The Treasury market caved in yesterday under the weight of concerns about the weak U.S. dollar and the strength of the economy.
Prices collapsed, taking the yield on the 30-year bond solidly through the bottom end of recent ranges. Teh benchmark issue ended down more than a point, to yield 7.60%.
Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 4.22 4.23 4.216-Month Bill 4.81 4.71 4.721-Year Bill 5.47 5.20 5.252-Year Note 6.16 5.93 5.903-Year Note 6.47 6.21 6.245-Year Note 6.94 6.69 6.667-Year Note 6.96 6.72 6.7010-Year Note 7.31 7.07 7.0530-Year Bond 7.60 7.39 7.33
Source: Cantor, Fitzgerald/Telerate
The market's downward spiral got underway as investors received some disturbing news on the economy, then accelerated due to weakness in the dollar.
But the bulk of the plunge came after the yield on the 30-year bond surpassed with conviction the psychologically important 7.55% yield level. The issue triggered many orders to sell on the way down, propelling the yield to the highest level in more than a month.
"We experienced a bit of a meltdown in the market," said Cary Leahey, senior economist at Lehman Brothers Inc. "Fundamentals pushed up lower at first, and then the technicals took over."
The Chicago Purchasing Management June index fell to 65.6% from 67.3% in May. However, the prices paid component rose to 69.7% from 63.6% and the employment index rose to 58.1% from 57.5% in May. A reading above 50% indicates expansion in the manufacturing sector and a reading below 50% indicates a contraction. Players were concerned by the employment and inflation components of the report.
Separately, government-backed securities lost ground as the dollar fell to a new post-World War II low against the Japanese yen. The dollar slid lower as dealers speculated about the future of trade talks between the United States and Japan and the potential for U.S. economic sanctions against Tokyo.
Late yesterday, the dollar was valued at 98.70 yen, down from 99.90 yen on Tuesday.
The fragile dollar continued to hold the market's attention 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.
Taken together, the weak dollar and signs of upward price pressures in the national economy bode poorly for consumers' purchasing power and for fixed-income investment instruments, said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. "We see with these two instances that inflation pressures are beginning to come closer and closer to the surface," Wesbury said.
Another, though less frequently cited reason for the bond market's declines yesterday were widespread rumors of liquidation in mortgagebacked securities.
Players voiced considerable concern about the deteriorating technical state of the market. Yesterday's declines took out long-standing technical resistance levels that have kept the Treasury market afloat in a tight range in recent months. Market players fear that without the presence of solid resistance levels in the futures market, the cash market could be vulnerable to sharp declines.
"The idea is that the market is heading into the second leg of the bear market," one technical analyst said. "The problem for Treasuries is that the market has basically entered uncharted territory that may prove to be quite difficult to navigate."
In futures, the September bond contract ended up more than a point at 101.07.
In the cash markets, the 6% two-year note was quoted late Thursday down 4/32 at 99.21-99.22 to yield 6.16%. The 6 3/4% five-year note ended down 12/32 at 99.04-99.06 to yield 6.94%. The 7 1/4% 10-year note was down 22/32 at 99.13-99.17 to yield 7.31%, and the 6 1/4% 30-year bond was down more than a point to yield 7.60%.
The three-month Treasury bill was down three basis points at 4.20%. The six-month bill was up eight basis points at 4.81%, and the year bill was up five basis points at 5.47%.
Standard & Poor's Corp. lowered the rating on Trans World Airlines Inc.'s $271 million of senior secured debt to CCC from CCC-plus.
The rating agency revised its rating outlook on TWA to negative from developing.
Standard & Poor's said the downgrade is based on weaker-than-expected revenue generation, particularly from trans-Atlantic routes, which raises liquidity risk going into the weak winter season later this year. With very limited cash holdings [$135 million at March 31], no undrawn credit facilites, and virtually no unsecured assets, TWA needs to build up cash reserves over the normally strong summer season, the rating agency said.
However, continued discounting on routes to Europe and, to a lesser extent, on domestic routes, will cause revenues to fall well short of previous company expectations, the press release said.
TWA's new senior operating management, headed by the recently appointed president, Jeffrey Erickson, plans to cut expenses by $135 million in the second half of 1994. Even with the reductions, which will not be easy, management expects operating profits this year to be at best breakeven to modest, the rating agency said.
TWA, which exited bankruptcy on Nov. 3, 1993, is the seventh-largest U.S. airline, serving domestic markets from its main hub at St. Louis and flying trans-Atlantic routes to Europe and the Middle East. Domestic operations suffer from the moderate size of the St. Louis market, which is 10th-largest in the U.S., and competition from low-cost Southwest Airlines Inc. on short-haul midwestern routes.
Standard & Poor's said TWA's trans-Atlantic competitive position is likewise fairly weak -- it is the fifth-largest carrier to Europe, accounting for 5.4% of total traffic, and, since the sale of most of its routes to London, has lost access to the largest and usually most profitable European destination.
TWA's proportion of high-paying business traffic is weaker than that of its competitors, both domestically and overseas, as reflected in its 7.2cent unit passenger revenues in 1993, versus the industry average of about 8.3 cents, Standard & Poor's said.
The long-term rating outlook is negative, the rating agency said, and if management is unable to effect planned cost cuts or refinance $190 million of asset-backed loans extended by former owner Carl Icahn and coming due in January 1995, the airline could face a liquidity shortfall during the winter of 1994-1995.
Moody's Investors Service Inc. said that although Mexican banks are rapidly approaching full participation in a modern financial system, this transition poses risks to the banks' credit health.
A report written by Moody's senior analyst Lynn Exton said that when financial systems undergo deregulation, privatization, and newly fierce compettion, bankers frequently tend to become less prudent, not more. They also tend to respond faster and with riskier loans in order to protect their market shares.
Moody's noted that Mexican lending growth has been moving quickly -- several times faster than the growth of nominal gross domestic product. The rating agency said twothirds of the Mexican banks that have been restored to private ownership belong to brokerage firms, which may have a higher risk appetite than banks.
Under these circumstances, Moody's said it expects overall asset quality will decline, resulting in higher credit expense. Although nominal profitability is now high, both more provisioning for troubled assets and fiercer competition will work to lower profits, Moody's believes, which in turn will thin out the debt protection available to Mexican banks.
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 mixed.