Citing a long list of reasons, investors stayed out of the U.S. government and corporate securities markets yesterday to avoid recent volatility.
Treasuries prices closed unchanged to slightly higher, with the benchmark 30-year bond ending up more than 1/8 of a point, to yield 7.50%.
Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 4.23 4.26 4.256-Month Bill 4.73 4.73 4.801-Year Bill 5.43 5.22 5.332-Year Note 6.10 5.96 5.953-Year Note 6.38 6.25 6.295-Year Note 6.85 6.71 6.727-Year Note 6.88 6.75 6.7510-Year Note 7.21 7.11 7.1030-Year Bond 7.50 7.39 7.37
Source: Cantor, Fitzgerald/Telerate
Participants were reluctant to take on new positions, fearing that the weak dollar and the strength of recent economic reports will prompt the Federal Reserve to tighten monetary policy next week. The approach of the quarter's end was another factor keeping players on the bench.
"There is absolutely no reason to get involved in the bond market right now, and people have shown little inclination to trade it," said Anthony Karydakis, senior economist at First Chicago.
Lack of sponsorship allowed the government bond market to hold steady despite new declines in the dollar and strong news on the economy.
Some fixed-income players were encouraged by the market's ability to stay above opening levels despite persistent volatility in global foreign exchange markets and an upward revision in first quarter gross domestic product. But most said a lack of liquidity provided Treasuries with little latitude.
The Commerce Department reported yesterday that the U.S. economy grew at an annual rate of 3.4% in the first quarter, stronger than previously reported. First-quarter GDP was originally reported up 2.6% and then revised up to 3.0%.
Players said that widespread talk of the Federal Reserve's making unannounced purchases of two-year and five-year notes helped support the Treasuries market.
But the weak U.S. dollar continued to hold the market's attention yesterday as investors speculated about the likely effect of its recent declines on Fed policy. Market players remain fearful that the sliding dollar will force the central bank to raise interest rates sooner than expected.
Late yesterday, the dollar was changing hands at 98.70 yen, compared with 99.90 Tuesday.
The dollar's weakness remains somewhat of a puzzle to bond market analysts. Most attribute it to a lack of confidence in the Clinton Administration, a better-than-expected pick-up in the German and Japanese economies, downward momentum in German inflation, continuing low inflation in Japan, and no clear turn yet in either the U.S. trade deficit or Japan's surplus. slowing growth in the U.S. economy and the perceived risk of higher inflation complete the list of near-term negatives.
Analysts said the dollar's slide has exacerbated fears that U.S. inflation is beginning to heat up. While the weak greenback has contributed to bond investors' concerns over mounting price pressures, the analysts stressed that it is not the only force behind the market's declines.
The problem for the bond market in a rising-inflation scenario is the lack of demand for U.S. government and corporate securities, especially among foreign investors. Without the help of funds flowing out of other markets into U.S. investments, fixed-income observers continue to argue that the bond market will have a difficult time recovering recent losses.
Against that backdrop, market observers remain mixed on whether the central bank would boost credit in coming weeks to bolster the sagging dollar. Much of the debate centers on whether the Fed would be willing to support the dollar at the expense of maintaining economic expansion.
Fred Leiner, bond market analyst at Continental Bank, is among the market observers who believe the Fed will boost rates in coming weeks to restore stability to global foreign exchange markets.
On the other side, Donald Fine, chief market analyst at Chase Securities Inc., thinks the Fed will rely on bouts of concerted central bank intervention, not higher rates, to prop up the dollar.
To support his case, Fine said investors need only to recall England's attempts to support the pound artificially through higher interest rates in 1991. Raising rates failed to boost the value of the currency over time and resulted in a substantial increase in unemployment.
In futures, the September bond contract ended up 8/32 at 102.17.
In the cash markets, the 6% twoyear note was quoted late Wednesday unchanged at 99.25-99.26 to yield 6.10%. The 6 3/4% five-year note ended up 2/32 at 99.16-99.18 to yield 6.85%. The 7 1/4% 10-year note was up 3/32 at 100.03-100.07 to yield 7.21%, and the 6 1/4% 30-year bond was up 6/32 at 85.04-85.08 to yield 7.50%.
The three-month Treasury bill was down one basis point at 4.23%. The six-month bill was up two basis points at 4.73%, and the year bill was down one basis point at 5.43%.
A $200 million two-part issue of Health & Rehabilitation Properties Trust floating-rate notes was priced through underwriters led by Merrill Lynch & Co.
The first tranche, $75 million of notes, due July 13, 1999, was priced at par. The coupons float and pay interest quarterly at 105 basis points above the three-month London interbank offered rate. The tranche is noncallable for nine months.
The second tranche, $125 million of notes, due July 13, 1999, was priced at 99.0159. The coupons float and pay quarterly at 95 basis points above the three-month LIBOR. The tranche is noncallable for two years.
The issue is rated Baa1 by Moody's Investors Service and BBB by Standard & Poor's Corp.
A $150 million issue of Consolidated Edison Co. of New York Inc. floating-rate debentures, due July 1, 1999, was priced at 99.9452 to yield 20 basis points more than the three-month LIBOR.
The debentures, which are noncallable for two years, will float and pay interest quarterly at 18.75 basis points above the three-month LIBOR.
Rated Aa3 by Moody's and A-plus by Standard & Poor's, the issue will be sold through underwriters led by Lehman Brothers Inc.
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.
Moody's said it upgraded, to Baa2 from Baa3, American Airlines Inc.'s $84 million of industrial revenue bonds issued in September 1990.
Most of the proceeds from the issue were used to finance expansion and renovation of terminal facilities at New York's John F. Kennedy Airport. The bonds were issued by the New York City Industrial Development Agency, or IDA, and principal and interest payments are guaranteed by American's parent, AMR Corp.
Moody's said the main reason for upgrading the issue was its reevaluation of the strategic value of JFK to American's overall transportation system and route structure. The airport supports American's service on the important New York-to-London route and now is one of the company's main gateways into Europe.