The U.S. government securities market ended a session characterized by wild prices swings in positive territory yesterday as strong demand for new supply lifted prices across the board.
The Treasury's 30-year bond traded in an unusually wide range of 1 1/4 points yesterday, weakening through the morning and recovering through the afternoon to close higher on the day. The benchmark bond ended up more than 1/2 a point to yield 7.34%.
"What initially appeared to be a soft session turned out to be one where we posted modest gains on the day," said William Sullivan, director of financial markets research at Dean Witter Reynolds Inc.
Treasuries began Wednesday's session on a weak note as dealers sold securities, rattled by losses in European bond markets, lingering concerns over the U.S. dollar, and the poor outlook for the Treasury's five-year note auction.
Faced with a number of potentially negative developments for bonds, investors lightened up on their holdings ahead of what was expected to be a dismal five-year note sale, fixed-income market observers said.
After Tuesday's diappointing two-year note sale, bond investors were nervous going into the five-year auction, typically a tougher sell than short-dated securities. However, a softer April durable goods report, lower commodities prices, and a more constructive outlook toward U.S. and Japanese trade talks may have brought some buyers to the table.
The stop-out rate on the Treasury's $11.01 billion of five-year notes auction was 6.78%, slightly better than the 6.79% dealers expected. The bid-to-cover ratio was 2.87-to-1, with non-competitive bids at $750 million. By contrast, Tuesday's two-year auction resulted in a yield of 5.94% and a dismal bid-to-cover ratio of 2.30-to-1.
Another sharp decline in the Commodity Research Bureau's Futures Price Index enlivened dealers to cover short positions set in anticipation of higher commodities prices.
The closely-watched CRB fell almost three points to 231.87 Wednesday. Coming on the back of a more than 3 1/2 point jump during Tuesday's session, the drop in prices was a welcome development for bond investors, many of whom feared recent increases in commodities as an omen of upward price pressures in the national economy.
Elsewhere, the Commerce Department reported new orders for durable goods from U.S. manufacturers rose a weaker-than-expected 0.1% in April, the eighth increase in the last nine months.
"The success of the five-year auction allowed the market to return its focus to a number of positive developments," Sullivan said.
Players were cautiously optimistic about the upbeat auction, noting that the absence of real retail interest for the five-year made it a bittersweet victory for the Treasury market. Participants generally agree that the lack of buy-side demand for government-backed paper - both in the primary and secondary markets - continues to weigh on the outlook for Treasuries.
Retail was worried about the five-year and there was some relief that the auction went well, but we'll still have to whether or not they decide to get involved in the market," said Matthew Alexy, senior market strategist at CS First Boston.
In futures, the June bond contract ended up 8/32 at 104.12.
In the cash markets, the 5 1/2% two-year note was quoted late Wednesday unchanged at 99.27-99.28 to yield 5.94%. The 6 1/2% five-year note ended up 4/32 at 99.04-99.06 to yield 6.69%. The 7 1/4% 10-year note was up 12/32 at 100.29-101.01 to yield 7.10%, and the 6 1/4% 30-year bond was up 17/32 at 86.25-86.29 to yield 7.34%.
The three-month Treasury bill was down five basis points at 4.25%. The six-month bill was down three basis points at 4.74%, and the year bill was unchanged at 5.20%.
Grand Metropolitan Investment Corp. priced a face amount of $1.224 billion of zero-coupon notes to yield 8.31%, according to lead manager Goldman, Sachs & Co. The noncallable notes were priced at $46.548 and are rated A2 by Moody's Investor's Service and Standard & Poor's Corp.
Also in the primary market, Philippine Long Distance Telephone Co. priced $250 million in 10-year junk to yield 10.71% or 350 basis points more than the 10-year Treasury note, according to lead manager BT Securities. The note were prized at 99.485 and bear a 10.625% coupon.
In the secondary market for corporate securities, spreads of investment-grade issues narrowed by 1/4 to 1/2 of a point, while high-yield issues generally ended 1/4 of a point higher.
Rating News
Nabisco Inc.'s investment-grade debt strengthened yesterday after Standard & Poor's affirmed ratings on the company.
Standard & Poor's said it affirmed the following ratings for RJR Nabisco and its units: BBB-minus for senior debt, BB-plus for subordinated debt, and A-3 for commercial paper.
In addition, Standard & Poor's affirmed its BB-plus preferred stock rating of RJR Nabisco Holdings Corp.
The tobacco company's 8.30% senior notes due 1999 were last quoted at 340 bid, 330 offered, and the company's 10 1/2% senior notes due 1998 were quoted at 210 bid, 195 offered, with both yields narrowing by 10 to 15 basis points compared with Treasuries.
The ratings were removed from CreditWatch, where they were placed on Sept. 22, 1993, and about $16 billion of total debt and preferred stock is outstanding. The affirmations follow the stabilization of U.S. tobacco markets following a 1993 price war and a re-evaluation of the dangers of smoking, Standard & Poor's said.
Concurrent with its recent $1.7 billion PERCS offering, RJR disclosed that proceeds could be used in part to fund a significant corporate investment, such as a joint venture, merger, acquisition, divestiture, asset swap, spin-off, and/or recapitalization that could result in the separation of the tobacco and food businesses, Standard & Poor's said.
Standard & Poor's said it believes that RJR management intends to maintain its investment-grade ratings and will make every effort to structure any corporate event to protect bondholders, including taking on a partner to effect a separation of these businesses.
Subsequent to the CreditWatch listing, U.S. tobacco markets have stabilized, but at reduced earnings and cash flow levels. Standard & Poor's said the U.S. tobacco business risk has permanently increased. While the agency does not expect a price war of the severity experienced in 1993, it does expect "price skirmishes" from time to time, as companies selectively defend their brand franchises.
Moody's said it upgraded to Baa2 from Baa3 the long-term foreign currency debt rating of the Czech Republic.
Approximately US$835 million of debt is affected, Moody's said.
The rating agency said the action will result in the upgrade of the debt of the Czech National Bank and Statni Banka. The Statni Banka's bonds are jointly guaranteed by the Czech and Slovak Republics. The Czech National Bank is the channel through which the Czech government issues debt.
Moody's said the upgrade reflects several factors. The Czech Republic is steadily becoming a full-market economy, and it has quickly integrated into the world trade system. The government has a clear market-oriented strategy that backs an ambitious privatization program.
The Czech Republic also enjoys generally stable macroeconomics fundamentals: producer price inflation, now near 9% annually, is moderate; the public sector fiscal deficit has been systematically small; although likely to rise, unemployment is exceptionally low; the current account has been in surplus the last few years; and any future deficits appear to be manageable for the near future.
The country has a relatively low external debt level, and has good chances of receiving sizable inflows of foreign direct investment, Moody's said. Treasury Market Yields Prov. Prev. Wednesday Week Month 3-Month Bill 4.25 4.27 3.956-Month Bill 4.74 4.66 4.411-Year Bill 5.20 5.15 4.952-Year Note 5.94 5.77 5.713-Year Note 6.26 6.13 6.055-Year Note 6.69 6.58 6.617-Year Note 6.74 6.65 6.6610-Year Note 7.10 7.01 6.9930-Year Bond 7.34 7.27 7.26 Source: Cantor, Fitzgerald/Telerate
