Activity in the corporate securities market heated up yesterday as issuers took advantage of stability in Treasuries and buyers came off the sidelines.
The notion that Federal Reserve policy is on hold began trickling into the corporate market this week, evidenced by stepped-up new issuance and tighter spreads in secondary trading, observers said.
Against the backdrop of improved conditions for U.S. fixed-income markets, a number of corporate treasurers found the primary market ripe for their offerings yesterday. Just under $1 billion in straight corporate debt was priced.
"The rally in the Treasury market gave an assist to the week's new issues, some of which were aggressively priced," said C.J. Smith, corporate analyst at Mabon Securities Corp.
The volatile Treasury market held new-issue corporate volume to a minimum in recent weeks. For instance, last week was bereft of new bonds as corporate treasurers decided to wait out the deluge of macroeconomic statistics.
This week, however, bond market participants have a cheerier view of their prospects now that the economy is beginning to display the mark of slower growth. The notion that the pace of economic growth may moderate in the months ahead gained credence last week as reports of slower activity came in.
"There seems to be a bit more conviction in the market this week on the part of buyers and issuers," a syndicate source said. "It's been a decent couple of days for all parties involved."
The largest straight debt deal came from the Tennessee Valley Authority. TVA offered $500 million of 30-year bonds, priced as 8.05s at 96.40 to yield 8.379% in a competitive bid won by CS First Boston. The issue is noncallable for five years and was priced to yield 85 basis points more than comparable Treasuries.
In a press release, the authority said proceeds from the bond issue will be used to repay short-term debt associated with capital projects in its power program.
The financial sector showed its mettle yesterday with two well-received deals. The larger of the two was a $200 million issue of First of America Bank Corp. subordinated notes, due July 15, 2004, and priced as 7.75s at 99.347 to yield 7.845%.
The noncallable issue, which will be sold through underwriters led by Bear, Steams & Co., was priced to yield 71 basis points more than comparable Treasuries. It is rated A3 by Moody's Investors Service and BBB-plus by Standard & Poor's Corp.
In the second issue from the financial sector, Comerica Bank offered $150 million of subordinated bank notes due July 15, 2024.
The notes were given a coupon of 8 3/8% and priced at 99.322 to yield 8.437%, or 92 basis points more than comparable Treasuries. Noncallable for 20 years, the issue is expected to be rated A2 by Moody's and A-minus by Standard & Poor's.
A $100 million issue of Harvard Industries Inc. senior notes, due July 15, 2004, was priced at par to yield 12%. The issue is noncallable for five years and is rated B2 by Moody's and B by Standard & Poor's. The issue will be sold through underwriters led by CS First Boston.
Looking ahead, Xerox Corp. filed with the Securities and Exchange Commission a shelf offering for up to $500 million of debt securities.
Together with a previous offering, the Stamford, Conn., maker of photocopiers and other equipment said it may issue as much as $1.01 billion of the securities.
Of the debt securities to be issued, Xerox said as much as $500 million of the debt to be issued may be convertible into common shares. Proceeds from the planned offering will be used for general corporate purposes.
No underwriters were named in the offering.
In the secondary market for corporate securities, spreads of investment- grade issues narrowed by 1/4 of a point, while high-yield issues generally ended slightly higher.
Treasuries wafted higher in extremely thin trading yesterday as the market waited for Federal Reserve chairman Alan Greenspan's Humphrey-Hawkins testimony today.
The 30-year bond ended up 3/8 of a point, to yield 7.46%.
The May merchandise trade report failed to provide the market with any direction. The Commerce Department reported that the trade deficit with Japan widened to $9.17 billion in May from $8.53 billion in April on the back of a 0.2% increase in exports and 1.5% rise in imports.
One reason for the market's muted reaction is that the significance of the trade figures for Treasuries are mixed. Analysts said the components of the trade report support the view that growth in gross domestic product is slowing. If so, however, that may also undermine the dollar.
Greenspan;s testimony this week is particularly crucial because much of the confusion in the bond market reflects puzzlement over when the Fed will tighten monetary policy again.
Treasuries have generally improved in recent sessions as more bond investors came around to the view that the Federal Reserve may not raise interest rates before its next meeting of policymakers next month.
Favorable economic figures and a stronger U.S. dollar in recent sessions have supported the view that the central bank can hold off on tightening monetary policy between now and the Aug. 16 meeting of the Federal Open Market Committee.
In futures, the September bond contract ended up 17/32 at 103.17.
In the cash markets, the 6% two-year note was quoted late yesterday up 4/32 at 100.05-100.06 to yield 5.89%. The 6 1/4% five-year note ended up 4/32 at 100.02-100.04 to yield 6.71%. The 7 1/4% 10-year note was up 12/32 at 100.22-100.26 to yield 7.13%, and the 6 1/4% 30-year bond was up 12/32 at 85.18-85.22 to yield 7.46%.
The three-month Treasury bill was down three basis points at 4.35%. The six-month bill was down six basis points at 4.79%, and the year bill shed five basis points at 5.23%. Treasury Market Yields Prev. Prev. Tuesday Week Month 3-Month Bill 4.35 4.55 4.27 6-Month Bill 4.79 5.07 4.75 1-Year Bill 5.23 5.51 5.23 2-Year Note 5.91 6.20 5.97 3-Year Note 6.22 6.54 6.31 5-Year Note 6.71 7.02 6.79 7-Year Note 6.91 7.22 6.8410-Year Note 7.13 7.41 7.1930-Year Bond 7.46 7.68 7.49
Source: Cantor, Fitzgerald/Telerate