The first cracks in the long-term rate structure began to appear last week through all sectors of the fixed-income market. The move to higher rates was spread throughout the yield curve as the Federal Reserve nudged the federal funds rate to 8 1/2 percent, realizing market participants' fears.
The fundamentals proved too strong to be denied. Revisions in the second-quarter gross national product showed the economy was stronger than was thought, and also that inflation was running at the 11 percent level as measured by the GNP price deflator. Couple those facts with a growing money supply, a strong demand for credit and a weak dollar overseas, and it is quite understandable why the Fed raised the funds rate. Some observers see this key rate moving to 8 5/8 percent by the end of September.
In the final analysis, for all the tightening the Fed has done this year, little has been accomplished, in slowing down the economy, the growth of the money supply and dreaded inflation.
The feeling in the markets now is that the final solution to these problems will depend mainly on the programs that the administration will offer to combat these economic ills. If the programs are strong, the end results will prove successful and the excesses will be brought under control. If they are not strong programs, the markets will reflect their disappointment, especially the foreign exchange market, which is looking for a meaningful reduction of inflation in this country.
The surprise of the week was the announcement by the Treasury of the sale of $1.5 billion of a 15-year bond. A 5-year note was expected. This 15-year Treasury, along with an announcement of $250 million of a 30-year utility bond, added an ingredient to those markets that had been missing supply. Coupled with the Fed tightening, this added pressure on the longer rates.
In fact, new corporate issue did so poorly last week that, when the unsold bonds in the syndicates were thrown on the market to seek their own levels, most fell 1 1/2 to 2 points and their yields rose anywhere from 10 to 15 one-hundredths. A high-grade double-A utility, the Public Service of Indiana, was accelerated to sell on Friday at an 8.95 percent return.
Two of the larger new tax-exempt issues sold poorly. The term bonds on the San Francisco airport issue and the Port of New York Authority issue both sold slowly. Buyers became cautious and withdrew from the market as rates were rising. Also, some issues were overpriced (the State of Louisana issue) and finally cleaned up at lower prices.
The 15-year, one-month Treasury will be auctioned on Wednesday. The issue will come in minimums of $1,000 and will mature on Nov. 15, 1993. Because these will not be callable, they could be very attractive to investors if they return more than 8.60 percent. Check the outstanding 15-year Treasury, the 8 5/8 percent due Aug. 15, 1993, to see where they close on Tuesday. The new issue should offer at least five-hundredths more yield than the outstanding issue.
As usual, tenders may be entered at Room 2134 of the Treasury at 15th and Penn. Ave., or at any of the Federal Reserve branches. Payment of at least 5 percent of the face amount applied for must accompany the tenddener. Final payment is due Oct. 5 by check or Oct. 10 in cash.
FNMA wiwill offer $1.7 billion of debentures in two issues on Tuesday. The issues will mature July 10, 1981, and Oct. 10, 1985. They will come in $10,000 minimums and may be purchased from brokers.