Salomon Brothers Inc. said Friday it violated bidding rules on three recent auctions and has suspended two managing directors in charge of the firm's Treasury securities trading desk as a result.
"Bids were submitted by Salomon in the names of persons who had not authorized such bids, and Salomon then purchased the notes allocated to such bids," a statement said.
As a result, the firm violated the prohibition against one person buying more than 35% of a given offering during both the December 1990 auction of four-year notes and the February 1991 two-year note auction.
In what Salomon called "an apparent oversight," the firm also admitted it did not disclose a long when-issued position that exceeded permissible limits when it submitted a 35% bid at the Ma6 1991 two-year note auction.
Salomon characterized the incidents as "irregularities and rule violations."
The Securities and Exchange Commission and the antitrust division of the Justice Department have been investigating the May auction, following reports of a price "squeeze" in which virtually all of the bonds were purchased by only a few investors, driving up prices.
A spokeswoman for the Justice Department confirmed that investigations into possible antitrust violations are under way there, but she declined to name which firms might be involved. Representatives of the SEC did not return calls regarding the extent of their probe.
Company officials said the firm "believes that the irregularities it has discovered did not result in any financial loss to the government."
The firm declined to name the managing directors involved, but said John Meriwether, a vice chairman of the firm, would assume responsibility for managing the government bond department. Two other unnamed employees were also suspended, Salomon said Friday.
Although the Federal Reserve decided just last week to cut short-term interest rates 1/4 point, speculation has arisen that another ease might be in the cards as early as next month.
Friday's inflation indicator, the producer price index, came in lower than expected and that could mean there is still room for further interest rate cuts without fueling inflation.
The Labor Department reported that the index fell 0.2%, when the market was expecting the number to remain unchanged. The core rate, which excludes food and energy costs, rose 0.2%, in line with expectations.
"That's good news on the inflation front, but in order to be comfortable with inflation levels we have to see inflation in the service sector coming down," said Maria Ramirez, chief executive officer of Ramirez Capital Consultants Inc.
On Friday, The Wall Street Journal's "Washington Wire" said the Fed is coming under increasing pressure from the Bush administration to continue lowering rates, especially in light of good news on the inflation front. Such a move could come at the next meeting of
Treasury Market Yields
Friday Week Month
3-Month Bill 5.46 5.62 5.72
6-Month Bill 5.60 5.79 5.92
1-Year Bill 5.76 6.02 6.23
2-Year Note 6.44 6.67 6.84
3-Year Note 6.84 6.96 7.29
4-Year Note 6.97 7.11 7.45
5-Year Note 7.48 7.61 7.89
7-Year Note 7.80 7.88 8.12
10-Year Note 7.96 8.04 8.24
20-Year Bond 8.20 8.23 8.43
30-Year Bond 8.22 8.24 8.43
Source: Cantor, Fitzgerald/Telerate
the Federal Open Market Committee on Aug. 20, the Journal said. But many say that any easing on the way will probably have to wait until after Sept. 6, when the August employment report is slated for release.
Fred Leiner, a market strategist at Continental Bank in Chicago, said that rather than focusing on the producer price index to gauge inflation, he is more concerned with the shape of the yield curve, which steepened throughout last week after Tuesday's interest rate cut.
Yields on the long bond started the week about 14 basis points higher than where they finished on Friday. Disappointing interest in the 30-year auction last week -- following good showings at both the three-year and 10-year auctions earlier in the week -- also put pressure on yields.
"There's probably some reason to be positive on the inflation outlook, but the yield curve is sending me to opposite message," Mr. Leiner said.
Speculation over another ease bolstered prices at the short-end at the close of last week. But Mr. Leiner said a cut in rates could be bad news for bonds. "The bond market is not convinced the Fed's concerns about the economy are completely justified," he said. Although money supply growth has been sluggish and other indicators are showing slight growth at best, "the market wants to see more evidence," Mr. Leiner said.
This week will bring a plateful of economic data that may provide such data.
Tomorrow, for example, the market will see retail sales figures for July and another important inflation indicator, the consumer price index. Business inventories and jobless claims are on tap for Wednesday, and housing starts will be released Thursday. Capacity utilization for July is due for release on Friday.
The September bond future contract closed 1/8 lower on Friday, at 96 2/32.
In the cash market, the when-issued 30-year 8 1/8% bond was 3/32 lower, at 98 26/32-98 30/32, to yield 8.22%.
In other when-issued trading, the 7 7/8% 10-year note rose 3/32, to 99 8/32-99 12/32, to yield 7.96%, and the three-year 6 7/8% note was up 5/32 at 100 1/32-100 3/32, to yield 6.84%.
Rates on Treasury bills were lower, with the three-month bill down five basis points at 5.32%, the six-month bill off four basis points at 5.38%, and the year bill three basis points lower at 5.46%.