U.S. CREDIT MARKET OUTLOOK - NARROW RANGES
After a few days of volatility, the
credit markets show signs of settling back into the
frustratingly narrow ranges that prevailed for much of the
first quarter, economists said.
    Friday's weak employment data for March braked an ascent in
bond yields before the 30-year yield could reach the
psychologically important eight pct level.
    But, with question marks hanging over the strength of the
economy and, more critically, the value of the dollar,
economists said the market remains fragile and will not quickly
recoup the ground lost in the past two weeks.
    The 30-year bond yield closed Monday at 7.84 pct, down from
7.86 pct on Friday and a 12-month high last week of 7.93 pct,
but trading was lackluster.
    "People are sitting on the fence, they don't really know
what to do," said Stephen Slifer of Shearson Lehman Brothers
Inc. "Our retail accounts are not committing themselves either
way."
    No economic indicators are due today, but the markets will
hear Congressional testimony from Fed chairman Paul Volcker at
1000 EDT (1400 GMT) and will be alert for the possibility of
another outright purchase of securities by the Fed.
    The Fed needs to buy a large volume of securities at this
time of year to offset the reserve drain caused by a build-up
of Treasury funds at the Fed around the April 15 tax date.
    The Fed confounded most economists' predictions of a bill
"pass" last week by buying instead a record 2.2 billion dlrs of
notes and bonds, and Maria Ramirez of Drexel Burnham Lambert
Inc said the Fed could make it two in a row by offering to buy
coupon securities today or Wednesday.
    The Fed will not buy bills since they are already in
relatively short supply after heavy Treasury paydowns in
recent weeks, she argued.
    "They haven't paid down so many bills before in a quarter,"
Ramirez said, noting that the Treasury has been able to reduce
the size of its regular bill auctions because of strong tax
revenues following the reform of the tax code at the beginning
of the year.
    Because it would be unprecedented for the Fed to conduct
back-to-back coupon "passes", most economists still expect the
Fed to buy bills this week instead of bonds and notes.
    After trading late yesterday at 6-1/8 pct, Fed funds were
indicated by brokers to open at 6-1/8, 6-1/4 pct.
 Reuter
