMC.
Kahan, like most market observers, expects the central bank to rise the federal funds rate 50 basis points to 4.25%, along with a 50 basis point increase in the discount rate to 3.50%.
In making his argument that the Fed will continue to tighten credit, Hugh Johnson, chief investment officer at First Albany Corp., pointed to a number of economic reports that support his view that the economy continues to gain steam. The clearest example of the economy's strength came last Friday when the Labor Department released its April employment report, he said.
"When you look at the employment numbers and you look at the increase in the work week and in overtime hours, it's clear the Fed will continue to tighten," Johnson said.
Late yesterday, the market began to consolidate ahead of the consumer price index. Though PPI painted a positive inflation picture and helped soothe fears in the marketplace, bond investors were anxiously awaiting the Labor Department's report on consumer prices.
Traditionally a better proxy for overall price pressures in the economy, the consumer price index will set the tone for the bond market in coming sessions and play a pivotal role in the Fed's interest rate deliberations at Tuesday's meeting of the Federal Open Markets Committee, analysts said.
Economists polled by The Bond Buyer generally expect the CPI to increase by 0.2% both for the overall report and the core rate.
John E. Silvia, chief economist at Kemper Mutual Funds, said today's CPI release will help the market decide whether inflation is as much a threat as feared.
Modest CPI gains of 0.2% to 0.3% per month have characterized the report for quite some time, he said. Silvia said that year-over-year CPI was just 2.5 in March, while gains in most major categories showed marked slowdowns in recent months. For example, he said, year-over-year medical care inflation has slowed from 6% in March 1993 to 4.9% by March of this year.
For April CPI, Silvia said he will be watching for possible price declines for new cars and airline fares. Seasonal adjustment factors may also moderate inflation to a gain of 0.1% or even no gain at all.
The risk for the financial markets lurks in the possibility that for any given month, the CPI series is quirky enough that an oversized gain of 0.4% to 0.5% is possible, Silvia said. "Given the financial markets' sensitivity to the data, such a gain would create problems for the market," he said.
In futures, the June bond contract ended up 9/32 at 102.11.
In the cash markets, the 5 1/2% two year note was quoted late Thursday up 4/32 at 98.28-98.29 to yield 6.09%. The 6 1/2% five-year note ended up 6/32 at 98.01-98.03 to yield 6.96%. The 5 7/8% 10-year note was up 13/32 at 99.06-99.10 to yield 6.72%, and the 6 1/4% 30-year bond was up 14/32 at 89.19-89.23 to yield 7.55%.
The three-month Treasury bill was down eight basis points at 4.25%. The six-month bill was down six basis points at 4.88% and the year bill was down five basis points at 5.43%.
U.S. investment banks are jockeying for position to underwrite the first post-partheid debt offering by the Republic of South Africa.
Fixed-income industry experts say the nation is planning a debt issue before the end of this year, either globally or in the U.S. markets. The offering is expected to total between $500 million to $1 billion.
One corporate securities trader said South African government officials first will seek a rating from a U.S. credit rating agency.
U.S. investment banks hope to win the right to underwrite the offering because they believe South Africa's new government will sell debt in international markets several times in coming years to finance infrastructure improvements.
In March, officials of Salomon Brothers Inc.; Merrill Lynch & Co.; Goldman, Sachs & Co.; Morgan, Stanley & Co.; J.P. Morgan Securities Inc.; and Lehman Brothers Inc. all journeyed to South Africa to drum up business for the offering.
Morgan Stanley and J.P. Morgan are widely rumored in South Africa to have been chosen to assist the government in getting a credit rating, said an official at Martin & Co., one of South Africa's top-ranked investment houses.
Government officials may announce the choice of a lead underwriter soon, bankers said.
The Comprehensive Anti-Apartheid Act of 1986 barred trading in South African securities and most business dealings with the country.
The primary market saw one investment-grade offering come to market. CIT Group Holdings offered $200 million of three-year, medium-term, floating-rate notes at par, according to lead manager Merrill Lynch.
The notes will float weekly at 25 basis points more than the three-month Treasury note. Final maturity is May 19, 1997, and settlement is May 19. The noncallable issue is rated A1 by Moody's Investors Service and A-plus by Standard & Poor's Corp.
In the high-yield market, Rohr Inc. offered $100 million of senior junk notes and $50 million of convertible subordinated notes, lead manager Salomon Brothers said.
The senior junk notes were priced late Wednesday at part to yield 11.625%. They are noncallable for five years. The 10-year convertible subordinated notes were also priced to yield 7.75%.