Prices held steady in a narrow trading range yesterday as Treasury bond investors positioned themselves for today's producer price index.
Signs of inflation have become an increasing worry for bond investors, and the market is keeping an anxious watch on what the August PPI may say about price pressures.
Economists' consensus is an index increase of 0.4%, with the PPI excluding food and energy up only 0.2%. A larger-than-expected increase could lead to a sell-off as investors jump to other markets, analysts say.
Another upcoming indicator, the consumer price index for August, has also stalled market activity as players await the Tuesday number.
The benchmark 30-year Treasury bond was unchanged in late trading yesterday, to yield 7.56%.
A government bond trader said a midmorning rise in prices, with the long bond up as much as 9/32, came about because traders were positioning themselves ahead of the PPI report. "We're stuck in yesterday's range and probably won't break out of it ahead of tomorrow's number," the trader said.
"The dollar rally, if you want to call it that, is certainly helping the bonds," the trader said. "Right now, we're trading tick for tick with the dollar-yen relationship."
The dollar was trading at 99.48 Japanese yen and 1.5590 marks at midmorning, up slightly from earlier levels. By late in the day, the dollar was quoted at 1.5565 German marks and 99.61 Japanese yen.
Maria Fiorini Ramirez, president of Maria Fiorini Ramirez Inc., said it is "a common misconception" that a weak dollar is a harbinger of inflation. There has been no inflation during the nine-year drop of the dollar from its peak of 250-plus yen in March 1985, she said. "A lot is lost in the data we look at," Fiorini Ramirez said. "We're looking at a small glimpse of the reality of the world that we live in."
Meanwhile, new state jobless claims declined by 3,000, to 330,000, in the week ended Sept. 3, the Labor Department reported yesterday. Economists had expected as much, and the market remained unmoved by the number.
Also yesterday, Federal Reserve vice chairman Alan Blinder addressed the Mortgage Bankers Association, but the market was unimpressed with his statement that fighting inflation and boosting employment are equally important Fed goals. Blinder, who has been fighting a perception that he is a dove on inflation, also said the economy seems to be responding "moderately" to Fed tightening this year.
"Tomorrow's report is much more important than Blinder's ambiguous comments," the government bond trader said. Blinder appears softer on inflation than employment, he said, and it looked as if he wanted to put those fears to rest.
Traders, if they were in the market at all, spent most of their energy yesterday squaring positions ahead of the PPI report. Fiorini Ramirez said market players are being exceptionally cautious because of the employment climate on Wall Street itself.
She pointed to Lehman Brothers' layoffs of 7% of its 8,650 employees, Merrill Lynch & Co.'s cut of 4% of its 2,500 employees in fixed income, and Paine Webber Inc.'s dismissal of 8% of 435 employees in its bond operation.
"Volume of activity has gone down a lot, the risk profile has diminished, and with less jobs around people are risk-averse and have less stamina to carry on positions," Fiorini Ramirez said. "It's very sensitive, and I think there's going to be a lot more merging on the money management, banking, and security sides."
Treasury Market Yields Previous Previous Thursday Week Month3-Month Bill 4.63 4.64 4.436-Month Bill 5.04 4.97 5.091-Year Bill 5.53 5.50 5.562-Year Note 6.18 6.13 6.243-Year Note 6.47 6.40 6.605-Year Note 6.88 6.77 6.997-Year Note 7.07 6.97 7.1710-Year Note 7.27 7.16 7.3430-Year Bond 7.56 7.44 7.64
Source: Cantor, Fitzgerald/Telerate
In late trading yesterday, the 10-year Treasury note was unchanged to yield 7.27%. The seven-year note was down 1/32 to yield 7.07% and the five-year was unchanged to yield 6.88%.
The yield on the three-month bill was unchanged at 4.63%. The yield on the six-month bill was also unchanged at 5.04%, and the yield on the one-year was down one basis point to 5.53%.
The December Treasury bond futures contract closed up 1/32 to 101 14/32.
Also yesterday, the Treasury Department said that it would sell $4 billion of one-week cash management bills today.
The bill sale is unusual because it settles on the same day it is auctioned, a senior Treasury official said.
The official explained that in recent months the government has been taking in more cash than anticipated through higher tax receipts, but "every once in a while you get a turn in the opposite direction," referring to higher than expected government outlays.
Treasury officials realized the cash shortfall yesterday and announced the cash management bill sale, as is standard practice, the official said.
In the corporate market, spreads on investment-grade issues narrowed yesterday by up to five basis points.
The primary market was very active. The Tennessee Valley Authority sold $500 million of 40-year 8 1/4% power bonds callable after five years. CS First Boston managed the deal and priced the bonds at 95.746 to yield 8.63% for a spread of 93 basis points to the 7 1/8% 30-year Treasury bond. At the end of the day, the underwriter reported that the deal was all sold.
Also yesterday, J.P. Morgan Securities was the lead manager for a $500 million offering of J.P. Morgan & Co. debt. The bank sold $500 million of 7 5/8% subordinated notes due in 2004. The noncallable notes were priced at 99.504 to yield 7.697%, 43 basis points more than the 10-year Treasury note.
In the below-investment grade market, prices were mixed. Bonds of Del Monte Foods Corp. continued to fall following the news that an arrest warrant has been issued for Carlos Cabal Peniche, a Mexican financier involved in acquiring part of the company.
The company's 10% bonds due in 2003 fell two points yesterday to 82, following a three-point drop on Wednesday.