        SMITH BARNEY SHEARSON                  

                            

    ECONOMIC AND MONETARY TRENDS

    Two short stories     Mitchell J. Held          
                                                1
    U.S. Securities.. Who's Buying 'Em?

Much has been written over the past few quarters
about U.S. residents' appetite for foreign securities.     
Foreign investors have not given up on U.S. securities
either. Foreign investors purchased $27.9 billion of
Treasury notes and bonds during the third quarter of 1994
(67% of new supply), more than they did in all of 1993 .   
 Central banks remained steady buyers, probably a function
of foreign exchange market intervention. But after selling
$11.3 billion in the second quarter, private investors
purchased 59.7 billion of notes and  bonds in the third
quarter.

Data by country/region do not separate official
from private sector transactions, so a complete analysis of
private-sector flow is difficult. Yet, investors from     
Latin America and the Caribbean remain heavy net  
sellers, liquidating $10.2 billion in the third quarter,
after a $15.7 billion net liquidation in the second
quarter. Large selling took place for resident investors of
the Netherlands Antilles and the British West Indies,
suggesting that it was either too hot down there during the
summer months or that it could have been the activities of
hedge funds.

UK. residents
purchased nearly $14 billion of Treasury notes and bonds during
the third quarter, double the total for all of 1993, bringing
European purchases to $17.1 billion. European investors
liquidated Treasuries during 1993. Asian investors were buyers
of S15.3 billion in the third quarter, bringing total purchases
to more than $33 billion in the first nine months of the year.
We're assuming that central banks made much of these purchases.

Other asset classes saw reasonable buying levels as
well from the private sector. More than $5.5 billion of agency
paper (including mortgages) was purchased in the third quarter,
bringing the total for the year up to $16.3 billion. This is
less than one-half of 1993 net purchases but is on track to
exceed the $18.3 billion purchased in 1992, the second-highest
year on record. Investors bought nearly $1O billion of corporate
bonds, bringing the January-September total to $29.4 billion,
just shy of the $30.4 billion for all of 1993. And foreign
investors were net buyers of $700 million of corporate equities
in the third quarter  In 1994 through September, foreign
investors had purchased $5.8 billion of corporate equities, down
from $21.6 billion in 1993.

Banks: How Will Loan Growth Be Funded?

Throughout 1994, banks have become more generous with
their funds. Bank loans rose at a 8.6% rate last year. A
cessation of investment purchases and, more recently, some
modest liquidation has helped the banking system fund the loan
growth. But the funding may be strapped over the next few months.

Banks have raised rates an CDs and that has helped
increase the growth rate of small time deposits. Indeed, through
December, small CDs had grown at a 16.3% annual rate over the
past three months and at an 11.7% annual rate over the past six
months. But CD growth appears to have come at the expense of
lower-cost savings deposits, which have fallen at a 12.8% annual
rate over the past three months and 10.2% over the past six
months. Indeed, the dollar decline of savings deposits has
exceeded the dollar rise of CDs, during a time in which demand
deposits and other checkable deposits are declining as well.
(Large time deposits have risen at a 20% annual rate over the
past three months).

In an environment in which the Fed is beginning
to restrict liquidity, the only liquidity resource that the 
banking system has (outside of foreign flows) is    
investment portfolios. In spite of the market's recent    
rally, chances are that the bulk of the "held far sale"    
portfolios remain underwater, making the banks somewhat    
reluctant to record the loss.

In an environment in which the Fed's recent loan 
officers' survey continues to suggest an easing of the     
credit quality reins, a legitimate question may be raised
about the banking system's ability to continue  lending
funds at recent growth rates, without significantly raising
the relative cost of borrowing to its ultimate customers.
This is occurring at a time when consumer debt levels have
already become relatively high.        

    TREASURIES

    Douglas Schindewolf

This week, the Treasury sold roughly S77 billion
of securities ranging in maturity from 64 days to 30 years  
-- how's that for variety! The quarterly refunding package
accounted for 40 billion of this week's slate of auctions.
Considering the fact that there was a considerable
run-up in prices in the wake of the employment report at
the end of the prior week, the market negotiated the new
supply admirably. On balance, the three-month bill rate was
about unchanged far the week and the yield on the long bond
increased by about five basis points. Yields on
intermediate securities rose a bit more -- almost 15 basis
points on the two-year note, for instance -- with that
sector caught in the throes of the debate about the
likelihood of another rate hike from the Fed.

In our judgment, so long as the market is caught
between the view that the tightening cycle is over and that 
another rate hike is possible, the two-year/fed funds   
spread is likely to vacillate within a range of 100 to 150
basis points, implying a 7.0%-7.1i% trading range for the
two-year note. If sentiment shifts toward the view that the
tightening cycle is over, we would anticipate a contraction
of the spread to the 50-to-100 basis point range (6.5%-7.0%
for two-year notes). If sentiment shifts toward the view that
another rate hike from the Fed is likely, a contraction of
the spreads could still occur (on the assumption that this is
likely to be the Fed's last move but it would apply to a
higher fed funds target (probably 6.5%), implying a
continuation of the 7.0%-7.5% range for the two-year note.

The quarterly refunding kicked off on Tuesday with
the sale of S17 billion three-year notes. This auction drew  
strong bidding interest, including $1.6 billion   
noncompetitive tenders, compared with an average of S1.1   
billion at the prior six auctions. The bidding produced an
average yield of 7.34%, compared with 7.41% at the prior
auction last November. The sale of $12 billion 1O-year notes
the following day was met by only a lukewarm warm
reception and resulted in an average yield of 7.54%, compared
with 7.96% at the prior auction last November. The refunding
concluded with a well-received sale of $ll billion 30-year
bonds on Thursday. The average yield was 7.65%, setting a
coupon of 7 5/8% on the new benchmark bond of 02/25. The next
auction of long bonds will be in August. Note: beginning
with the two-year note auction scheduled far February 22,
competitive bids in all note and bond auctions must show
the yield bid expressed with three decimals. (Competitive
bids in Treasury bill auctions will remain unchanged --
that is, the bid must show the discount rate expressed with
two decimal places.)

For the record: The minutes from the December 20
FOMC meeting suggest that the jitteriness of the financial markets amid the Orange County fallout and the approach of year end played a secondary but influential role in the Fed's decision not to raise official interest rates at that meeti
ng. The following is an excerpt from the minutes: "A number of members commented that financial    markets might tend to be a bit unsettled over the balance    of the year as a result of the expected year-end adjustments, along with the un
certainty about the effects and incidence of the sizable
market losses incurred by some investors in 1994. In these
circumstances, where there did not appear to be an urgent
need for a further policy move, a number of members viewed
conditions in financial markets as arguing for a steady
policy course pending a reassessment early next year." The   
Committee issued a policy directive biased toward      
restraint, but waited until the subsequent meeting    (January
31-February 1) to raise official rates another     notch. Note:
Alan Greenspan is scheduled to deliver the    Fed's
Humphrey-Hawkins testimony to Congress on February    22 and 23.

CORPORATES

Diane Garvey

New issuance of corporate debt was fairly light for
the week with approximately $2.2 billion issued through
Thursday. some highlights far the week, include a $500MM Ford
Motor Credit (A/A+) 7-year at +70BPs $400MM Legrand (A/A)
30-year at +95BPs, $300MM Associates Corp. N.A. putable 1O-year
at +38BPs, and $250MM Shawmut Bank-N.A.(Baal/BBB) [Smith Barney
was a co-manager) at +l15BPs. The calendar for the week of the
13th is building with the anticipation of a $1 billion debt
offering from American Home Products toward the end of the week.

As for secondary trading market activity was robust
across the maturity spectrum and indiscriminate of industry
sector. Interest in industrial paper remained strong throughout
the week with tremendous flow business reported for cable
companies. In particular. Time Warner's intention to merge with
Cablevision Industries in a stock transaction including 2.5MM
shares of Time Warner Inc.'s common and 3.25MM shares of two new
series of convertible preferred as well as its "12-18 month
initiative" including debt reduction, asset sales and intent to
improve balance sheet measures caused spreads to tighten by
10-15BPs on intermediate paper and 20-25BPs on long paper. As
for other cable companies like Tele-Communications Inc ('),
spreads tightened at least 10-15BPs for intermediates and
10-15'BPs for the longer paper. Demand for higher rated
industrials remained strong with spreads in Double A paper
tightening on average by 2BPs for the week. Favorable operating
results reported by Sears, Roebuck & Co, this week caused
spreads on Sear's paper to tighten by 3BPs. US West
Communication's paper tightened by 3BPs for the week due in part
to the news emanating from Time Warner's announcement and US
West's ownership stake in Time Warner Entertainment. Bank
spreads ended the week 5BPs tighter on average. Price talk for
Shawmut's bank deal widened to 115BPs from 105BPs which, at +115
was well received in the marketplace and tightened by 5BPs after
the break. Demand for 12-15 year bank paper remained strong and
spreads have tightened even more than 5BPs in certain cases.
Canadian paper continued to see good flow and ended the week
firmer by 3-5BPs.

 *Smith Barney usually maintains a market in the
securities of this company. # Within the last: three years,
Smith Barney, or one of its affiliates, was the manager
(co-manager) of a public offering of the securities of this
company or an affiliate.

MUNICIPALS

Too much money chasing too few notes and bonds
caused the Short Term tax-exempt market to trade higher this
week. Following last week's very positive employment figures,
some buyers of short term tax exempt debt felt it was time to
extend out on the curve by buying issues in the one to two year
sector of the market. Corporations and Bond Funds had been
investing in this sector over the past few months because longer
term paper has been relatively less attractive. Indicative of
the strong interest in this sector is the secondary market for
the $4.0 Billion State of California RAWs which mature 4/25/96.
After Friday's Employment number the RAWs improved 20 basis
point from 5.30% to 5.10% . This past week RAWs continued to
improve by 10 basis points and were not affected by the PPI
number despite negative reactions in other markets.

                                      Mark Matthews

For more information, go to internet, omnifest.uwm.edu, logon on as "visitor",
then "go finance".

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