Comments by U.S. monetary and government officials created substantial volatility in the Treasury market yesterday, but prices ended narrowly mixed as players continued to bide their time ahead of the May inflation reports.
The 30-year bond ended down slightly more than 1/8 of a point, to yield 7.27%.
The inflation series will offer bond investors their first comprehensive view of national price pressures in May and provide U.S. monetary authorities with a blue-print for the direction of short-term interest rates.
Ahead of the inflation reports, the Treasury market has entered into a holding pattern, with few participants willing to place new bets on the market.
"People are reluctant to take the market higher ahead of the inflation series," said Tony Crescenzi, head of fixed-income at Miller, Tabak, Hirsch & Co. "The market is willing to consider the upside, but people would like to see the inflation numbers before they commit to that view."
Government securities continued to benefit from improved sentiment among investors and traders. After the recent rally, players have grown more confident that the market has established a near-term bottom. For example, traders are reporting healthy two-way flow in the market as some retail accounts take profits and others line up to purchase the securities.
Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., said the lack of buy-side demand recently for government-backed paper -- both in the primary and secondary markets -- is weighing on any chance for Treasuries to move higher. Larger accounts, he said, are looking for a more stable interest rate environment and assurances that the economy is not overheating before entering the market.
In the interim, the government bond market is extremely vulnerable to news about the economy, inflation, and interest rate policy. As was the case yesterday, the Treasury market experienced wild price swings on comments by monetary and government officials.
Bond prices rallied early in the day, largely in response to comments from Federal Reserve Chairman Alan Greenspan. Speaking at a press conference in London, Greenspan said that recent inflation statistics have been "clearly restrained." While Greenspan's remarks were essentially old news, the statement still sent the market higher.
The market reversed direction through the morning after comments from Commerce Secretary Ron Brown, who said that although there are no plans to invoke trade sanctions against Japan if the current round of negotiations fails, they can't be ruled out. In response, the dollar fell against the yen, triggering selling of Treasuries.
However, selling subsided when a government official said the Clinton Administration would not seek a lower dollar to facilitate ongoing trade negotiations. Bowman Cutter, deputy director of the White House's National Economic Council and its lead official on China and Japan, stressed that the United States has "absolutely no intention" of devaluing the dollar to gain a competitive trade advantage.
Cutter, speaking to reporters after an address before the U.S.-China Business Council, said that recent reports and speculation regarding changes in administration policy toward Japan are misguided.
Comments by another Fed official created some selling pressures late in the session. Kansas City Fed President Thomas Hoenig said the U.S. labor force is near full employment. The inflation-sensitive bond market interpreted the comments as yet another sign that wage pressures may be rising, analysts said.
"The market's vulnerability to news and comments was evident in the wild price swings we saw," a bond strategist said. "It really shows how nervous the market is ahead of the inflation numbers."
Expectations of the Labor Department's producer price index release center on moderate increases in the PPI of 0.2% overall and 0.3% excluding food and energy. In April, the PPI fell 0.1% overall while it edged up 0.1% with food and energy factored in.
In futures, the September bond contract ended down 11/32 at 104.21.
In the cash markets, the 5-7/8% two-year note was quoted late yesterday down 1/32 at 100.05 -100.06 to yield 5.77%. The 6-3/4% five-year note ended unchanged at 100.30-101.00 to yield 6.51%. The 7-1/4% 10-year note was down 2/32 at 102.01-105.05 to yield 6.94%, and the 6-1/4% 30-year bond was down 5/32 at 87.18-87.22 to yield 7.27%.
The three-month Treasury bill was up one basis point at 4.22%. The six-month bill was up two basis points at 4.65%, and the year bill was up one basis point at 5.10%.
The primary market saw a busy day of issuance for the third session in a row, adding to the more than $2 billion of debt issued so far this week.
Corporate Securities
Loral Corp. issued $650 million of debt in two tranches, said lead manager Lehman Brothers Inc.
The first tranche consisted of $250 million of notes due June 15, 2004. The notes were given a coupon of 7-5/8% and priced at 99.188 to yield 7.743%, or 85 basis points more than comparable Treasuries.
The second tranche consisted of $400 million of bonds due June 15, 2024. The bonds were given a coupon of 8-3/8% and priced at 99.186 to yield 8.45%, or 115 basis points more than the 7-1/8% 30-year bond.
Both issues are noncallable and are expected to be rated Baa2 by Moody's Investors Service and BBB by Standard & Poor's Corp.
A $200 million issue of Eastman Chemical Co. debentures, due June 15,2024, was priced as 7-5/8S at 99.844 to yield 7.645%, according to lead manager Goldman, Sachs & Co.
The noncallable issue was priced 75 basis points above comparable Treasuries. The issue is rated Baa 1 by Moody's and BBB by Standard & Poor's.
In addition, American General Finance issued $150 million of senior notes due 1999 via CS First Boston.
In the secondary market, spreads of investment-grade issues narrowed by 1/8 of a point, while high-yield issues generally ended unchanged.
Rating News
Duff & Phelps Credit Rating Co. has assigned a rating of BBB to Long Island Lighting Co.'s $285 million two-part offering for general and refunding bonds.
In a press release, Duff & Phelps said the rating applies to the $100 million, 7-5/8% issue due 1998 and to the $185 million, 8-5/8% issue due 2004. Proceeds will be used to repay and call higher-coupon debt.
Duff & Phelps also said Long Island Lighting's financial fundamentals are expected to gradually improve as a result of electric and gas rate relief, continued cost control efforts, and growth in the gas distribution business.
A recent equity offering that netted about $85 million and planned common equity issuances should help improve the capital structure, which is highly leveraged, Duff & Phelps said.
The potential for load loss and lower profit margins continues to be a risk, Duff & Phelps said. However, the nature of Long Island Lighting's service territory, limited transmission access, and lack of large-load users help to offset the disadvantage of the company's high rates, the rating agency said. Ongoing cost-cutting measures and the company's proposed two-year electric rate freeze should enable Lilco to improve its competitive posture to some extent, the agency said.
In discussing its rating of Long Island Lighting Co.'s two-part bond offering, Duff & Phelps noted that the company was granted a 4% electric rate increase effective December 1993, the final step of a three-year rate plan.
