U.S. government securities ended firmer but off their session highs yesterday as tepid demand and eroded early gains made on lower commodities prices and a stronger U.S. dollar.

The 30-year bond ended up more than 3/8 of a point, to yield 7.39%.

After two consecutive sessions of aggressive selling, government bond investors found reason to buy back some of the securities they sold in response to higher commodities prices and volatility in world currency markets.

However, tepid demand at the Treasury Department's two-year note auction placed selling pressure on the market through the afternoon.

"Lower commodities prices and the strong dollar provided a good underpinning for the market, but prices fell after we had an unpleasant surprise from the two-year auction." said Anthony Karydakis, senior financial economist at First Chicago Capital Markets Inc.

Players who have read persistent increases in commodities as an omen of price pressure in the national economy were encouraged by a decline in the Commodity Research Bureau's index of 21 key commodities prices yesterday. The CRB ended Tuesday's session down 3.67 to 234.69, erasing sizable chunk of its increases in recent sessions.

The closely watched index rose more than 4 1/2 points Monday on higher agriculture and precious metals prices.

Lending further support to the bond market was a firmer U.S. dollar. News that the United States and Japan will resume formal trade framework talks lifted the dollar against the yen. The dollar closed at 104.60 yen, up from 104.33 late Monday.

The long end outperformed other sectors of the Treasury market as investors found solace in the retracement in commodities prices. Meanwhile, the short end lost ground as weak demand for supply Tuesday fueled fears that today's auction of $11 billion of five-year notes would come in weak.

The two-year notes were sold at a yield of 5.94%, a bit higher than most traders had expected. Non-competitive bids came in at $1.42 billion, higher than the previous auction's at $1.388 billion. The bid-to-cover ratio was 2.30-to-1.

The market's ability to absorb supply will set the tone for trading in the near term as dealers gauge retail interest for government securities and their own aptitude for distributing the paper, market observers said.

The five-year auction, players agree, will be critical to the market's ability to stabilize. Bond investors remember all too well the difficulty the market has had in absorbing new coupon securities since the Federal Reserve began tightening monetary policy in February, they said.

In terms of the five-year issue, primary dealers worry that the bond market's rally last week may have pushed short-term Treasury yields to unattractive levels.

On the economic statistics front, Johnson Redbook's latest indicator of national retail sales shows sales down 2.7% in the first three weeks of May from the April average.

The report also showed that sales in the week ended May 21 were up 6.7% from the same period in 1993. Memorial Day, which falls in the fourth week of May this year, produced a strong increase in the reading last year.

Last week, the Redbook reported that seasonally adjusted sales for the first two weeks of May were up to 6.6% over last year and down 2.8% from April. Redbook staff said sales were up in what was described as the Southwest-West followed by the Central region, the Southeast, and the East.

In futures, the June bond contract ended up 16/32 at 104.04.

In the cash markets, the 5 1/2% two-year note was quoted late Tuesday unchanged at 99.08-99.09 to yield 5.89%. The 6 1/2% five-year note ended up 1/32 at 98.31-99.01 to yield 6.73%. The 7 1/4% 10-year note was up 5/32 at 100.17-100.21 to yield 7.15%, and the 6 1/4% 30-year bond was up 13/32 at 86.08-86.12 to yield 7.39%.

The three-month Treasury bill was down one basis point at 4.30%. The six-month bill was down two basis points at 4.77%, and the year bill was up one basis points at 5.21%.

Corporate Securities

U.S. corporate bond prices gained almost one point yesterday, led by a reassessment of Monday's fears of inflation, dealers said.

Corporate bond prices firmed in line with U.S. Treasuries, and traders said yield spreads narrowed by 20 basis points.

In the secondary market for corporate securities, spreads of investment grade issues narrowed by 3/4 to a point, while high yield issues generally ended a point higher.

The rally was led by News Corp. Ltd., which gained following the announcement that its Fox television network secured 12 new affiliate stations. Most of the stations were CBS affiliates.

Bonds issued by Philip Morris recovered from morning trading to remain relatively unchanged after falling Monday on news that Mississippi filed a lawsuit against the major tobacco companies to recoup state funds spent on Medicaid payments.

In the primary market, PNC Funding Corp. issued $200 million of 7 3/4% subordinated notes due 2004 via Smith Barney Shearson.

A $200 million issue of Tennessee Valley Authority first-installment series bonds, due May 31, 1999, was priced at par to yield 7.318%, according to lead underwriter CS First Boston Inc. The issue is noncallable for two years and was priced 60 basis points more than comparable Treasuries.

A $150 million issue of Penske Truck Leasing Co. LP notes, due May 15, 1999, was priced as 7 3/4 at 99.965 to yield 7.76%. The noncallable notes were priced 104 basis points more than comparable. Treasuries and sold through underwriters led by Kidder Peabody & Co.

Rating News

Moody's Investors Service said it downgraded Greece's senior long-term foreign currency debt to Baa3 from Baal.

As a result, the ratings on all outstanding issues of the Bank of Greece were also cut to Baa3 from Baa1, Moody's said.

In addition, Moody's assigned a Baa3 rating to the 1.0 billion-mark issue due 2001 of the Hellenic Republic of Greece, which is the first Euro-market bond issued directly by the Republic, the agency said.

Moody's cited, in particular, the continued deterioration of Greece's fiscal balances, exacerbated by and contributing to a rapidly growing debt burden.

Moody's said that substantial fiscal reforms and restructuring required to counter and reverse these forces are unlikely to have much impact in the short term.

As a result, Moody's said Greece's public sector debt may continue to grow in the coming years, keeping real interest rates at high levels, crowding out domestic investment, and slowing economic growth.

While progress had been made during 1990-92 in bringing down the public sector borrowing requirement, Moody's said Greece's central budget deficit increased sharply in 1993 to 13.9% of gross domestic product, overshooting the 7.9% budgetary target. The primary budge [exclusive of interest payments] was in deficit in 1993, despite a 5.1% GDP surplus, the agency said.

Standard & Poor's Corp. affirmed its A-1-plus commercial paper ratings of Sandoz Group units, Sandoz Corp., and Sandoz Holding Netherlands BV, following the announcement of Sandoz's agreement to purchase Gerber Products Co. for about $3.7 billion in cash.

Standard & Poor's said it also affirmed Gerber's A-1-plus commercial paper rating. In addition, Standard & Poor's said it may raise Gerber's AA-minus senior debt.

Gerber has about $100 million of rated long-term debt outstanding.

Standard & Poor's said the Gerber acquisition will double Sandoz's nutritional foods business and add critical mass, particularly in the United States, as well as provide some modest diversification to Sandoz's primary businesses in pharmaceuticals and chemicals.

Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 4.30 4.31 3.966-Month Bill 4.77 4.75 4.391-Year Bill 5.21 5.26 4.862-Year Note 5.89 5.87 5.533-Year Note 6.27 6.22 5.895-Year Note 6.73 6.64 6.427-Year Note 6.77 6.69 6.4910-Year Note 7.15 7.03 6.8130-Year Bond 7.39 7.26 7.10Source: Cantor, Fitzgerald/Telerate

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