Weak bond markets abroad and a sharp increase in commodities prices sent Treasuries lower yesterday in moderate activity.
Prices ended moderately lower across the board, led by the 30-year bond, which closed down more than 1/4 point, to yield 7.4%.
There was no single factor behind the market's declines, Wall Street analysts and traders said, noting that activity was dominated by dealers and speculative accounts. Retail investors for the most part remained idle, they said.
Most players cited declines over the last few trading sessions in the European bond market as the primary force behind the Treasury market's losses. To a lesser extent, they cited higher commodities prices, a weak U.S. dollar, and concerns over this week's economic news as factors behind the Treasury market's losses.
"The weakness in Europe was the most important factor for U.S. Treasury bonds, and that's the primary reason why we were down," said Fred Leiner, bond market strategist at Continental Bank.
European bond markets sold off amid fears that improvement in economies on the continent will lead to higher interest rates. Exacerbating the selling were reports that the German central bank canceled a bond issue because it worried there wouldn't be enough demand. Just last week the Bundesbank called off a note sale because of poor bidding.
The weakness carried over into Treasuries as foreign investors sold U.S. government securities to hedge against losses in Europe. Traders said the Treasury market was seen as the most liquid of bond markets and came under pressure from large numbers of foreign sellers attempting to raise capital.
Inflation fears seemed to be validated yesterday, evidenced by a relentless increase in commodities prices. The Commodity Research Bureau's index of 21 key futures prices ended up 4.57 points to 235.45. Players fear the persistent increases in this inflation indicator could be an omen of price pressures in the national economy.
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. Observers agree that larger accounts are looking for a more stable interest rate environment and assurances that the economy is not overheating before entering the market.
The deciding factor for some accounts will be the outcome of this week's economic reports. Bond investors will get hit with a barrage of economic statistics, including the National Association of Purchasing Managers survey. But the most important will be the employment figures, which will provide the market with its first comprehensive look at the economy's performance in May.
Wall Street experts 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%.
The bond market got some economic reports Tuesday suggesting that economic growth may be starting to slow, including a decline in the Conference Board's measure of May consumer confidence and an unexpectedly large 6.8% decline in April's single-family home sales.
However, traders focused on the increase in the "prices paid" measure of the Chicago Purchasing Managers survey. The report's price component rose to 63.6 in May from 59.8 in April.
In addition, the Commerce Department reported that personal income rose 0.4% in April while spending slipped 0.1%.
The Treasury Department announced plans yesterday to pay down about $950 million on the federal debt with the sale Monday of about $25.2 billion in short-term bills.
Maturing bills outstanding total $26.15 billion. The sale amount is unchanged from the previous weekly T-bill auction. The offering will be divided evenly between 13-week and 26-week bills, which will be dated June 9 and will mature Sept. 8 and Dec. 8.
The Federal Reserve holds $6.36 billion of maturing three- and six-month bills for its own account. The Fed also holds $1.48 billion of maturing bills as agents for foreign and international monetary authorities.
In futures, the June bond contract ended down 15/32 at 103.18.
In the cash markets, the 5 7/8% two-year note was quoted late Tuesday down 1/32 at 99.25-99.26 to yield 5.97%. The 6 3/4% five-year note ended down 8/32 at 99.29-99.31 to yield 6.75%. The 7 1/4% 10-year note was down 6/32 at 100.20-100.24 to yield 7.14%, and the 6 1/4% 30-year bond was down 10/32 at 85.30-86.02 to yield 7.42%.
The three-month Treasury bill was unchanged at 4.26%. The six-month bill was up three basis points at 4.81%, and the year bill was up four basis points at 5.34%.
The primary market for corporate securities saw just one deal priced yesterday as issuers and investors remained sidelined ahead of this week's round of economic reports.
EchoStar Communications Corp. issued $335 million in debt due 2004 via Donaldson, Lufkin & Jenrette Securities Corp.
In the secondary market for corporate securities, spreads of investment-grade issues widened by 1/8 to 1/4 of a point, while high-yield issues generally ended unchanged.
Fitch Investors Service Inc. rated at A-minus Lehman Brothers Holdings Inc.'s $200 million of 7% senior subordinated notes due May 15, 1997.
In a press release, Fitch said it rated Lehman's senior long-term debt A, subordinated debt A-minus, and commercial paper F-1. Fitch rated Lehman's broker-dealer senior debt A, subordinated debt A-minus, and commercial paper F-1.
The rating agency said it based the ratings on the recapitalization and spin-off of the company by American Express Co., completed yesterday, that provides a sound risk-adjusted foundation to support Lehman's business and residual non-strategic assets.
Fitch called Lehman's institutional franchise strong and noted that the company has built momentum over the past three years. The agency said Lehman's earnings stream is diversified, but operating profit margins are below industry averages because of a large expense base.