Treasuries continued to rally on the eve of the May employment report and participants said the market seems prepared to extend the gains if today's statistic come in as expected.
Prices ended higher across the board, led by the 30-year government bond, which closed up more than 1/2 a point, to yield 7.33%.
U.S. government bonds posted moderate increases yesterday following the market's impressive comeback Wednesday, when it erased all the losses posted on strong economic figures and closed higher.
Activity was generally quiet as many players stayed on the sidelines ahead of today's release of the May employment report by the Labor Department. But even though most investors avoided the market ahead of the jobs report, players reported scattered buying, a development that they said bodes well for Treasuries.
"The market is well set up to do better on an uneventful report," said Anthony Karydakis, senior financial economist at First Chicago Capital Markets Inc. "There is clearly a stronger tone to the market this week."
The employment report will provide the market with its first comprehensive look at the economy's performance in May and present concrete evidence of the pace of growth so far in the second quarter. The report will also set the tone for trading in coming sessions.
Forecasts center on an increase in nonfarm employment between 275,000 and 300,000, which includes the return of 75,000 striking teamsters.
Should the report come in at or below expectations, players expect bond prices to rally as dealers cover short positions and retail accounts pour into the market. On the other hand, they said, a strong release will probably send investors running for the exist and bond prices lower.
Wall Street observers believe the jobs report will be particularly important to the bond market because it will either encourage or discourage buyers from investing money in Treasuries. Participants generally agree that the lack of buy-side demand for government-backed paper -- both in the primary and secondary markets -- continues to weigh on the outlook for Treasuries.
"The most important factor for the market is whether portfolios get involved," Karydakis said. "We have to see whether large accounts will assess current fundamentals and yield levels as attractive."
Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., said larger accounts are looking for a more stable interest rate environment and assurances that the economy is not overheating before entering the market.
"We need a consistent set of economic reports that show us whether the economy is strengthening or whether growth is moderating," Wesbury said.
Some Wall Street analysts fear another solid month of employment gains could place additional pressure on the bond market and keep long-term interest rates rising. Market players are approaching the jobs report with caution, as bond investors increasingly fear that an upside surprise may be in store.
Market participants largely ignored economic statistics released yesterday. The leading economic indicators index came in steady in April from an unrevised 0.7% increase in March. Some Wall Street observers said the report showed that growth in the economy may be moderating in the second quarter.
In futures, the June bond contract ended up 13/32 at 104.22.
In the cash markets, the 5 7/8% two-year note was quoted late yesterday up 3/32 at 99.29-99.30 to yield 5.90%. The 6 3/4% five-year note ended up 9/32 at 100.10-100.12 to yield 6.66%. The 7 1/4% 10-year note was up 15/32 at 101.09-101.13 to yield 7.05%, and the 6 1/4% 30-year bond was up 17/32 at 86.27-86.31 to yield 7.33%.
The three-month Treasury bill was down four basis points at 4.21%, the six-month bill was down eight basis points at 4.72%, and the year bill was down six basis points at 5.25%.
Corporate Securities
Despite strength in Treasuries, the primary market for corporate securities was quiet yesterday as issuers and investors remained sidelined ahead of the employment report.
AT&T Corp. issued $500 million of notes due June 1, 2006.
The notes were given a coupon of 7 1/2% and priced at 99.53 to yield 7.56%, or 50 basis points more than comparable Treasuries. The noncallable issue is expected to be rated Aa3 by Moody's Investors Service and AA by Standard & Poor's Corp.
In the secondary market, spreads of investment-grade issues narrowed by 1/4 to 1/2 of a point, while high-yield issues generally ended unchanged.
Rating News
Moody's downgraded to Ba3 from Bal the long-term foreign currency debt rating of Turkey.
About $8.5 billion of debt securities are affected, Moody's said.
The rating agency said that the downgrade reflects the view that the Turkish economy will have to go through a significant adjustment to correct the country's fiscal and financial crises. In the context of economic stagnation, the government will probably find it politically difficult to implement a program of long-term economic restructuring, Moody's said.
Turkey experienced a flight out of Turkish lira assets at the beginning of the year -- a result of monetization of public sector deficits. Municipal elections in late March delayed a package of fiscal measures until early April. By then, however, lack of confidence in government policies led to a major devaluation and very high interest rates. This has resulted in bank failures and financial difficulty for indebted firms, the rating agency said.
As a result, Turkey is likely to face recession this year, Moody's said, noting that economic growth may decline as a result of efforts to reduce the public deficit, falling real wages, and poor investment prospects. A bright spot will be export- and import-competing sectors, which will benefit from the devaluation, low internal demand, and faster growth in Europe, Moody's said.
To help reestablish financial stability, the government is in the process of obtaining a stand-by loan from the International Monetary Fund. However, recession and high interest rates will hamper fiscal adjustment, Moody's said. Because the coming adjustment could lead to a fall in employment and real wages, support for the government's plans for fiscal consolidation and privatization may weaken, the rating agency said.
Elsewhere, Fitch Investors Service said it would be concerned with any attempt by tobacco companies to deprive bondholders of claims to assets upon which they have relied, such as a food business, by transferring such assets outside the company.
In a release, Fitch noted that tobacco companies are considering fundamental structural changes in the face of mounting anti-smoking attacks in the United States. Some bonds contain covenants that protect bondholders in such events, while others do not.
In the event of a spin-off, the risk to bondholders will depend upon bond covenants, Fitch said. For example, covenants contained in RJR Nabisco's $1.5 billion 10 1/2% senior notes due 1998 state that the issue may be redeemed, in whole or in part, upon a change in control, as defined in the indenture. In such an event, the noteholders have the right to require the company to repurchase the senior notes at a price of 101% of principal plus accrued and unpaid interest. However, the redemption price could be greater should the company decide at that time to exercise its right to redeem the senior notes in whole or in part, Fitch said.
Fitch said there is a question as to whether a spin-off could survive federal and state fraudulent conveyance statutes. The statutes provide for a voiding of transfers intended to hinder, delay, or defraud creditors, or transfers for less than adequate consideration where the company is insolvent or left with too little capital to carry on its business. While the possibility of voiding a spin-off might be good for tobacco bondholders, it could adversely affect the ratings of the new non-tobacco companies, Fitch said.
Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 4.21 4.26 4.106-Month Bill 4.72 4.74 4.591-Year Bill 5.25 5.20 5.192-Year Note 5.90 5.94 5.853-Year Note 6.24 6.26 6.175-Year Note 6.66 6.69 6.707-Year Note 6.70 6.74 6.7610-Year Note 7.05 7.10 7.0930-Year Bond 7.33 7.34 7.32 Source: Cantor, Fitzgerald/Telerate
