Government bond prices ended higher yesterday as investors purchased securities, shrugging off higher commodities prices and the specter of tighter monetary policy.
The 30-year bond ended up almost 1/2 a point to yield 7.44%.
Treasuries started Monday's session on a positive note as dealers covered short positions ahead of what market players see as an imminent tightening of monetary policy this week.
Despite encouraging signs in the April employment statistics, bond investors consider higher short-term rates a given as the Federal Reserve Board meets to discuss interest rate policy.
Still, the government securities market saw its share of volatility Monday as rising commodities prices tested investors's resolve. Skyrocketing coffee and grain prices sent the Commodity Research Bureau's index of commodities futures sharply higher. The index closed up more than three points to 230.49.
The upward trend in the CRB index is disturbing to long-term bond investors because the index is rapidly approaching its all-time high of 230.999, reached in mid-March. A break to a new high would be a decidedly bearish development for the bond market, players said.
Tempering the blow from higher commodities prices, the Fed reported that industrial production in April rose 0.3%, marketing the 11th straight monthly rise. Capacity utilization held steady in April from March's level of 83.6%. Both reports were in line with expectations and provided no early volatility to the market, traders said.
Treasuries managed to end in positive territory as market participants set their sights on the outcome of today's meeting of the Federal Open Market Committee.
"The focus it still on the Fed, and people are wondering what they'll do Tuesday," said Elias Bikhazi, money market economist at Deutsche Bank Securities Corp.
Most expect the central bank's policymaking arm to boost both the federal funds and discount rates today or tomorrow in a move to rein in economic growth and avoid inflation down the road.
Last week's inflation releases and news yesterday that the nation's capacity utilization rate held steady in April supported the view that the Fed may only raise rates 25 basis points. But most analysts said the odds favor a more aggressive 50 basis point hike in the federal funds target, rather than the 25 basis point increments that policymakers made in three tightening moves earlier this year. The discount rate is expected to rise to 3.5% or even to 4%, they said.
Proponents of a 50 basis point increase in the federal funds rate said the economy is growing too strongly to keep inflation under wraps, and the financial markets need a large move to settle them. Supporters of a smaller move said growth is set to weaken from here, and the Fed is typically cautious about moving too swiftly.
While fixed-income market players normally frown on any attempt to raise interest rates, many see the next round of tightening by the Fed as a necessary evil to maintain stability in the economy and the financial markets.
In fact, failure by the central bank to boost rates would probably be a negative for investors because it would toss an element of uncertainty into the bond market and fuel speculation that the Fed is behind the curve on its need to rein in growth.
John E. Silvia, chief economist at Kemper Mutual Funds, said that although current inflation remains modest, commodities prices have turned upward. "Right now, the upturn in this commodity index is a strong negative signal to the bond market," Silvia said.
In futures, the June bond contract ended up 17/32 at 103.21.
In the cash markets, the 5 1/2% two-year note was quoted late Monday up 2/32 at 99.03-99.04 to yield 5.98%. The 6 1/2% five-year note ended up 5.32% at 98.19-98.21 to yield 6.82%. The 7 1/4% 10-year note was up 11/32 at 100.02-100.06 to yield 6.72%, and the 6 1/4% 30-year bond was up 15/32 at 85.21-85.25 to yield 7.44%.
The three-month Treasury bill was up four basis points at 4.24%. The six-month bill was down three basis points at 4.80%, and the year bill was down two basis points at 5.35%.
Corporate Securities
While anticipation of an expected tightening of monetary policy kept many issuers on the sidelines, two came off the bench and tried their chances in the primary market.
A $100 million issue to J.B. Poindexter & Co. senior notes, due May 15,2004, was priced at par to yield 12.5%, according to Morgan Stanley & Co., the underwriter on the deal. The issue is noncallable for five years and is rated B2 by Moody's Investors Service Inc. and B by Standard & Poor's Corp.
Merrill Lynch & Co. issued $100 million of floating-rate medium-term notes due May 24, 1996, said sole manager Merrill Lynch Capital Markets.
Priced at par, the noncallable notes float weekly and pay quarterly at 25 basis points more than the three month U.S. Treasury bill. The issue is expected to be rated A1 by Moody's and A-plus by Standard & Poor's.
In the secondary market for corporate securities, spreads of investment grade issues narrowed by 1/8 to 1/4 of a point, while high-yield issues general ended unchanged.
Rating News
Moody's said it confirmed the ratings of EDS, Sprint Corp., and General Motors Corp.
The rating confirmations follow an announcement that EDS and Sprint are engaged in discussions concerning the possible formation of a strategic relationship that could involve a merger or other types of business ventures or alliances.
Moody's said the formation of any such relationship could involve a spinoff of General Motors' interest in EDS to its Class E shareholders. Significant uncertainties exist about the ultimate structure or outcome of any transaction, including the need for numerous regulatory and shareholder approvals. However, Moody's said, based on currently available information, the transaction could have favorable implications for Sprint, neutral to negative implications for EDS, and neutral to positive implications for General Motors.
Moody's said it will continue to monitor new developments in relation to the possible transaction, which could result in future rating changes.
The ratings confirmed are: EDS' Prime-1 rating for commercial paper; Sprint Corp.'s Baa3-rated senior unsecured debt, (P)Baa3-rated shelf registration for senior debt securities, and Prime-3 rating for commercial paper; General Motors Corp.'s Baa1-rated senior notes, (P)Baa1-rated shelf registration for senior debt securities, Baa3-rated preference shares, and (P)Baa1-rated shelf registration for preference shares.Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 4.24 4.33 3.766-Month Bill 4.80 4.93 4.261-Year Bill 5.35 5.52 4.862-Year Note 5.98 6.23 5.653-Year Note 6.35 6.56 6.077-Year Note 6.88 7.11 6.7910-Year Note 7.22 7.46 7.1230-Year Bond 7.44 7.62 7.41 Source: Cantor, Fitzgerald/Telerate
