The government bond market is all dressed up with no place to go this week.
Sporting a more optimistic outlook, fashioned by a number of weak economic reports released last week, bond investors are funneling back into the market and pushing yields lower across the board.
Treasuries are coming back into style as more bond investors embrace the view that the Federal Reserve may not raise interest rates before its next meeting of policymakers.
The sea change in investor attitudes reflects improved market fundamentals and a better technical outlook. Favorable economic figures and a stronger U.S. dollar last week rounded out the list of reasons why observers believe the central bank can hold off on tightening monetary policy between now and the Aug. 16 Federal Open Market Committee meeting.
The new trend, however, hasn't quite caught on yet in the broader fixed-income markets. The problem is that despite the bond market's new wardrobe of weaker economic news, retail investors are playing their assets close to the vest. Amid signs that the economy continues to expand apace and uncertainty about the direction of U.S. interest rates, few long-term investors are willing to come off the sidelines and risk sizable losses.
"The bond market doesn't know where it's going," said Donald Fine, chief market analyst at Chase Securities Inc. "The softening of economic statistics we've seen gave the market some comfort, but people want to see if that softening continues. My guess is we're in a holding pattern."
Much of the confusion in the bond market reflects puzzlement over when the Federal Reserve will tighten monetary policy again. There still remains a wide divergence of opinions as to whether the Fed will act soon to rein in credit again or will sit back and continue to monitor the economy's performance.
The bond market hopes to get a read on the future of monetary policy this week as Fed Chairman Alan Greenspan testifies before Congress. But many Wall Street observers are saying that the bond market's better performance last week indicated that, at least for now, investors have already made up their minds.
"As fears of Fed firming receded, bond market sentiment turned less bearish, precipitating substantial short covering and speculative buying," said Philip Braverman, chief economist at DKB Securities, the New York-based unit of Japan's DaiIchi Kangyo Bank. "Though the market has concluded that the Fed will not firm for the moment, it has not yet discerned that further Fed firming is entirely inappropriate for as far as the eye can see."
The retail sales report in particular provided the first comprehensive view of demand pressures in the national economy in June and gave the bond market further indications that the slowdown in spending in recent t, months continued last month.
"There is no sin in having growth in the economy," Samuel Kahan, chief economist at Fuji Securities Inc., said Thursday. "It's abovetrend growth that's a problem, and the retail sales report shows the economy is only growing at a steady pace at best."
The Commerce Department reported that retail sales increased 0.6% last month; most analysts had forecast 0.8%.
Getting a read on the current pace of spending was crucial to long-term bond investors, who have been reluctant to establish large positions amid signs that the economy continues to grow apart, he said.
Another sign came from the Commerce Department, which reported business inventories rose 1.1% in May to a seasonally adjusted $884.77 billion, the largest increase in nearly seven years. In addition, the University of Michigan's mid-month report on its July consumer sentiment index showed a decline to 88.9 from 91.2 in June, according to market sources.
The bond market reacted positively to the rise in inventories because higher inventories in the second quarter could place some downward pressure on manufacturing activity in the third quarter, players said.
Coupled with last week's round of favorable inflation reports, players said they are gradually becoming a shade more bullish on the bond market's prospects.
"It's still a bear market, but things are starting to look a bit better," said John Canavan, analyst at Stone & McCarthy Research Associates Inc.
Treasury Market Friday
Government securities prices rose Friday as economic reports lent further credibility to the view that the Federal Reserve will not boost shortterm rates immediately.
The 30-year bond ended down 1/8 of a point, to yield 7.54%.
The market largely ignored the release of the June industrial production and capacity utilization report. The Federal Reserve Board reported industrial production in June rose 0.5% while capacity utilization expanded by 0.3 percentage points to operate at 83.9% in June, the highest level since June 1989.
In futures, the September bond contract ended down 4/32 at 102.18.
In the cash markets, the 6% twoyear note was quoted late Friday unchanged at 99.30-99.31 to yield 6.01%. The 6 3/4% five-year note ended unchanged at 99.19-99.21 to yield 6.83%. The 71/4% 10-year note was down 3/32 at 99.30-100.02 to yield 7.23%, and the 6 1/4% 30-year bond was down 4/32 at 84.23-84.27 to yield 7.54%.
The three-month Treasury bill was down two basis points at 4.35%. The six-month bill was unchanged at 4.85%, and the year bill was up one basis point at 5.33%.
Corporate Securities
Standard & Poor's Corp. said that since Federated Department Stores said it had reached an agreement in principle to merge with R.H. Macy & Co., the rating agency should be able should be able to remove Federated's debt from negative CreditWatch status by Jan. 31, the anticipated merger consummation date.
The combined entity, with $13 billion in annual revenue coming from more than 300 stores in virtually every major market, would be the largest department store company in the United States, said Standard & Poor's.
The proposed plan is for Macy's to emerge from Chapter 11 in January with Macy's creditors receiving a combination of cash, debt, and equity valued at about $4.1 billion.
Standard & Poor's said the rating on R.H. Macy's approximately $1.5 billion of
subordinated debt was lowered to D after the company filed for Chapter 11 bankruptcy protection.
The agreement has been endorsed by the management of both companies, by all of Macy's creditor groups, and by Macy's board of directors. A formal plan of reorganization is expected to be filed around Aug. 1. At that time, the rating agency expects to withdraw all its ratings on R.H. Macy's debt, Standard & Poor's said.
Federated believes that the combined company will be much stronger than either Federated or Macy's is separately, said Standard & Poor's. However, Federated's ratings remain on CreditWatch with negative implications until Standard & Poor's can fully assess the extent of any added business and financial risk that may result from the combination.
Standard & Poor's said it believes that potential business risks include difficulties in assimilating a company with a different corporate culture and a different buying theory, the possible need to sell or close stores that are in direct competition with each other, and the possible negative customer response from potential changes in merchandising and marketing.
An initial assessment of the proposed new capital structure does not seem to result in a significant change, Standard & Poor's said. However, one of the key financial concerns is that cash flow generation may be weakened since Macy's is less profitable than Federated, the rating agency said.
Before determining whether a change will be made in the Federated credit rating, Standard & Poor's said it will analyze management's plans for consolidations, asset sales, and potential cost savings.
