U.S. CREDIT MARKET OUTLOOK - MINI-REFUNDING
A hefty slice of new U.S. Treasury
supply is not the most welcome prospect for a slumbering credit
market, but at least this week's offerings should provide it
with some focus, economists said.
    "Banks and mutual funds have cash that should be put to
work, so the auctions should breathe some life into the market,"
said economists at Merrill Lynch Capital Markets Inc.
    The Treasury will place a 25 billion dlr package of
two-year, four-year and seven-year notes on the sales block
this week.
    The "mini-refunding," which will raise 9.27 billion dlrs in
new cash, comprises 10 billion dlrs of two-year notes for
auction on Tuesday, 7.75 billion dlrs of four-year notes on
Wednesday and 7.25 billion dlrs of seven-year notes on
Thursday. The market also faces the regular weekly three- and
six-month bill auction today, amounting to 12.8 billion dlrs.
    The mini-refunding does not come at a particularly
auspicious time for the market. Bond prices have been drifting
sideways in a narrow range against the backdrop of a cloudy
U.S. Economic outlook, diminished chances of a change in
Federal Reserve Board policy and a stable dollar.
    Moreover, the bond market's inertia has compared
unfavourably with the rash of activity taking place in
high-yield markets overseas, like the U.K., As well as in U.S.
Equities.
    But according to the Merrill Lynch economists, there are
signs the pall hanging over the U.S. Bond market is lifting a
bit.
    "Customer activity has been light, but all on the buy-side,
and there is a marked absence of selling," they said in a weekly
report.
    Philip Braverman of Irving Trust Securities Inc believes
banks will snap up the two- and four-year issues at this week's
sales.
    "The banks are in need of investments that provide earnings.
Though the yield spread to the cost of carrying these
maturities has been wider, it is still positive," he said in a
weekly market review.
    But economists agreed not even the auctions will generate
enough impetus for a major move. This will only come once the
overseas markets have had their run.
    "Based on last week's events, there is little to indicate
that the appetite for yield has begun to wane," said economists
at Salomon Brothers Inc.
    Indeed, talk persisted last week that Japanese investors
are planning to re-weight their portfolios in favour of the
higher-yielding markets at the start of Japan's new fiscal year
on April 1.
    And while traditionally the Japanese have not been big
buyers of the shorter-dated issues on offer at this week's U.S.
Auctions, such reports undermine market confidence.
    Even actions by the British, Australian and Canadian
monetary authorities to curb the rise of their currencies
should also enhance the attractiveness of their respective bond
markets, the Salomon Brothers' economists said.
    Meanwhile, ecomomic releases are unlikely to enliven the
U.S. Market unless they deviate widely from expectations,
economists said.
    This week's economic calendar begins on Tuesday with
February durable goods orders. Economists expect a rebound from
January's depressed levels.
    Peter Greenbaum of Smith, Barney, Harris Upham and Co said
several areas, including transport equipment, should have
bounced back. But a decline in military capital goods will cap
total new orders. He forecasts a rise of two pct after
January's 6.7 pct slump. Some other economists foresee a gain
as large as five pct.
    Friday's consumer price report for February is expected to
show an increase of about 0.3 pct after a 0.7 pct January gain.
Economists said energy prices -- the driving force behind the
January rise -- rose more moderately last month, while food
prices declined.
    Meanwhile, economists warned that the federal funds rate
will be subject to volatility in the weeks ahead due to the
approach of quarter-end and the mid-April tax date.
    Some economists expect the Fed to execute a bill pass this
week because its adding requirement increases sharply in the
new statement period beginning on Thursday.
    Fed funds traded at 6-1/16 pct late Friday and are expected
to open near that level.
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