The recent spate of favorable inflation news was overshadowed yesterday by higher commodities prices, which sent government bond market prices sharply lower.
The Treasury's 30-year bond ended down more than a point, to yield 7.40%.
Concerns over a possible conflict with North Korea sent oil futures prices soaring and Treasuries reeling yesterday. Those fears were reinforced when Pentagon officials were quoted by news services as saying the United States must prepare for a possible ground war.
"The market is having some Korea jitters, and that is boosting commodities prices," said Paul Kasriel, monetary economist at Northern Trust Securities in Chicago.
U.S. benchmark West Texas Intermediate crude oil rose $0.81 to $19.05, sending the Commodity Research Bureau's index of 21 futures prices sharply higher.
Rising prices of agricultural and precious metals futures placed additional upward pressure on the closely watched CRB, which closed up 3.31 points to 238.61 Wednesday.
Contributing to the market's declines was the weak U.S. dollar, which fell to 1.6360 German marks and 102.65 Japanese yen.
Upward pressure on commodities prices can only hurt a market already weakened by signs of mounting wage pressures and lingering fears of higher interest rates, observers said.
Robert Brusca, chief economist at Nikko Securities Co., said the market has begun to detect a gradual erosion in the positive inflation outlook that existed earlier in the year. While he doesn't see the return of the sort of hyperinflation seen in the 1970s, he does believe price pressures in the national economy are mounting.
"There are real price pressures that are really building," Brusca said. "Generally, the lows of inflation have already been seen."
Still, shorter-term securities continue to perform better than longer-term securities as many traders put cash into the front end of the yield curve with inflation seemingly under control in the near future, players said.
Economic news reported yesterday provided the market with little insight in overall economic activity. The Federal Reserve reported industrial production rose 0.2% last month, with capacity utilization slipping 0.1% to 83.5%.
John Silvia, chief economists at Kemper Mutual Funds, believes a favorable reading on industrial production and capacity utilization will take some pressure off the Federal Reserve to raise interest rates.
But even with the likely drop in May, capacity utilization will remain high, Silva said, identifying several sectors with rates greater than 90%, including lumber, motor vehicles, textiles, paper products, and petroleum. "While inflation pressure remain in the background now, these are areas worth watching for future inflation trends," he said.
The Treasury plans to raise a combined $4.73 billion in fresh cash next week with the sale of $17 billion of two-year notes and $11 billion of five-year notes.
The balance of the proceeds will be used to redeem $23.27 billion in maturing notes.
The two-year notes, to be sold Tuesday, June 21, will be dated June 30 and will be mature June 30, 1996. The five-year notes, to be sold Wednesday, June 22, will be dated June 30 and will mature June 30, 1999.
The Federal Reserve holds $3.19 billion of the maturing securities for its own account. The Fed also holds $817 million of maturing securities as agent for foreign and international monetary authorities.
In futures, the September bond contract ended down more than a point at 104.14.
In the cash markets, the 5 7/8% two-year note was quoted late Wednesday down 4/32 at 100.01-100.02 to yield 5.83%. The 6 3/4% five-year note ended down 14/32 at 100.10-100.12 to yield 6.65%. The 7 1/4% 10-year note was down 23/32 at 101.00-101.04 to yield 7.08%, and the 6 1/4% 30-year bond was down more than a point at 86.06-86.10 to yield 7.40%.
The three-month Treasury bill was unchanged at 4.26%. The six-month bill was up three basis points at 4.81%, and the year bill was up four basis points at 5.34%.
There were three deals priced in the primary market for corporate securities yesterday: Bank of Boston Corp. issued $100 million of debt due 1996 via Merrill Lynch & Co.; Ford Motor Credit issued $500 million of notes due 2004 via J.P. Morgan Securities Inc.; and Potomac Edison issued $75 million of debt due 2024 via Goldman, Sachs & Co.
In the secondary market for corporate securities, spreads of investment-grade issues widened by 1/2 to 3/4 of a point, while high-yield issues generally ended 1/2 a point lower.
Fitch Investors Service Inc. said it raised the $8.7 billion senior debt of Sears, Roebuck & Co., Sears DC Corp., and Sears Overseas Finance NV to A from BBB.
Sears Roebuck Acceptance Corp.'s $3 billion commercial paper is rated F-1. The credit trend is stable, the ratings agency said.
Fitch said that last year Sears completed a successful corporate repositioning and Merchandise Group restructuring that refocused its business and reduced debt. The majority of its remaining debt exists to support the credit card operation, while the merchandising business operates with little debt.
The ratings reflect Sears Merchandise Group's low debt leverage and strong cash flows, successful implementation of its new merchandising strategy, expected sustainability of 1993's strong performance, the liquidity of receivables lending support to the commercial paper program, and the strength of the Allstate insurance operations, Fitch said. Sears operates in a highly competitive retail environment and is exposed to potential natural disaster losses at its insurance unit.
Fitch said the rating methodology segregates credit card operations from the merchandising business. Sears Merchandise Group's $14.2 billion of debt at yearend 1993 finances its $15.9 billion of liquid receivables. Excluding the credit card business, Sears Merchandise Group's yearend 1993 ratio of debt to capitalization, including leases, was a favorable 36%. Cash-flow leverage was 0.8 times, indicating that Sears could repay its non-credit related debt in less than one year from cash flow.
Sears led the retailing industry in same-store sales in 1993, posting a 9.1% increase. Sears has developed a sharp merchandising focus, building on the loyal customer base for hard lines to successfully expand the more profitable apparel side.
Commercial paper liquidity is enhanced by Sears' $8 billion of unencumbered credit card receivables, Fitch said. Sears has a $4.5 billion, five-year bank facility that provides in excess of 100% backup for the issuance of commercial paper.
Allstate Corp., a public company 80% owned by Sears, is the second largest property-casualty insurer. The company benefits from a strong balance sheet, reserve position, and access to capital, with a high degree of liquidity, Fitch said. Treasury Market Yields Prev. Prev. Wednesday Week Month 3-Month Bill 4.21 4.22 4.276-Month Bill 4.65 4.65 4.661-Year Bill 5.15 5.10 5.152-Year Note 5.83 5.77 5.773-Year Note 6.18 6.08 6.135-Year Note 6.65 6.51 6.587-Year Note 6.71 6.56 6.6510-Year Note 7.08 6.94 7.0130-Year Bond 7.40 7.27 7.27