Treasuries ended mostly lower yesterday as renewed worries about a Federal Reserve rate hike and volatility in the U.S. dollar sapped strength from the market.
The 30-year bond was up 1/32 to yield 7.54%, while the rest of the market posted moderate losses.
The bond market remains under pressure as investors adjust to the likelihood that the central bank will tighten monetary policy sooner than previously expected, fixed-income observers said. Fed chairman Alan Greenspan, in his semiannual Humphrey-Hawkins testimony before the Senate Banking Committee on Wednesday, indicated that the central bank is still concerned over the pace of economic growth and inflation. Bond market players took the comments to mean that the Fed will again raise rates.
"In not so many words, Greenspan made it clear that the Fed thinks the economy has gained too much steam and that rates are headed higher," said Tony Crescenzi, head of fixed-income at Miller, Tabak, Hirsch & Co. "From the way it trades, the market must firmly believe the Fed is going to tighten."
Against that backdrop, short-term fixed-income investors are lightening their inventories of government-backed paper, and long-term investors are shying away from putting on new positions in the market.
The short end of the Treasury market took the brunt of the selling as accounts moved money to other parts of the yield curve ahead of what many see as an imminent tightening of monetary policy. By contrast, longer-dated governments out-performed other sectors of the curve because players believe that the inflation-sensitive long bond has the most to gain from tighter credit conditions, observers said.
Players were generally surprised by the market's muted response to a stronger dollar yesterday. Concerns about the currency played a role in pushing government bond prices lower early in the session. News that the Bundesbank left official German interest rates unchanged at yesterday's meeting disappointed currency traders and sent the dollar slightly lower. The dollar weakened to 1.5550 German marks during the session.
But the dollar trended higher through the afternoon on the back of comments by Bundesbank President Hans Tietmeyer, who said the German central bank is interested in a strong dollar, and by Treasury undersecretary Lawrence Summers, who asserted that the Clinton Administration would like to see a stronger dollar. The greenback improved to a level of 1.5915 marks late yesterday.
The market's preoccupation with Fed policy and the currency markets eclipsed Thursday's economic releases, which painted a mixed picture of the pace of growth in the United States.
The Labor Department reported that initial claims for state unemployment rose 27,000 in the week ended July 16, to 392,000. Analysts generally discounted the sharp increase, attributing it to temporary automobile industry layoffs in Michigan.
Separately, the July Philadelphia Fed survey indicated some weakness in manufacturing and some increases in price pressures. The overall index slid to 11.3 in July from 16.1 in June. The bond market, however, focused on the price components. Prices paid jumped to 36.4 from 28.7 and prices received rose to 15.8 from 11.0.
The hefty increases in the price components placed considerable pressure on the front end of the market. The pressure on short-dated paper has been intensified this week by the approach of new government supply. The Treasury will auction $28.25 billion of two- and five-year notes next week. In addition to the monthly note sales, players are beginning to set their sights on the August refunding.
Still, market participants reported a moderate amount of retail buying interest in Treasuries maturing in five years and over, while the short end suffered from what one trader called "Fed tightening fever."
White House chief economist Laura Tyson validated investors' fears that the administration would not object to higher rates yesterday when she said a 25-basis-point rise in U.S. interest rates would not hurt economic growth. Tyson added that such a rise in rates has already been factored into growth forecasts for 1994 and 1995, which the Council of Economic Advisers projected last Friday at 3.0% and 2.70%, respectively.
Tyson said the 25-basis-point rise in rates could occur both in short-and long-term rates. However, she said, the administration has not changed its forecast of three-month bill rates averaging 4% in 1994 and 4.7% in 1995.
Market observers generally agreed that Tyson's comments were in line with views that the Fed has at least one more tightening move up its sleeve and that it could come before the next meeting of the Federal Open Market Committee on Aug. 16.
"We also anticipate another notch up in the funds rate," said Mickey D. Levy, chief financial economist at NationsBanc Capital Markets Inc. "Thus, further curve flattening will begin from the short end this summer and continue with a rally in the longer maturities as the Fed's forecast of a moderation of economic growth unfolds."
In the futures market, the September bond contract ended up 3/32 at 102.23.
In the cash markets, the 6% two-year note was quoted late Thursday down 3/32 at 99.27-99.28 to yield 6.06%. The 6 3/4% five-year note ended down 6/32 at 99.14-99.16 to yield 6.87%. The 7 1/4% 10-year note ended down 4132 at 99.29100.01 to yield 7.24%. The 6 1/4% 30-year bond ended up 1/32 at 84.24-84.28 to yield 7.54%.
The three-month Treasury bill ended up four basis points to 4.41%. The six-month bill closed up four basis points to 4.90%. The year bill ended up five basis points to 5.40%. Corporate Securities
Bonds backed by International Business Machines Inc. firmed yesterday after the company reported robust earnings in the second quarter.
IBM reported revenues for the quarter of $15.351 billion, compared with $14.953 billion in the year-ago period. In addition, the company raised its long-term cost-cutting goal to $8 billion from $7 billion.
Yield spreads to comparable Treasuries for IBM's paper narrowed by more than three basis points, according to market sources.
Activity in the primary market for corporate securities was punctuated by a $300 million offering by the city of Seoul, South Korea. The issues, due Aug. 1, 2004, and priced as 7 7/8s at 99.856 to yield 7.91%, will be sold through underwriters led by Lehman Brothers Inc.
The noncallable issue was priced 99 basis points more than comparable Treasuries and includes a onetime put option for Aug. 1, 1999, at par. The issue is rated A1 by Moody's Investors Service Inc. and A-plus by Standard & Poor's Corp. Treasury Market Yields Prev. Prev. Thursday Week Month 3-Month Bill 4.41 4.33 4.23 6-Month Bill 4.90 4.88 4.71 1 -Year Bill 5.40 5.40 5.20 2-Year Note 6.06 6.08 5.93 3-Year Note 6.38 6.38 6.21 5-Year Note 6.87 6.87 6.69 7-Year Note 7.04 7.10 6.72 10-Year Note 7.24 7.28 7.07 38-Year Bond 7.54 7.60 7.39
Source: Cantor, Fitzgerald/Telerate