Citing recent disclosures by Salomon Brothers Inc. that it violated bidding rules at several recent Treasury auctions, Sen. Christopher Dodd, D-Conn., yesterday asked the Treasury Department to investigate the adequacy of auction oversight regulations.
In a letter to Treasury Secretary Nicholas Brady, Sen. Dodd notes Salomon admitted it broke auction rules forbidding a single bidder from acquiring more than 35% of a given offering by submitting bids in the name of clients who had not authorized the purchase, as well as through other "irregularities."
At the February 1991 auction of five-year notes and 30-year bonds, for example, officials at the firm knew of the violations in April, but "it appears that they were reported to the Treasury and other regulators only last week," the letter says.
"In view of the recent disclosures, I would appreciate a report on your views of the adequacy of Treasury's auction rules and existing
Treasury Market Yields
Thursday Week Month
3-Month Bill 5.43 5.51 5.75
6-Month Bill 5.55 5.64 5.97
1-Year Bill 5.61 5.79 6.25
2-Year Note 6.25 6.49 6.84
3-Year Note 6.68 6.89 7.29
4-Year Note 6.84 6.98 7.46
5-Year Note 7.33 7.52 7.91
7-Year Note 7.64 7.82 8.14
10-Year Note 7.82 7.97 8.27
20-Year Bond 8.05 8.21 8.43
30-Year Bond 8.08 8.22 8.47
Source: Cantor, Fitzgerald/Telerate
authority under other statutes to address these and other irregularities in Treasury auctions," Mr. Dodd said.
He added it is "absolutely essential" to maintain the integrity of the auction process, to keep borrowing costs as low as possible for the federal government.
Analysts have so far found it difficult to gauge what impact the Salomon disclosures are having or might have on the market. But several have said it might result in much heavier federal regulation of the sort suggested by Sen. Dodd's letter.
Lacy H. Hunt, chief economist at Carroll, McEntee & McGinley Inc., said the situation has created an unknown element in the market's psychology, adding that whenever that sort of dynamic is at work, "uncertainty is how it reflects itself in the market. It could chase some people to the sidelines."
Yesterday's market activity was chaacterized by quiet consolidation, following Wednesday's raucous buying session.
The long bond ended the day in New York down 5/16, to yield 8.08%.
Rumors that the Federal Reserve called an emergency session to discuss lowering interest rates gave the market an early boost into positive territory. But the Fed denied the rumor and later executed four-day system repurchase agreements, signaling no change in policy.
Disappointment over the Fed action led to the lows for the day at around 9/16 off on the long bond. But prices soon moved back up to their opening levels, where they sat for the rest of the day.
"After three or four days of run-ups, it's not surprising you're going to get a little stall action," one trader said. "People are tired."
And yesterday's economic indicators did little to waken them. July housing starts were reported up 3.7%, the fourth monthly increase in a row and somewhat stronger than expected.
Initial jobless claims rose 8,000, to 408,000, in the week ended Aug. 3, about as expected.
Lacy Hunt, chief economist at Carroll, McEntee & McGinley Inc., said the claims numbers are not particularly important either in calculating where the economy is headed or in trying to second guess the Fed.
"And there's reason to believe that claims are not a true reflection of the labor market, because of the number of people exhausting their 26 weeks of benefits," Mr. Hunt said.
In the futures market, the September contract closed down 5/16, at 97 14/32.
In the cash market, the bellwether 30=year bond was down 5/16 late in the day, to yield 8.08%.
The 7 7/8% 10-year note fell 5/32, to 100 6/32-100 10/32, to yield 7.82%, and the three-year 6 7/8% note was 3/32 higher at 100 14/32-100 16/32, to yield 6.68%.
Rates on Treasury bills were lower, with the three-month bill down one basis point at 5.29%, the six-month bill also one basis point lower at 5.34%, and the year bill three basis points lower at 5.33%.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply was up $3.3 billion to $867.6 billion in the week ended Aug. 5, the broader M2 aggregate gained $1.2 billion, to $3.387.2. trillion; and M3 fell $5.6 billion, to $4.142.4 trillion, in the same period.
Also, for the week ended Wednesday, the federal funds rate averaged 5.62%, compared with 5.83% the previous week, according to the New York Fed.
Staff reporter Vicky Stamas in Washington contributed to this column.