L.A. violence could scare foreign investors Fear may cut participation in Treasury sale this week.

May 04, 1992|By Kenneth N. Gilpin | Kenneth N. Gilpin,New York Times News Service

NEW YORK -- Some credit market analysts say the disorders in Los Angeles and elsewhere last week may be felt in the financial markets for weeks if not months.

They look to this week's $36 billion Treasury refunding auctions as one area where the anxiety may be felt.

"To the extent that foreign participation in these auctions matters, the fact that foreigners are looking at a place that is not as politically secure as it seemed even a few days ago" will not help the debt sales, said David H. Resler, chief economist at Nomura Securities International.

Now that serious questions have been raised for the first time in at least a decade about America as a model of political and social stability, it remains to be seen how enthusiastic overseas investors will be to buy the new 3- and 10-year notes and 29 1/2 -year bonds that will be sold.

Other analysts expect to see fallout in Washington from the riots. They say Congress and the Federal Reserve Board may feel more pressure to try to stimulate economic growth for fear that fragile recovery could stumble.

"Alan Greenspan has to be awfully nervous about this situation," said Edward Yardeni, chief economist at Prudential Securities, referring to the Federal Reserve chairman. "Both Wall Street and the Fed favor a slow recovery. But this social unrest creates a lot of pressure to generate something more substantive because the fundamental underlying problem feeding the unrest is the recession."

Even before the riots, market participants viewed this week's refunding auctions as more speculative than most, in part because for the first time in years a crucial set of economic data, April employment statistics, will be released Friday, the day after the auctions.

Any lack of enthusiasm about this week's refunding on the part of foreigners would come on top of several years of diminishing foreign participation in the quarterly auctions. Domestic institutions such as commercial banks have filled the void.

Despite all the publicity surrounding Japanese purchases of Treasury securities in the late 1980s, foreign ownership of marketable government debt has remained fairly steady since the mid-1970s.

In a recent report, Susan Hering, an economist at Salomon Brothers, noted that at the end of 1991, for eigners owned less than 19 percent of marketable Treasury issues. And the bulk of those securities are held by central banks, institutions whose decisions are not known to rest on alarmist tendencies.

While a lack of demand from overseas may be a negative at the auctions, the possibility of another easing in monetary policy by the Fed in response to the social crisis could be positive in the short term for the market, analysts suggested.

Last week, weaker-than-expected money supply figures and a report from the nation's purchasing managers heightened expectations that the Fed might move on economic grounds alone. If Friday's employment report shows growth in the labor force remains sluggish, the Fed may decide to lower short-term rates.

Analysts' estimates for growth in the non-farm work force range from as high as 165,000 to as low as 25,000.

Job growth of more than 100,000 would be a welcome relief from the scant gains recorded this year, but even a gain of that size would be well below the levels seen in the early stages of previous recoveries. The riots could affect future hiring and spending plans.

"Civil unrest is not conducive to economic growth," said Donald J. Fine, chief market analyst at Chase Manhattan Corp. "It is too early to draw many conclusions, but what we have seen is not going to help the nation's psyche, or boost consumer confidence. Everybody loses here."

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