Treasury prices posted more losses Friday as the market continued to adjust to the possibility that the Federal Reserve's next move will be to tighten monetary policy.
Late in the afternoon, the 30-year bond was off 1/2 point on the day, and down a full point from the previous Friday's close, to yield 7.02%.
Treasury prices declined early in the session as dealers responded to the big increases in the monetary aggregates reported late Thursday.
The bond market has been reassessing the outlook for Fed monetary policy since the April price reports suggested that inflation might be more of a problem than most economists expected. The rebound in money supply growth was a blow to those hoping for another Fed easing.
"The weakness in the money supply has been one of the main arguments of people saying the Fed will ease further, or that they won't tighten," said Ellas Bikhazi, a money market economist at Deutsche Bank Government Securities.
Bikhazi said the improvement in the monetary aggregates was especially troublesome because the bond market's mood was already negative.
"People are very cautious here because they're reassessing the inflation outlook, the potential for deficit reduction, and what this economy is doing," he added. "As far as I can figure out, short-term we should still be under pressure."
Late Friday, the Fed released the minutes from the March meeting of the Federal Open Market Committee, which showed policymakers had voted for a neutral policy, even though two governors, Lawrence Lindsey and Wayne Angell, came out in favor of a tightening.
Bikhazi said this week's auctions will contribute to the pressure on the market. The Treasury will sell two- and five-year notes and one-year bills in addition to the regular weekly bill auction.
Michael Strauss, chief economist at Yamaichi International (America), expects prices to move lower going into the note auctions, and said the recent sell-off in Treasury prices was "more than justified."
In the wake of the bigger than expected increases in the April producer price and consumer price inedexes, "we're probably one bad CPI [report] away from getting a tightening" in Fed monetary policy, he said.
"We're in a bear market, we've seen the cyclical low [in rates], and we are going to work our way to higher rates," Strauss said. He predicted the 30-year yield would get to 7.50% by year end.
Traders said a lot of Friday's activity related to the expiration of options on the Chicago Board of Trade.
During the afternoon, prices improved on short-covering, then drifted back toward the session lows after the FOMC minutes were released.
The market ignored the Treasury's April budget report, which showed that the government ran a $8.1 billion surplus last month. That was close to the consensus forecast for an $8.9 billion surplus, but down from the $14.6 billion surplus in April 1992.
The June bond futures contract closed 17/32 lower at 109 24/32. In the cash market, the 7 1/8% 30-year bond was 13/32 lower, at 101 5/32-101 7/32, to yield 7.02%.
The 61/4% 10-year note fell 11/32, to 101 5/32-101 7/32, to yield 6.14%.
The three-year 41/4% note was down 1/8, at 99 5/32 99 7/32, to yield 4.53%.
In when-issued trading, the two-year notes to be sold tomorrow were bid at 4.17% and the five-year notes to be auctioned Wednesday were bid at 5.36%.
Rates on Treasury bills were higher, with the three month bill up four basis points at 3.01%, the six-month bill up three basis points at 3.13%, and the year bill eight basis points higher at 3.32%.
Zions Buys Discount
Zions First National Bank of Utah will acquire Discount Corp. of New York, one of 39 primary dealers in government securities, for about $65 million, or $8 a share, the companies said Friday.
The bank is a subsidiary of Zions Bancorporation, the second largest bank holding company in Utah.
Discount, which has been a primary dealer since 1960, has gone through hard times recently, posting a $24.5 million loss in 1992.
The news of the marger boosted Discount's stock, which closed at 71/4 Friday, up two points on the day.
The merger must be approved by two-thirds of Discount's common stockholders.
After the merger, Discount will remain in its current location and operate as a division of the bank.Treasury Market Yields Prev. Prev. Friday Week Month3-Month Bill 3.05 2.99 2.896-Month Bill 3.20 3.14 3.001 -Year Bill 3.42 3.31 3.152-Year Note 4.09 3.95 3.723-Year Note 4.53 4.38 4.135-Year Note 5.30 5.18 5.047-Year Note 5.75 5.64 5.4810-Year Note 6.14 6.00 5.8830-Year Bond 7.02 6.94 6.79Source: Cantor, Fitzgerald/Telerate