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Treasuries Weren't Built Ford Tough Today

Eyes were turned to corporate supply today, with volume thin in the bond market.

Treasuries collapsed under the weight of impending corporate supply today, as dealers and investors both sold securities guaranteed by the federal government to get ready for securities backed by the faith of, among others,

The Limited



At least $8 billion in new corporate debt is scheduled to be sold this week, including a mega-deal from

Ford Motor Credit

, an arm of


(F) - Get Ford Motor Company Report

, and that's dampened interest for lower-yielding Treasuries. The auto manufacturer will sell at least $3 billion in securities later this week, and has plans for more sales later this year.

"Ford is replacing the federal government as the one to wash the Street in supply," said Mitch Stapley, chief fixed-income officer at

Kent Funds


Well, not completely. If this expected supply wasn't enough, the Treasury itself will auction $15 billion in two-year notes Wednesday, a monthly exercise. It was enough to put the market in a bad mood for a good part of the day. Lately the 30-year Treasury bond was down 19/32 to trade at 89 13/32. The yield rose 4 basis points to 6.02%.

The planned corporate offerings induce selling among dealers preparing to underwrite these deals. The underwriters sell Treasuries to offset the danger of holding riskier corporate debt. Should bond yields rise, they've protected themselves by shorting, or selling, the Treasury market.

On days where the Treasury market is crowded with buyers, this kind of dealer-related activity has less impact. This is not that day.

Investors, unwilling to bet on a rise in yields ahead of an expected

Federal Reserve

rate hike next week, are sticking to the sidelines. The Fed meets June 29 and 30, and the market feels it's all over but the shouting, which will sound something like: "The Fed has hiked rates from 4.75% to 5%!"

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reported volume down 18% when compared to the average second-quarter Monday, as just $41 billion in securities changed hands by 3 p.m. EDT. "It's just thin -- that's the main thing," said Stapley. "Volume's horrible in Treasuries, and so we get down three-quarters of a point on basically nothing."

Since October, when liquidity disappeared from the bond market, the most successful issues have been the largest, most liquid issues. It's an unprecedented move for a corporate issuer, which once it receives the proceeds of its debt sale, typically has little to do with the daily activity in the credit markets.

This week's docket is headed by Ford's deal, expected to price later this week. The company said it would sell at least $10 billion this year in installments to enhance liquidity in the credit markets. This is a tactic federal agencies

Fannie Mae



Freddie Mac


have taken within the last year to drum up more interest in their sizable debt issues, as well as offset some of the liquidity lost in the credit markets through shrinking Treasury supply.

Ford's move underlines the fact that since October, when liquidity was nonexistent in the corporate market, the most successful bond pricings have been the largest and therefore most tradable issues.

Other issuers this week are expected to include

United News & Media's


$1 billion issue and Edison Mission Energy's $600 million offering. Roche Holdings, a European company, sold $1 billion in notes earlier today. (The Limited will sell $300 million later this week, according to sources.) With the outlook for Treasury interest rates uncertain, corporate deals attract investors seeking higher yields.

"I think the investor is looking for a pick-up in yield rather than appreciation of price," said one futures dealer in New York. "There's nothing in the pipeline to gyrate the

prices higher, so the investor will want a security with high coupons."

The day's only economic release was the hardly stimulating May

federal budget

statement, which revealed that the government, through eight months of the fiscal year, is running a $40 billion surplus, compared with $15 billion through the first eight months of 1998.