Figures showing a large increase in the money supply were released late Thursday afternoon, spoiling what had been a decent week in the fixed income markets.
Technical factors greatly influenced the direction of the market last week as they have for the past several weeks. A lack of new issues, a lack of dealer inventory and a great deal of money in the hands of buyers have helped to create the good climate. New issues that were reasonably priced sold well. Issues that were priced ahead of the market did poorly. However even as the euphoria was occuring. Wall Street had one eye cocked on the monetary figures because some large growth in the nation's money supply had been anticipated. The growth turned out to be at the high end of the expected range.
As to the direction of rates, it appears that on a short-term basis the bond markets could hold their current levels and perhaps do slightly better. On the horizon are stronger fundamentals, namely higher inflation in October, more erosion of the dollar, a strong demand for credit, and continued growth in the money supply. To combat these foces, the Federal Reserve must continue to tighten credit, which means higher rates.
Customer selling, an increase in the supply of new issues and more tightening by the Fed would push rates higher over a longer period. All are possibilities, and the Fed tightening should occur first. An increase in supply, especially in the Treasury area, will build in October.
Technical factors have created a unique situation in which the short federal funds rate has risen 50 one-hundredths over the past two months (which should force other rates to adjust to higher levels and lower prices) while longer bonds have been rallying anywhere from 1 1/2 to 2 points in the Treasures to even more in longer municipals and corporates.
The corporate market is the one arena that has especially been hurt from a lack of supply. But discerning buyers bought only one out of 3 issues that were offered last week. The $150 million Southern Bell Telephone issue was estimated to be only 55 percent sold after it was offered on an 8 5/3 percent basis. The issue that cleaned up was the Consumer Powers at 9 percent.
Key municipal issues were well received and were eagerly purchased by banks, casulty insurance companies and bond funds although the returns are, considerably below the rates of a few weeks ago. The $50 million Virginia Housing Authority issue was accelerated to last week, and the term bonds were 6 3/4 percent at par.
The Treasury will auction a 2-year note Wednesday. It will be available in minimum denominations of $5,000 and possibly could return more than 8 1/2 percent. Subscriptions may be entered no later than 1:30 p.m. Wednesday at the Treasury in D.C. and Federal Reserve banks elsewhere.
Regardless of the crosscurrents, the prices on long bonds are too high and should retreat as we enter the final quarter of the year. The return on the money market fund is around 7 1/2 percent and represents a good place to park your funds while you wait for the bugler to call retreat.