A more stable U.S. dollar and healthy demand for new supply gave the market a lift yesterday as dealers and retail accounts lined up to purchase Treasuries.
The benchmark 30-year bond ended up a point, to yield 7.39%.
Government bonds gained ground as the dollar stabilized and encouraged investors to buy back some of the securities they sold Tuesday.
"The stronger dollar proved to be a positive development for the bond market, and prices red recent losses posted due to currency volatility," said Samuel Kahan, chief economist at Fuji Securities Inc.
The Treasury market lost ground Tuesday as the U.S. dollar's fall to a new post-World War II low unnerved investors worried about their dollar-denominated assets.
Accounts lightened their holdings of U.S. government securities Tuesday as the dollar fell firmly below 100 yen, its lowest level in almost 50 years, and the deutsche mark hit a new 1994 low of 1.5903 marks.
The dollar improved to 100.80 yen and 1.6048 deutsche marks in midday trading, up from 100.15 and 1.5935 late Tuesday in New York.
Foreign exchange market activity continues to be the focus of trading, as record lows set Tuesday have many in the market fearful the Federal Reserve will have to raise interest rates in order to support the dollar.
Lending further support to Treasuries was stronger-than-expected demand at the Treasury's auction of new five-year notes. The Treasury sold $11 billion of five-year notes on Wednesday at a yield of 6.77%, a slightly lower yield than most traders had expected. Noncompetitive bids totaled $856 million, up from $750 million from the last five-year auction, and the bid-to-cover ratio was 2.75 to 1.
After the auction resulted were released, the market rose as dealers covered short positions, building on gains made on the stronger dollar.
The latest wave of market jitters reflects investors' fears that the sliding dollar will force the Federal Reserve to raise interest rates sooner than expected. That notion has been supported by news reports that Fed officials, have privately signaled their willingness to do just that.
Testifying before the House Budget Committee yesterday, Fed Board Chairman Alan Greenspan said the United States "cannot be indifferent" to sharp dollar movements, adding that the Fed and Treasury Department are closely monitoring the currency.
Greenspan said that foreign exchange markets have been the focus of considerable attention in recent days.
"I do not intend to discuss these developments in my testimony this morning," Greenspan said. "However, I thought it would be appropriate to inform the committee that [Treasury Secretary Lloyd] Bentsen and I have been following developments very closely because we cannot be indifferent to major movements in our currency."
Market observers were mixed on whether the central bank would boost credit in coming weeks to bolster the sagging dollar. Much of the debate centers on whether the Fed would be willing to support the dollar at the expense of maintaining economic expansion.
David C. Munro, chief U.S. economist at High Frequency Economics, is among the market observers who believe the Fed will boost rates in coming weeks to restore stability to global foreign exchange markets.
On the other side, Donald Fine, chief market analyst at Chase Securities Inc., thinks the Fed will rely on bouts of concerted central bank intervention, not higher rates, to prop up the dollar.
To support his case, Fine said investors need only to recall England's attempts to support the pound artificially through higher interest rates in 1991. Raising rates failed to boost the value of the currency over time and resulted in a substantial increase in unemployment.
"Monetary policy should never be used to stabilize the dollar," Fine said.
In futures, the September bond contract ended up more than a point at 103.20.
In the cash markets, the 5 7/8% two-year note was quoted late Wednesday up 4/32 at 100.01-100.02 to yield 5.96%. The 6 3/4% five-year note ended Up 9/32 at 100.02-100.04 to yield 6.71%. The 7 1/4% 10-year note was up 19/32 at 100.27-100.31 to yield 7.11%, and the 6 1/4% 30-year bond was up 32/32 at 86.07-86.11 to yield 7.39%.
The three-month Treasury bill was down one basis point at 4.26%. The six-month bill was down two basis points at 4.73%, and the year bill was down one basis point at 5.22%.
A $500 million issue of Indah Kiat International Finance Co. guaranteed senior secured notes was priced in three tranches through underwriters led by Morgan Stanley & Co.
The first part, $150 million of noncallable debt due June 15, 1999, was priced at par to yield 11.375%.
The second part, $200 million of noncallable debt due June 15, 2002, was priced at par to yield 11.875%.
The third part, $150 million of debt due June 15, 2006, was priced at par to yield 12.25%. The debt is noncallable or seven years.
The debt is guaranteed by P.T. Indah Kiat Pulp & Paper Corp. The three parts are each rated Ba3 by Moody's Investors Service and B by Standard & Poor's Corp.
Also in the primary market, Fannie Mae issued $1.5 billion of global notes due 2004 via Merrill Lynch & Co.; Comerica Bank issued $500 million of floating- rate notes due 1995 via Morgan Stanley and Co.; and Surgical Health Corp. issued $75 million of senior subordinated notes due 2004 via Smith Barney Inc.
In the secondary market for corporate securities, spreads of investment-grade issues narrowed by 1/2 to 3/4 of a point, while high-yield issues generally ended mixed.
Kidder Peabody CEO Resigns
Kidder, Peabody & Co. chairman and chief executive officer Michael A. Carpenter has resigned, effective immediately, a company spokeswoman said.
General Electric Co. named Dennis D. Dammerman chairman and chief executive of its Kidder Peabody unit.
Dammerman will retain his titles of senior vice president and chief financial officer of GE.
GE named Denis J. Nayden president and chief operating officer of Kidder Peabody. Nayden served as executive vice president at GE Capital Services.
The changes come in the wake of news about alleged phantom trades by ex-head of Treasuries trading Joseph Jett that forced GE to inject $200 million into the brokerage firm.
John Welch, GE chairman and chief executive officer, said: "The appointments of Dennis Dammerman and Denis Nayden demonstrate our commitment to the success of Kidder Peabody. Michael Carpenter shares this commitment and recognizes that for the good of the firm it is time to have a fresh team leading Kidder
"We are making these appointments now in order to lay to rest any perceived issues about Kidder's financial strength or our corporate support for the firm," Welch said.
Carpenter said, "I am proud of what we accomplished during my five years at Kidder. Because of my commitment to the firm and its future, I am stepping aside today to allow a new team to concentrate on running the strong set of businesses we have established."
GE said Dammerman's is filling the Kidder Peabody post as a transition role and that after the transition, he will return to his chief financial officer post at GE.