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.
  

