Persistent worries about the U.S. dollar and the direction of the economy weighed on the minds of bond investors yesterday and prices of government securities ended lower.
The 30-year bond ended down 1/8 of a point, to yield 7.34%.
The concerns kept buyers on the sidelines and provided sellers with the necessary excuses to liquidate Treasuries.
"We saw some pressure from the dollar's continued weakness as well as from economic news and the potential inflation implications of those developments," said Michael Strauss, chief economist at Yamaichi International America Inc.
The Commerce Department reported that leading indicators rose 0.7% in March. While the figures were in line with market expectations, it suggested that many sectors of the economy continue to expand, analysts said.
The threat of continued turmoil in global foreign exchange markets also weighed on investors' minds. Dollar volatility raises inflation fears because the cost of imported goods rises. Investors also see a declining dollar as hampering the attractiveness of dollar-denominated assets.
The Treasury market and the dollar improved in early new York trading on rumors of central bank intervention, but both subsequently erased all of the gains when it became clear central banks had not come in in defense of the dollar.
The Fed's recent interventions in the foreign exchange markets reminded the fixed-income market that the Fed's moves to a tighter interest-rate policy did not strengthen the dollar. One avenue by which a tighter monetary policy is supposed to slow U.S. economic growth -- the Fed's desired goal -- is by making exports more expensive and less competitive over time, thereby dampening U.S. export growth.
Because recent rate hikes failed to bolster the level of the dollar against the Japanese yen and the German mark, bond investors are increasingly viewing the dollar's weakness as one more reason for the Fed to tighten credit.
The view continues to fuel speculation that the central bank may hike the federal funds rate again before the May 17 Federal Open Markets Committee meeting, which previously was seen as the most likely time for the next tightening.
"The market is building in the potential for another rate increase intended to prop up the level of the dollar," a head fixed-income trader said. "The Fed is in a position where it has to do its job and protect the level of the currency and avoid inflation.
Amid signs that the U.S. economy continues to gain steam and fears that the Fed will again boost short-term interest rate, market observers see little upside potential for the government bonds.
Dung Vukhac, managing director and head of fixed-income at Core-State Investment Advisors, said he continues to believe that unless and until there is clear evidence that the economy has returned to a non-inflationary growth path of 2% to 2.5%, inflation worries are not likely to fade and the bond market will not be able to stage a sustained rally.
"Since the economy is still in the process of rebounding from the adverse impact of severe weather and a major earthquake, signs of a deceleration of economic activity are not likely to emerge until the early summer months," Vukhac said.
Vukhac believes bond yields have risen to attractive levels by historical standards and that long Treasury yields appear to have priced in the cyclical inflation risk and found a trading range. However, he is less optimistic about the outlook for mortgage and corporate sectors of the fixed income markets.
"We expect the mortgage spread to continue to widen as a result of yield volatility and the trend toward a flatter yield curve," Vukhac said. "Corporate spreads also appear vulnerable since that have already widened despite a very light new issue volume this year to date."
In such an environment, he recommends that portfolios maintain durations shorter than their benchmarks. Portfolio structure should be barbelled with corporate and mortgage holdings concentrated on the shorter maturities to pick up yield while minimizing spread risk, he said.
In futures, the June bond contract ended down 1/4 of a point at 104.07.
In the cash markets, the 5 1/2% two-year note was quoted late Tuesday down 4/32 at 99.11-99.12 to yield 5.83%. The 6 1/2 five-year noted ended down 3/32 at 99-,029-99-,04 to yield 6.70%. The 5 7/8 10-year note was down 5 32 at 91.09-91.13 to yield 7.11%, and the 6 1/4% 30-year bond was down 4/32 at 86.26-86.30 to yield 7.34%.
The three-month Treasury bill was up five basis points at 4.12%. The six-month bill was up four basis points at 4.59%, and the year bill was up six basis points at 5.18%.
Moody's Investors Service Inc. said recent action by RJR Nabisco Inc. may facilitate the company's ability to redeem its $1.5 billion of 10 1/2% senior notes due 1998.
RJR Nabisco Inc. is an RJR Nabisco Holdings Corp unit.
In a special comment released Tuesday, Moody's said RJR Nabisco Inc.'s ability to call the 10 1/2 senior notes prior to their maturity will be enhanced by the company's decision to redeem on May 15 all but a small portion of about $2.1 billion of high-coupon subordinated debentures.
Moody's said that the senior notes contain restrictive covenants that limit RJR Nabisco Inc.'s ability to pursue transactions that would result in a separation of its tobacco and food operations. The senior notes are callable prior to maturity only under certain circumstances detailed in the securities' indenture, the agency said.
If all of the subordinated debentures were redeemed, Moody's said a different and more onerous set of conditions would have to be satisfied for the RJR Nabisco Inc. 10 1/2% senior notes to become callable.
As a result, leaving a small portion of the subordinated debentures outstanding makes it more likely that the 10 1/2% senior notes will become callable at some point in the future, Moody's said.
Traders said RJR Nabisco Inc.'s 10 1/2% senior notes due 1998 rose following the release of Moody's report.
Paper-hungry investors were able to sink their teeth into a couple of new deals in the primary market for corporate securities yesterday.
Ford Motor Credit priced $500 million of notes at 99.886 to yield 7.277%, according to lead manager Goldman, Sachs & Co.
The noncallable notes were priced 55 basis points more than the five-year Treasury note and mature on May 15, 1999. The notes are rated A2 by Moody's and A by Standard & Poor's Corp.
In addition, GTE Northwest, a unit of GTE Corp., issued $200 million in debentures due May 1, 2001, said lead manager Morgan Stanley.
The debentures were given a coupon of 7 3/8% and were priced at 99.53 to yield 7.462%, or 50 basis points more than comparable Treasuries. The noncallable debentures are rated A3 by Moody's and A by Standard & Poor's.
Moody's said it confirmed the long- and short-term debt ratings for Eastman Kodak Co. following Kodak's announcement that it plans to sell its health businesses and concentrate its operations solely in imaging.
Moody's said the ratings confirmation is based on Kodak's statement that it will use net proceeds from the sale to pay down debt, freeing operating cash flow to invest in its core imaging franchise.
Ratings confirmed are Eastman Kodak Co.'s senior debt at A3, shelf registration at (P) A3, subordinated debt at Baa1, and Prime-2 for short-term debt.
Moody's notes that Kodak has announced only its intention to divest its non-imaging health businesses at this time. The terms, timing, and balance sheet impact of the sale have not yet been determined, and it could take up to a year to complete the sale process.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 4.12 3.96 3.736-Month Bill 4.59 4.39 4.111-Year Bill 5.18 4.86 4.702-Year Note 5.83 5.53 5.423-Year Note 6.15 5.89 5.845-Year Note 6.70 6.42 6.417-Year Note 6.76 6.49 6.5810-Year Note 7.11 6.81 6.9230-Year Bond 7.34 7.10 7.24Source:Cantor, Fitzgerald/Telerate