A firmer U.S. dollar and the promise of stepped up foreign investment sent government bond prices higher yesterday, extending the market's gains since the Federal Reserve tightened credit Tuesday.
The 30-year bond closed up 3/8 of a point of yield 7.23%.
Reports that yesterday's talks between U.S. and Japanese officials would produce results on the trade front boosted the dollar against the yen, a development which encouraged buyers of dollar-denominated investments to purchase Treasuries.
The dollar closed at 104.25 yen, up from 103.49 late Wednesday.
Observers said the rise in bond prices yesterday reflected the improved psychology that has existed in the market since the central bank's aggressive tightening move, which convinced many retail investors that it's safe to put money back into Treasuries.
"The dollar's better performance carried over into the bonds as people grew more optimistic that foreign accounts would come back into the market," said Mary Dennis, money market economist at Merrill Lynch Government Securities Inc.
Lending additional support to the market were reports that the Fed Bank of New York bought medium-term Treasury securities under the table, players said.
The central bank at times conducts such purchases on behalf of a foreign central bank and has a policy of not commenting on the rumored operations. Traders said the Fed was believed to have bought mainly five-year notes, but some two-year and 10-year notes as well. They linked the reported purchases to the May 4 intervention that left foreign central banks with excess dollar reserves to park.
Both developments combined to help the bond market recover from early losses as accounts took profits after prices rose for two sessions in response to the Fed's aggressive tightening.
Treasuries managed to post healthy gains yesterday, despite another sharp increase in commodities prices. The Commodity Research Bureau's index ended up 1.45 at 232.43. Analysts were encouraged by the market's bravado in the face of upward pressure on crude oil and precious metals prices, and said the strong technical state of the market has proved a formidable foe to speculative accounts attempting to try the downside.
Stronger than expected trade figures also placed pressure on the fixed - income market through the morning. The Commerce Department reported that a surge of gold, airplane, and telecommunications equipment helped narrow the U.S. trade deficit in goods and services about 18% to a seasonally adjusted $7.5 billion in March.
However, imports and exports of good and services both climbed to record levels in March. Exports rose 9.6% to $58.3 billion from a revised $53.2 billion. Imports rose 5.4% to $65.8 billion from a revised $62.4 billion.
"The market got whipsawed around by the trade figures through the morning and by higher CRB prices in the afternoon, but still managed to rise on the day," Dennis said.
The Federal Reserve Bank of Philadelphia's report that the area's manufacturing sector continued to grow in May failed to attract much attention from market participants.
The bank's general activity diffusion index increased from 11.6 in April to 14.8 this month. The increase in the index for May follows four consecutive months of gradual decline.
But more important for the bond market were the prices paid and prices received components, which painted a mixed picture. The diffusion index for current prices paid declined from a level of 33.1 in April to 27.4 this month.
In futures, the June bond contract ended up 1/2 a point at 105.26.
In the cash markets, the 5 1/2% two-year note was quoted late Thursday up 4/32 at 99.19-99.20 to yield 5.70%. The 6 1/2% five-year note ended up 12/32 at 99.30-100.00 to yield 6.49%. The 7 1/4% 10-year note was up 17/32 at 102.01-102.05 to yield 6.94%, and the 6 1/4% 30-year bond was up 3/8 of a point at 88.01-88.05 to yield 7.23%.
The three-month Treasury bill was down five basis points at 4.22%. The six-month bill was down three basis points at 4.63%, and the year bill was down eight basis points at 5.06%.
Moody's Investors Service said it raised the senior debt ratings of Chrysler Corp. and Chrysler Financial Corp. to A3 from Baa2.
The Prime-2 ratings of CFC and its guaranteed subsidiary, Chrysler Credit Canada Ltd., for commercial paper insurance remain unchanged.
About $17.5 billion of debt securities is affected, Moody's said.
Moody's said the rating upgrades are based on the outlook for further improvement in Chrysler's debt protection measurements and financial flexibility during the intermediate term. The rating upgrades also recognize Chrysler's efforts to reduce financial risk and its continued pursuit of a conservative financial policy, which was most recently demonstrated by the announcement of a plan to accelerate pension contributions and eliminate the company's unfunded pension liability by year end 1994.
The ratings raised are:
* Chrysler Corp.: senior notes and debentures to A3 from Baa2; shelf registration for senior debt securities to (P)A3 from (P)Baa2; and preferred stock to Baa1 from Ba1.
* Auburn Hills Trust: guaranteed exchangeable certificates [guaranteed by Chrysler Corp.] to A3 from Baa2.
* Chrysler Financial Corp.: senior notes and debentures to A3 from Baa2; medium-term notes to A3 from Baa2; and shelf registration for senior debt securities to (P)A3 from (P)Baa2.
Moody's said Chrysler is likely to continue generating strong earnings and cash flow through the intermediate term, in part because of the competitive strength of its product mix. Although the company will face increasing competitive pressures, particularly in the minivan and sport/utility segments, Moody's believes that ongoing product introductions [including the JA-compact car and a redesigned minivan during the 1995 model year] should support Chrysler's competitive position in the North American market.
Chrysler's earnings and cash flow should benefit from the company's conservative capital investment strategies. Specifically, Chrysler is expanding production capacity to meet current demand levels by increasing the production capacity and efficiency of its existing manufacturing plants, rather than by investing to build new plants. Consequently, Chrysler is limiting the risk that it may be burdened by the cost of carrying excess production capacity during the next downturn in vehicle demand.
Moody's said it believes that the combination of a strengthened product range and improved production efficiency should enhance the stability of Chrysler's future cash flow. Moreover, because of management's continuing efforts to reduce indebtedness, Moody's said that further improvement in Chrysler's debt protection measurements is likely during the intermediate term. The rating upgrades also acknowledge management's continued focus on strategies to improve Chrysler's financial flexibility and reduce exposure to financial risk. Chrysler recently announced a plan to increase cash payments to the pension plans and eliminate the company's unfunded pension liability by the end of 1994. Moody's said this plan, along with Chrysler's success during the last two years at reducing debt, increasing equity capital, and selling non-strategic assets, indicates that management is maintaining a relatively conservative financial policy.
MBNA Master Credit Card Trust 1994-2, an MBNA Corp. unit, issued $900 million of global floating-rate debt, said lead manager Merrill Lynch and Co.
The notes float at the one-month London Interbank Offered Rate plus 21 basis points with an expected final maturity of Dec. 15, 199, Merrill Lynch said. The initial coupon is 4.585% at 99-29/32 to yield 23 basis points more than the one-month LIBOR, Merrill Lynch said, adding that the cap is 12%.
Credit enhancement is a 10.5% cash collateral account, the lead manager said.
The primary market for corporate securities experienced its third straight day of active issuance yesterday.
Among the straight debt priced yesterday in the primary market for corporate securities, Household International issued $100 million of floating-rate notes due 1997 via Lehman Brothers Inc.; International Paper Co. issued $150 million of notes due 2004 via Kidder, Peabody & Co. Inc.; and Duke Power issued $150 million of debt due 2024 via Donaldson, Lufkin & Jenrette Securities Corp.
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 generally ended unchanged.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 4.22 4.22 3.796-Month Bill 4.63 4.88 4.311-Year Bill 5.06 5.43 4.812-Year Note 5.70 6.09 5.533-Year Note 6.04 6.49 5.915-Year Note 6.49 9.96 6.477-Year Note 6.56 7.02 6.5510-Year Note 6.94 7.34 6.8830-Year Bond 7.23 7.55 7.20Source: Cantor, Fitzgerald/Telerate