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<HEAD><TITLE>Bridge News: Full: US Credit Review: Profit-taking offsets gains on Asia</TITLE></HEAD><BODY BGCOLOR="#ffffff"><P><TABLE BORDER=0 WIDTH=100% CELLPADDING=0 CELLSPACING=0><TR><TD COLSPAN=3><H2> Full: US Credit Review: Profit-taking offsets gains on Asia</H2></TD></TR><TR><TD VALIGN="middle" ALIGN="left"><FONT SIZE=-0><I>Updated Thu Jan 15 17:46 ET</I></FONT></TD>
</TR></TABLE>
<P><PRE>-
New York--Jan 15--Treasury prices ended little changed today as
overseas gains triggered by a slide in Hong Kong stock prices were offset
by profit-taking and some healthy economic data in the US.
* * *
The bond market's bullish sentiment has ebbed this week and many
players are calling for a further correction in prices. But because
Treasury prices keep getting small boosts from more bad news out of Asia,
participants are wary of setting up short positions.
One such boost occurred overseas, when Hong Kong's Hang Seng index
plunged 7.0% on worries about more bankruptcies, especially among real
estate companies.
When US trading opened, players seemed more inclined to take profits
than extend the overseas gains, and some cited Indonesian President
Suharto's signing of an economic reform package as a sign that Asia's
economic crisis was beginning to be resolved.
But at midmorning, Treasuries moved higher again when Bridge News
reported that US banking sources see "resistance" by South Korean
government officials to the $25 billion financial bailout plan.
"The market is all tied into what's going on in the Far East right
now," a government securities trader said. "We're trading tick for tick on
every bit of news that comes out of the Far East."
The trader said that because many players missed the market's rally at
the start of this year, there are willing buyers any time prices dip, which
helps keep the market rangebound.
Negatives for US bonds today included the dollar's weakness against the
yen and strong reading on January activity from the Philadelphia Fed. The
low in prices occurred after the Philadelphia Fed's midmorning report that
its index jumped to 17.3 in January from 9.2 in December.
Traders also cited the overhang of corporate debt. Another $4.625
billion of investment-grade paper was priced today.
Although the market has given up some ground since Monday morning, many
traders think it could go still lower. But Josh Feinman, a money market
economist at Bankers Trust, said he didn't see anything coming up near term
that could trigger big losses.
"I think the market has ultimately overdone it, because it has priced
in a Fed ease and I don't think the Fed is going to ease," Feinman said.
"But I just don't see what the catalyst will be for a major correction."
He noted that Treasury prices were able to withstand last week's news
that US payrolls posted another huge gain in December, and said the market
is likely to remain immune from strong economic reports for at least
another month or so because "Asia will still be looming out there as the
potential savior."
Steve Van Order, fixed-income investment strategist at Calvert Funds,
which runs $3.8 billion of fixed-income investments, said the bond market's
moves since the beginning of the year were like a fast-forward version of
his outlook for all of 1998.
While the market may have come too far too fast, making it vulnerable
to a correction, "I wouldn't change my general view as a bull by any
means," he said.
Van Order said the 2-year note's surge to a 5.02% yield Monday morning
was reminiscent of the 2-year's previous break below the funds rate last
October on flight-to-quality buying.
"What we think may happen in the short term is a replay of what
occurred after the flight to quality in October," he said. "The market may
try to settle in a bit."
He noted that there's also supply coming up, with the Treasury set to
sell 2- and 5-year notes later this month and 3-, 10- and 30-year paper
early next month, in addition to the heavy corporate issuance.
"The fundamentals will continue to support lower yields, but you need
to do a little digestion and reflection," he said.
Van Order said that from a long-term perspective, the fact that the 30-
year yield has been able to take out its 1993 low of 5.77%, a level it
failed to break in 1995, is very bullish.
Given his bullish outlook, Van Order said he would be a buyer of long-
term Treasuries again if the 30-year yield got back up to 6%. He's less
upbeat on short-term paper because he thinks the Fed could hold policy
steady for some time, limiting the gains at the short end.
At 1630 ET, the 30-year bond was down 1/32, bid at 105 11/32, where it
yielded 5.745%, and the 10-year note was down 2/32 at 104 28/32. Short-term
notes were slightly higher on the day and Treasury bill rates were 2 to 7
basis points lower.
The first batch of data today included a 3,000 rise in jobless claims,
to 335,000, when the consensus called for a decline to 321,000, and a
slightly smaller-than-expected 0.4% rise in November inventories.
But the number that grabbed the bond market's attention was the surge
in the Mortgage Bankers Association's refinancing index, to 1842.5 in the
week ended Jan 9 from 972.7 the previous week. The report also showed a
154.9% increase in total applications.
Analysts said some of the strength in the refi index probably had to do
with the problems seasonally adjusting data around holidays.
But they said a big increase in refinancing was to be expected given
the recent slide in rates. From the bond market's view, the rise in
refinancing threatens to give consumers more wherewithal to spend at the
mall. On the other hand, it suggests faster prepayments on mortgages, which
should send holders of mortgage-backed paper in to buy Treasuries to offset
the shrinking duration on their mortgage holdings.
In fact, the MBA index didn't seem to have all that much impact on
prices today, but traders will be watching to see if convexity buying picks
up in coming sessions.
The early drift lower in the US seemed to have more to do with profit-
taking than with the numbers. There was reportedly some hedge fund selling
in the 5- and 10-year sectors, and traders also cited the dollar's weakness
against the yen.
The market hit its session lows after the Philadelphia Fed reported the
17.2 reading on its January business index, far more of an improvement from
December's revised 9.2 reading than the market expected.
The overall reading and the gains in the new orders and shipments
measures all indicated that at least in the Philadelphia area,
manufacturing is gaining strength rather than withering in the face of a
flood of cheap imports from Asia.
The bond market did like the Philadelphia Fed's price components:
prices-received fell to minus 4.2 in January from 3.1 in December
and prices-paid fell to 9.4 from 20.7.
There was also talk about Plaza Corp.'s sale of 4,000 Mar 5-year
contracts. As the day wore on, traders noted that Plaza was also buying
some bond contracts, suggesting that it was putting on a flattener.
At midmorning, Treasuries got a lift when Bridge's report that the
South Korean government was resisting the bailout plan raised concerns
about the outlook for Korea.
Treasuries continued to fluctuate within fairly narrow ranges during
the afternoon, with the dollar's break below 130 yen helping push Mar bonds
back toward their lows late in the day session.
Traders say Friday's shortened session is likely to be a replica of
today's, with prices stuck in narrow ranges and the focus on any news about
Asia.
The consensus calls for a 0.5% rise in December industrial production,
which follows a 0.8% gain in November and a 0.5% rise in October. But
traders expect the market to shrug off a healthy report just as it has most
other recent data.
Traders will be more interested in Federal Reserve Chairman Alan
Greenspan's 1200 ET speech at a conference about increasing minority
representation on Wall Street. But analysts say Greenspan is likely to save
any market-moving comments for his Jan 29 appearance before the Senate
Budget Committee.
At 1630 ET, key coupon prices and bill rates in the cash market,
compared with levels at Wednesday's close:
Fed funds: 5 3/4%
3 mo: 4.98 dn 0.07 5 5/8% (2-yr): 100 21/32 up 1/32
6 mo: 4.94 dn 0.03 5 3/4% (3-yr): 101 7/32 up 4/32
1 yr: 4.90 dn 0.02 5 5/8% (5-yr): 101 9/32 up 1/32
6 1/8% (10-yr): 104 28/32 dn 2/32
6 1/8% (30-yr): 105 11/32 dn 1/32
End
<B>Bridge News</B> Tel: (212) 372-7522
Send comments to debt@xxxxxxxxxx
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