WSJ(8/6):Credit Markets:Tsys May Stay In Tight Range This Wk
Dow Jones News Service ~ August 5, 2001 ~ 7:30 pm EST
By Andrew Gelfand
Dow Jones Newswires
NEW YORK -- The government-securities market will grapple with a flood of new bond supply from the Treasury Department and a few important economic reports this week. Still, most analysts don't expect anything to push bond prices out of their recent range.
The problem is that cohesive expectations for the economy and for Federal Reserve monetary policy continue to hang in the balance.
Though recent economic data have continued to paint an overall weak portrait of the U.S. economy, other more promising signs of a potential economic rebound have given bond investors no choice but to wait and see how the economic cycle plays itself out.
This week promises to give a few more clues about how the economy is performing, including the Federal Reserve's Beige Book report and the producer- price index. However, trading action is also likely to look beyond the economic fundamentals during the middle of the week, when the Treasury will auction $27 billion in five-year, 10-year and 30-year issues.
Last week, the manufacturing sector continued to show weakness, as the National Association of Purchasing Management index showed continued contraction of the nation's factory activity. But other economic signals, such as a drop in jobless claims and a still-low unemployment rate of 4.5%, made many bond investors wary of recent strength in bonds.
Due to these mixed indicators, forecasters are having trouble forming any clear expectations for what lies beyond a widely anticipated one-quarter-point cut at the Aug. 21 Federal Open Markets Committee meeting. That muddy outlook continues to keep Treasury prices frozen.
"I think it leaves us rangebound. Rallies are on hold and we won't see a pullback either," said John Canavan, market analyst at Stone & McCarthy in Princeton, N.J. "With such an open question [about what the Fed will do after August], there's little room upside or downside to generate any momentum."
The flip-flopping views on the economy were typified last week by price movements in the two-year note, which rallied early in the week to their lowest yield since October 1993, only to be pushed back up later in the week.
Mr. Canavan said he expects the yield of the 10-year Treasury, a de facto benchmark, to stay in a range of 5.05% to 5.20% this week, with the 30-year's yield between 5.50% and 5.70%.
Within that range, however, yields might see some upward pressure as the Treasury Department sells the $27 billion in new notes and bonds. As dealers distribute the debt to investors, prices are likely to stick near the low end of their recent range.
The Treasury will auction $11 billion of reopened May five-year notes tomorrow, $11 billion of new 10-year notes on Wednesday and $5 billion of reopened February 30-year bonds on Thursday.
Some money managers say they are cautious about building heavy positions in government debt, since the combination of new supply and uncertainty about the economy raise potential pitfalls in the market. "With all supply that's in the front end, we don't see that rallying a whole lot more," said Christopher Mahony, vice president at J & W Seligman & Co. in New York. However, "after the supply, the back end can do a bit better," he added.
Besides the PPI report for July on Friday, tomorrow brings the preliminary reading on productivity for the second quarter, which could shed more light on conditions in the labor market.
"Companies have been quick to reduce labor input so they can keep costs under control. Despite sluggish performance of the economy, we're calling for an increase" in productivity, said Carol Stone, deputy chief economist at Nomura Securities in New York.
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Friday's Market Activity
Prices of Treasury securities moved modestly lower Friday, weakened by the release of the U.S. July employment report.
At 4 p.m. EDT, the benchmark 10-year note was down 3/32 at 98 27/32 to yield 5.16%. The 30-year bond was down 5/32 at 97 to yield 5.58%.
The five-year note fell 4/32 at 99 28/32 to yield 4.63%, while the two-year note was unchanged at 99 31/32 to yield 3.89%.
Bond prices had been sharply lower earlier in the session, but rebounded due to weakness in U.S. stocks and a continued belief among investors that the Federal Reserve has at least one more interest-rate cut up its sleeve.
Market participants said earlier weakness in the bond market, which brought most Treasury issues near their lowest levels for the week, lured in a variety of dip-buyers who helped lift prices back near Thursday's closing levels.
The market's initial dip came after the Labor Department reported that job creation in the nation remains weak, but is showing signs of stabilization.
The employment report was "stronger than expected, when you take into account the revisions and that the jobless rate was unchanged at 4.5%," said Tony Crescenzi, chief executive of the Bondtalk.com Web site.
The government said nonfarm payrolls declined by 42,000 in July, which was less than the consensus forecast of a drop of 55,000. As a result, the unemployment rate remained unchanged at 4.5% compared with the forecast of 4.7%.
However, when stocks began to fall later in the session, bond prices started to recover.
In the corporate-bond market, Amerada Hess Corp. joined the investment-grade queue for this week with plans for a $1.2 billion three-part offering through lead manager Salomon Smith Barney Inc. The New York-based energy company will issue five-year, 10-year and 30-year maturities later this week.
More than $8 billion of new debt hit the high-grade market last week, as companies took advantage of the positive tone in the marketplace.
In the junk-bond arena, debt of benchmark telecom company Global Crossing Ltd. traded down one point. However, a credit agency's red flag on the company's credit came too late Friday to have much of an effect.<b/>
Late Friday, Moody's Investors Service put Global Crossing's senior implied debt rating under review for possible downgrade, two days after the company cut its revenue forecast and made plans to lay off 15% of its work force.
-- Steven Vames and Tom Barkley
(END) DOW JONES NEWS 08-05-01
07:30 PM |
