Governments slid lower Monday as investors lightened inventories ahead of today's inflation report, which they fear will pose problems for the market.
The 30-year bond ended down almost 1/2 a point, to yield 7.35%.
This week's gamut of economic reports has left few players willing to get involved in the bond market. Reports scheduled for release include retail sales, industrial production, capacity utilization, and housing starts.
But the most important release is today's consumer price index, which, coupled with last Friday's producer price report, offers bond investors their first comprehensive view of national price pressures in May and provides monetary authorities and a blueprint for the direction of short-term interest rates, market participants said.
"The CPI for May will have powder enough to give traders burns," said David C. Munro, chief U.S. economist at High Frequency Economics.
Contributing to the market's declines were higher commodities prices, weakness in the U.S. dollar and foreign bond markets, and follow-through selling from Friday, players said.
Upward pressure on coffee, grains, and metals prices sent the Commodity Research Bureau's index of 21 futures prices up more than 2-1/2 points to 235.50.Treasury Market Yields Prev. Prev. Monday Week Month 3-Month Bill 4.19 4.16 4.246-Month Bill 4.66 4.64 4.801-Year Bill 5.16 5.11 5.352-Year Note 5.87 5.75 5.983-Year Note 6.20 6.07 6.355-Year Note 6.65 6.48 6.827-Year Note 6.69 6.53 6.8810-Year Note 7.05 6.90 7.2230-Year Bond 7.35 7.21 7.44 Source: Cantor, Fitzgerald/Telerate
Adding further fuel to the fire yesterday were comments by Federal Reserve Governor Susan Phillips, who called the recent increases in commodities prices worrisome.
Although Phillips' comments were generally consistent with ones made in recent weeks by other Fed officials, the fixed-income markets remain extremely vulnerable to any talk of inflation, said Fred Leiner, bond market strategist at Continental Bank.
"The market is worried primarily about rising inflation and anything or anyone that suggest prices are rising is having an effect," Leiner said.
If last Friday's PPI index was any indication, analysts said, the Treasury market could be in for a surprise today, market participants said. Though producer prices fell 0.1% in May, they rose 0.4% excluding the volatile food and energy components. The sharp increase in the core rate raised eyebrows in the fixed-income markets and placed an even brighter spotlight on tomorrow's CPI release.
Expectations for the CPI release center on moderate increases of 0.2% overall and 0.3% excluding food and energy. In April, Consumer prices rose 0.1% over all, while they edged up 0.2% with food and energy factored out.
Ahead of the release, the bond market entered a holding pattern, with few participants willing to place new bets. That recent lack of buy-side demand is weighing on the outlook for Treasuries, analysts agreed.
Larger accounts are looking for a more stable interest rate environment and assurances that the economy is not overheating before entering the market, they said.
Today will also bring the May retail sales report. Market players are anxiously awaiting this Commerce Department release to judge whether consumer spending patterns are in fact slowing as scattered surveys have indicated.
Bond investors continue to wonder whether spending on the national level will remain an engine of economic growth or sputter out as the economy approaches the end of the second quarter. Economists generally expect retail sales to increase between 0.1% and 0.2% in May.
The inflation-sensitive bond market will keep an eye on the Federal Reserve's report on industrial production and capacity utilization. With capacity at the nation's factories hoveringg dangerously close to the 84% level, investors wonder how far behind wage pressures could possibly be.
The increase in hourly earnings in the May employment report raised some red flags and provided one of the most compelling pieces of evidence yet of mounting wage pressures. Average hourly earnings jumped 6 cents in May to $11.11. Market players fear that Wednesday's report on capacity utilization could be another red flag. Economists generally expect capacity to hold near 83.6% in May.
In futures, the September bond contract ended down 10/32 at 104.30.
In the cash markets, the 5-7/8% two-year note was quoted late Monday down 3/32 at 99.31-100.00 to yield 5.87%. The 6-3/4% five-year note ended down 9/32 at 100.11-100.13 to yield 6.65%. The 7-1/4% 10-year note was down 11/32 at 101.07-101.11 to yield 7.05%, and the 6-1/4% 30-year bond was down 15/32 at 86.23-86.27 to yield 7.35%.
The tree-month Treasury bill was unchanged at 4.19%. The six-month bill was down one basis point at 4.66%, and the year bill was unchanged at 5.16%.
Bankruptcies filed in U.S. courts in the second quarter of fiscal 1994 declined slightly from the first quarter and were at their lowest level since the quarter ending September 1990, according to a report issued by the administrative office of the U.S. courts.
The report said filings totaled 206,565 in the second quarter versus 206,570 at the end of the first quarter. It was the lowest quarterly filing since the quarter ending Sept. 30, 1990, when 192,555 bankruptcies were filed. Second quarter 1994 filings were more than 16,000 below those reported in second quarter 1993, the report said.
Market sources agreed that steadily declining bankruptcies bode well for corporate bond issuers and investors as the trend suggests renewed stability in U.S. companies and portends stronger credit quality.
"It's a very good development for issuers and investors," a syndicate source said.
Non-business filings -- those cases typically filed by consumers -- totaled 192,707, a very small increase over last quarter when filings numbered 192,617. Business filings for the second quarter barely changed, totaling 13,858, while filings for the period ending in December totaled 13,953.
As in the first quarter, the same five district courts led the nation during the second quarter in number of bankruptcy filings. The District Court for the Central District of California reported the greatest number of filings at 21,511, followed by the Northern District of Illinois at 7,144, and the Northern District of California at 6,601 filings.
The remaining two of the five district courts were the Northern District of Georgia with 6,408 filings, and the Middle District of Florida, with 6,248 filings.
Nationwide, the majority of bankruptcy filings were in Chapter 7, totaling 142,035, up from last quarter's total of 140,351.
Chapter 7 is a straight liquidation, designed for individuals and businesses wishing to start over, but who cannot pay their debts from their income. Under this chapter, the individual debtor is permitted to keep certain exempt property and the remaining property is sold to satisfy creditors.
Chapter 13 was the next largest bankruptcy categoiry, with filings this quarter at 60,279, down from the previous quarter's total of 61,726.
Chapter 13 is designed for individuals with regular income who wish to, but are unable to, pay their debts. Under this chapter, creditors may be repaid, in full or part, in installments, over a three-year to five-year period.
In other news, R.H. Macy & Co. Inc. said it has been informed that the attorney general of New York has begun a formal investigation of the possible acquisition of Macy's by Federated Department Stores Inc.
Macy's said the attorney general's office requested detailed information and documents relating to several aspects of Macy's business and its competitive environment as they relate to Federated and other competitors.
Macy's said it plans to cooperate with the request.
In the secondary market for corporate securities, spreads of investment-grade issues widened by 1/4 to 1/2 of a point, while high-yield issues generally ended 1/4 of a point lower.