Treasury Note Auction Called ‘Horrendous’

Market Overview

Highlights of Tuesday’s market activity, compiled from Times staff and wire reports:

* A poor showing at the Treasury’s auction of three-year notes sent interest rates up sharply.

The yield on the Treasury’s bellwether 30-year bond rose to 8.02% from 7.94% Monday.


* Stocks fell for the fourth straight session on the disappointing Treasury auction. The Dow Jones industrial average dropped 14.31 points to 3,031.31.


NEW YORK--The government’s sale of $14 billion of three-year Treasury notes Tuesday went worse than almost all analysts had expected, and traders blamed the cool reception on new Treasury Department rules for the auctions.

Bonds were also undermined by the Federal Reserve’s failure to publicly engineer a widely expected interest rate cut, which left dealers wondering if rates will come down anytime soon.


The sale was the first leg of $38 billion of notes and bonds to be sold by the Treasury this week, and was seen as a bad omen for the remaining auctions.

It was the first offering since the government introduced new auction rules in the aftermath of the Salomon Bros. scandal.

The yield on the new three-year T-note was set at 6%, compared to 5.99% expected just before the bidding ended. Though the yield was the lowest on a three-year note since 1972, analysts had expected much better bidding.

The auction “was horrendous. It was so bad it kind of left you stunned for a couple of minutes,” said Ward McCarthy of Stone & McCarthy Research Associates Inc.

McCarthy noted that the bid-to-cover ratio, which is the total amount of bids versus the amount the Treasury accepted, was 1.55, the lowest ratio since 1981. For long-term securities, the usual ratio is about 2.0.

Paul McCormack, a manager at Chase Securities, called the $21.77 billion in tenders received for the three-year paper “a real paltry amount.” Japanese securities firms were believed to have bid for only 15% of the notes, down from their usual take of about 20%.

Some traders blamed the lack of bids on confusion about the Fed’s next move on interest rates. If rates aren’t going lower, some investors figured, what’s the incentive to buy bonds now?

Though the Fed is believed to have voted to cut rates at a closed-door meeting Tuesday, many investors wanted to see public action in the form of a cut in the Fed’s key discount rate, now 5%.


More traders, though, said the real culprit was a change in the bidding process, which had previously been controlled by an elite group of 39 big bond dealers.

After revelations in August of auction violations by one of the biggest dealers, Salomon Bros., the Treasury Department changed the bid rules. Now, about 14,000 banks and securities dealers, which could already bid for themselves, could also bid for clients.

But they apparently couldn’t make up for a pullback in bidding Wednesday by wary members of the 39-dealer group.

Traders have curtailed the usual discussion before auctions, traditionally a method of exchanging price information, because of worries that U.S. regulators could view this activity as collusion.

“People are not even saying ‘boo’ to each other,” said a senior manager at a primary dealer.

“I think the bureaucrats in Washington . . . just reduced the incentive for the primary dealers to underwrite these auctions,” McCarthy said.

It was also the first auction in which non-competitive investors, meaning firms or individual investors who enter small bids and accept the average auction yield, were allowed to bid on $5 million in the auction, up from $1 million previously.

Yet non-competitive bids totaled only $852 million. Small investors may have been discouraged by current low yields on T-notes, analysts said.


What worries traders is that the Treasury bond sale continues with an offering of $12 billion of 10-year notes today and $12 billion of 30-year bonds on Thursday. If few investors step up to buy, yields may have to shoot higher to attract more interest.

Meanwhile, the federal funds rate, an important short-term rate that is the interest on overnight loans between banks, dropped to 4.938%, down from 5% late Monday. But that wasn’t viewed as a signal from the Fed.


Stocks were modestly higher until early afternoon, when the Treasury released the poor results of its auction of three-year notes.

By the close of trading, declining issues outnumbered advancing ones by more than 6 to 5 on the New York Stock Exchange, with 742 up and 853 down.

Big Board volume came to 172.09 million shares, up from 155.66 million in Monday’s session.

Over the past four sessions, the Dow index has lost about 40 points. Investors have been expecting interest rates to come down, and the shock of the weak bond auction unnerved the stock market, analysts said.

“The (bond) auction didn’t go so well,” said Ron Doran, director of institutional trading at C. L. King & Associates.

“Buyers have backed away. Hopes are still hanging on an interest rate cut, but if it doesn’t happen by the end of the week, we could take a real shot Friday,” Doran warned.

Among the market highlights:

* Walt Disney sank 4 5/8 to 113 3/4, dragging the Dow lower. Traders said Goldman Sachs cut its rating and earnings estimates on the entertainment giant, apparently on concerns about the economy.

* Many retailers continued to weaken on worries about poor consumer spending. Dayton Hudson lost 1 5/8 to 60 3/4, Penney slid 3/4 to 48 5/8, and Gap lost 1 to 44 3/4.

* Industrial stocks continued to churn. Clark Equipment gained 3 5/8 to 24 7/8 after it said it may sell its money-losing fork-lift truck business. Prudential Securities raised its rating to buy from hold.

But among other industrials, FMC lost 1 1/4 to 49 1/2, PPG Industries fell 1 to 48 3/8, and Dover Corp. dropped 1 3/4 to 36 1/2.

* Oxford Health plunged 4 1/2 to 18 1/2 after Montgomery Securities cut its 1992 estimate for the health-benefits services firm.

* Among Southland firms, CII Financial slid 2 3/4 to 15 3/4 on a disappointing earnings report, while Jacobs Engineering rose 1/2 to 24 on its earnings report.

* Software Toolworks gained 1/2 to 5 1/4. It reported a second-quarter profit of 5 cents, contrasted with a 31-cent loss a year ago.

* Tandem Computers slipped 3/8 to 11 3/4. Smith Barney lowered its rating to hold from buy.

* Transworld Music dropped 3 to 18 1/2. Paine Webber lowered its rating and earnings estimates.

Overseas, news that media tycoon Robert Maxwell was missing at sea checked a rise in the London Stock Market. At the close, the Financial Times 100-share index was up 13.1 points at 2,540.9.

Shares came back from recent weakness in Frankfurt with a 0.4% rise. The 30-share DAX average rose 5.91 points to 1,576.12.

In Tokyo, stocks ended the day lower but above intra-day lows in thin trading. The 225-share Nikkei average ended down 93.38 points at 24,950.86.


The dollar was little changed as the expectation of lower U.S. interest rates cast a pall over the foreign exchange markets.

In New York, the dollar was quoted at 1.639 German marks, unchanged from Monday. It rose to 130.03 Japanese yen from 129.19 Monday.

The British pound fell against the dollar. In New York, sterling edged down to $1.773 from $1.774.

A decline in interest rates would make U.S. government securities and other dollar-denominated investments less attractive and thus lower demand for the dollar.


Grain and soybean futures prices fell on the Chicago Board of Trade amid flagging hopes for an announcement soon on new U.S. food aid to the Soviet Union.

On other commodity markets, orange juice futures surged; energy futures were mixed; precious metals retreated, and livestock and meat futures were mixed.

On the New York Mercantile Exchange, December deliveries of light, sweet crude oil fell 2 cents to $23.78 per barrel.

Meanwhile, precious metal futures fell on New York’s Commodity Exchange. December gold fell $2.70 to $355.40 an ounce; December silver fell 2 cents to $4.063 an ounce.

Market Roundup, D8