The Treasury market waged a remarkable recovery yesterday, ending moderately higher after plunging on strong economic news.
Prices recovered as an afternoon decline in commodities prices and reports that the Federal Reserve purchased securities under the table prompted dealers to cover short positions.
The 30-year bond ended up more than 1/2 a point to yield 7.37%. The benchmark issue had been down almost a point on the day at a yield of 7.50%.
The market fell in the morning after a report from the National Association of Purchasing Managers showed the manufacturing sector of the economy continued to expand at a healthy pace in May.
But a combination of professional short-covering and light retail buying on dips sent prices higher across the yield spectrum. Dealers got short when the market fell through the morning, but ended up having to cover the positions as the market began to improve.
Retail investors were particularly active buyers of Treasuries as the 30-year bond approached and broke above the psychologically important 7.50% yield, players said.
"We saw persistent retail buying at the lows and short-covering as the market started to focus on a number of favorable developments like Fed buying and lower commodities," said Tony Crescenzi, head of fixed income at Miller, Tabak, Hirsch & Co.
The Federal Reserve bought bills of all maturities after yesterday's auction for delivery tomorrow, the Federal Reserve Bank of New York confirmed.
The move was purely technical and carries no policy implications, analysts said. The outright purchase of bills, or bill pass in market parlance, was expected. The New York desk's need to add securities was quite large in the current two-week reserve maintenance period that began May 25 and remains so in the next maintenance period, economists said.
The Commodity Research Bureau's index of 21 key futures prices ended down 1.61 points to 233.84. The downward price pressures were a welcome development for bond investors who fear the persistent increases in the inflation indicator could be an omen of price pressures in the national economy.
Meanwhile, the National Association of Purchasing Management's May composite index was unchanged in May from April's strong figure of 57.7%.
The problem for the bond market was the prices paid index, which showed prices continued the upward trend begun in December, raising the diffusion index for prices to 71.5%, the highest level since October 1990. New orders also continued to grow, but at the slowest rate since last October.
The May purchasing managers' figures revived dormant worries about inflation pressures and raised questions about whether economic growth has really moderated in the second quarter. A series of softer-than-expected economic reports for April had been interpreted as indicating the economy was cooling off.
"The increase in the price component is alarming from an inflation standpoint and from a Fed policy standpoint," an economist said. "Everyone knows the Fed looks at the NAPM, and this report may carry with it some policy implications."
Still, the most important release this week will be tomorrow's employment figures, which will provide the market with its first comprehensive look at the economy's performance in May.
Wall Street analysts fear another solid month of employment gains could place additional pressure on the bond market and keep long-term interest rates rising. Market players are approaching the jobs report with caution, as bond investors increasingly fear that an upside surprise may be in store for the market.
Economists polled by The Bond Buyer generally expect an increase of 275,000 nonfarm jobs in May, with 15,000 coming from the manufacturing sector. The civilian unemployment rate is expected to hold steady at 6.4%.
In futures, the June bond contract ended up 23/32 at 104.09.
In the cash markets, the 5 7/8% two-year note was quoted late yesterday up 1/32 at 99.26-99.27 to yield 5.95%. The 6 3/4% five-year note ended up 4/32 at 100.02-100.04 to yield 6.72%. The 7 1/4% 10-year note was up 9/32 at 100.29-101.01 to yield 7.10%, and the 6 1/4% 30-year bond was up 17/32 at 86.14-86.18 to yield 7.37%.
The three-month Treasury bill was down six basis points at 4.25%. The six-month bill was down two basis points at 4.80%, and the year bill was down one basis point at 5.33%.
Corporate Securities
A survey by Securities Data Co. showed further weakness in new-issue activity in May as investors continued to shy away from debt and equity securities.
New issuance dropped to $39.8 billion in May from $42.6 billion in April and $71 billion in May 1993.
Securities issuance in most markets tapered off in May, Securities Data said. Corporate and agency issues dropped about 40% to nearly $34.9 billion from the year-earlier month, while tax-free municipal issues plunged to about $12.2 billion from $28 billion in May 1993. Junk bond issuance was down 43% from the year-earlier month, with issuers raising about $2.3 billion last month, according to Securities Data.
Financial sectors facing the greatest difficulties in selling new securities included the mortgage-backed market, where new issuance dropped even further after steep declines in April. Mortgage-backed issuance totaled just over $8 billion, representing a 16.5% drop from the previous month and a 64% decline from a year earlier.
Echostar Communications Corp. said it is offering securities consisting of $624 million of 12 7/8% senior secured discount notes due 2004 and 3,744,000 common stock purchase warrants.
The company said the $335 million of proceeds expected from the offering will be used to complete the financing of the Echostar direct broadcast satellite system using two Martin Marietta Corp. Series 7000 satellites.
Echostar said that Donaldson, Lufkin & Jenrette Securities Corp. managed the public offering. The offering became effective May 27 and is expected to close Tuesday.
The company said that the direct broadcast system will provide more than 100 channels of digital video and 250 channels of digital audio and data services.
The company said that the system is scheduled to begin operation in the fall of 1995 with the launch of the first of the two Echostar satellites.
There were no deals priced in the primary market for corporate securities yesterday as issuers and investors remained sidelined ahead of this week's round of economic reports.
In the secondary market, spreads of investment grade issues narrowed by 1/2 to a point, while high-yield issues generally ended narrowly mixed.
Rating News
Duff and Phelps Credit Rating Co. upgraded Chrysler Corp. yesterday, citing efforts by the company to strengthen its balance sheet and improve financial flexibility, including its progress in reducing unfunded pension obligations.
The credit rating agency raised Chrysler's senior debt to BBB-plus from BBB and Auburn Hill Trust Certificates to BBB-plus from BBB. It also raised Chrysler Financial Corp.'s commercial paper to Duff 1 from Duff 2, senior debt to A-minus from BBB-plus, and senior subordinated debt to BBB-plus from BBB.
Chrysler recently vowed to erase its underfunded pension liability by the end of the year. "We believe that Chrysler has further opportunity in the current U.S. cyclical upswing to invest to broaden the product line and expand capacity," Duff & Phelps said in a release. "We expect credit quality trends to remain positive for the foreseeable future."
