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Bond firm amid Russia storm
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August 26, 1998: 4:14 p.m. ET
Two-year auction sails through, but analysts warn lower yields aren't likely
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NEW YORK (CNNfn) - U.S. Treasurys rode the Russian bear market Wednesday as ruble weakness set the stage for a successful, but lackluster, auction of two-year notes.
The 30-year benchmark Treasury issue held on to morning gains and closed in U.S. trading up 5/32 in price, with the yield falling to 5.41 percent.
A late-day announcement Tuesday from Russia about the change-over of short-term debt into long-term debt there drew mounting criticism from brokerages Wednesday, which led many investors into the security of U.S. bonds.
CS First Boston, a key participant in the Russian market, said the debt swap was unfair to global investors and urged the International Monetary Fund to take a more active role in exchange rate and monetary policy.
Meanwhile in Russia, rumors emerged -- however false they may be -- that Russia's newly named Prime Minister, Victor Chernomyrdin, had lined up a military coup against President Boris Yeltsin.
"It was getting some play in the market," Alison Montgomery, a currency analyst with I.D.E.A., said "But it does sound bizarre."
One bond analyst said demand for a $15 billion auction of two-year Treasury notes Wednesday did produce yield levels well below the Federal funds rate, suggesting many investors don't expect rates to rise.
The two-year auction mustered a high of 5.125 percent, with a median offering yield at 5.11 percent.
But John Lonski, a senior bond analyst at Moody's Investor Service, also said the ratio of bids on the notes to actual purchases pointed to weak demand.
"You had to have some conviction that the Fed isn't going to raise rates any time soon," he said, adding, however, that "there is a sizable segment of the investment community that the Fed will have no choice to cut rates to help east Asian economies."
"This was a lackluster auction," he added. "Demand was not strong enough to suggest that without further deterioration in overseas economies that there is much more of a down side for bond yields."
The German mark, which slumped amid the fears of Russian spillover, was off nearly a full pfennig at 1.8070 to the dollar. That followed a 5-percent plunge in the ruble against the dollar overnight and a subsequent halt to ruble-dollar trading in Moscow.
The Japanese yen, which the ruble's woes appeared to bump from center stage in the currency market, was up slightly at 144.08 to the dollar. 
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