U.S. CREDIT MARKETS MIXED AT MIDSESSION
U.S. credit markets were mixed in dull
trading at midsession, with moderate losses in coupon issues
and Treasury bill rates near unchanged.
    Bills improved slightly on remarks from Federal Reserve
chairman Paul Volcker that a restrictive monetary policy would
be damaging to investment and that last week's increases in
U.S. banks' prime lending rates to 7.75 pct from 7.50 pct was
not connected with Fed policy, dealers said.
     Coupon issues were 1/32 to 5/16 lower, pressured by a weak
dollar. Treasury bill rates were anywhere from three basis
points lower to one basis point higher.
    The key 7-1/2 pct Treasury bond was 5/16 lower at 95-26/32
to yield 7.87 pct compared with 7.84 pct at yesterday's close.
    Dealers said remarks from Federal Reserve Chairman Paul
Volcker indicating that exchange rates had adjusted enough to
narrow the U.S. trade deficit and warning that a further,
sizable dollar fall could be counterproductive had little
exchange rate impact as they were seen as a reiteration of his
views.
    In any case, they said the dollar is expected to be under
pressure while monetary officials of leading industrial nations
meet this week in Washington, which may hurt bonds.
    Dealers said three-month bill rates had eased early in the
session on a few sizable buy orders from retail accounts, but
that otherwise there was little activity in this sector.
    "When Volcker hit the tape it helped bills, because it
makes people think the Fed is not going to tighten," a bill
trader said. "But it's a nervous trade, with no real buyers."
    Three-month bills were bid at 5.50 pct, three basis points
below their price at yesterday's auction, while six-month bills
rose one basis point from their auction price to 5.64 pct bid.
    Year bills rose one basis points to 5.74 pct bid.
    Most economists expected the Federal Reserve to supply
temporary reserves, but most had forecasted an indirect
injection via customer repurchase agreements rather than a
direct injection via two-day system repurchases which the Fed
conducted at its usual intervention time.
    The Fed intervened when Federal funds were trading at 6-1/8
pct. Funds opened at this level and remained there at midday,
down from yesterday's 6.20 pct avearge.
    The 6-3/8 pct two-year notes fell 1/32 to 99-21/32 at
midday and the 7-1/4 pct 10-years dropped 9/32 to 97-27/32.
 Reuter
