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Traders Bracing for Deluge of New Government Securities

May 3, 1987

NEW YORK (AP) _ The Treasury plans to sell $29 billion in bonds and notes over the next few days to keep pace with the government’s swelling debt, and experts say success of that auction lies in the appetite of foreign investors, particularly that of the Japanese.

″If you want the auction to go well, the market has to have the perception the Japanese will participate,″ said Mitchell Held, an economist with Smith Barney, Harris Upham & Co.

Bond traders are hoping the Japanese will continue to buy U.S. debt securities at the same high levels as in previous quarterly refinancing operations, despite the dollar’s weakness against the yen and Japan’s trade dispute with the United States.

The dollar’s precipitious drop on foreign exchange markets - which picked up even more steam since the Reagan administration recently announced stiff tariffs against some Japanese products - has sent bond prices sharply lower and pushed up interest rates to levels not seen in more than a year.

The key concern among investors has been that a fall in the dollar would make dollar-denominated securities less attractive to foreign investors. Investors also worry about a revival of inflation caused by a weak dollar, which further erodes the value of fixed-income securities.

Interest rates have risen to compensate for both factors.

″I think the spotlight for the auction is on the foreigners, and I don’t think the U.S. Treasury securities look as appetizing as U.S. investors think they do,″ said Robert Brusca, chief economist for Nikko Securities Co. International Inc. ″The currency markets are too unstable.″

″I think the Japanese investor is going to be very cautious,″ added Larry Wipf, an economist for Norwest Corp. in Minneapolis. ″They won’t sit out but perhaps participate less than the past. If I were them, that’s what I’d do.″

Other economists disagreed.

″There’s no other place to put their trade surplus money,″ said Jay Goldinger, an analyst with the investment banking firm of Cantor, Fitzgerald & Co. Inc. in Beverly Hills, Calif. ″The Japanese will buy because there’s value in relationship to their currency.″

Goldinger noted the wide yield ″spread″ between Japan’s 10-year bond and the U.S. counterpart. The Japanese bond currently yields 2.9 percent while the U.S. bond has a yield of 8.29 percent.

Raymond Stone, chief financial economist with Merrill Lynch Capital Markets, said he was relatively optimistic that the Japanese would actively participate in the auction and keep rates down.

″But that bullishness could change if I read the Sunday papers and see (Japanese Prime Minister Yasuhiro) Nakasone going back home and in shame″ after meeting with President Reagan over the past week, Stone said.

″He’s a lame duck or a dead duck, people are saying. This is his last ditch politial attempt,″ Stone said. ″The perception must be that the trade war has come to an end and the U.S. administration is willing to protect the dollar.″

Nakasone and Reagan discussed the trade dispute between their two countries, which stems from Japan’s huge trade surplus with the United States. Friction between the two countries was heightened after Reagan imposed 100 percent tarrifs on $300 million worth of Japanese electronics products following allegations that Japanese semiconductor producers had violated an agreement on computer-chip trade.

During his visit, Nakasone told Reagan Japan’s central bank was taking steps cut short-term interest rates to spur economic growth in his country and lower the value of the yen against the dollar.

At the same time, Federal Reserve Chairman Paul A. Volcker confirmed what economists had been suspecting all along - that the U.S. central bank had acted to stem the dollar’s decline by slightly tightening its credit policies.

″It’s a unique time,″ said Stone.

He noted that the Fed was hoping to strengthen the dollar and ultimately drive down interest rates, particularly long-term, inflation-sensitive maturities, by pushing up short-term rates for the time being.

In its auction, the Treasury plans to raise $16.5 billion of fresh cash in its quarterly refinancing with the sale of the $29 billion in notes and bonds to redeem $12.5 billion of maturing securities.

The issues include $10 billion of three-year notes to be sold Tuesday, $9.75 billion of 10-year notes to be sold Wednesday and $9.25 billion in 30- year bonds to be sold Thursday. The package is identical to the last quarterly auction in February.

End Adv Weekend Editions May 2-3

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