January opened with a bang for all markets. The Iranian situation caused the dollar to decline on Tuesday, and the bond markets retreated. However, once the central banks intervened to support the dollar, the bond markets reversed direction and headed up during the rest of the week.
Several technical factors came to aid the already rallying markets.In recognizing the forces behind the strong performance, the following factors should be mentioned:
To begin with, rates on all fixed-income securities are at high attractive levels. Governments especially are at historically high levels.
January always has been the month when institutions have a great amount of funds to invest in the markets. To take advantage of this fact, investment bankers try to schedule bond sales during January. So far the schedule has been light although the municipal calendar is building.
This brings us to inventory, or secondary, merchandise that dealers own or have on their "shelves" to sell. In the corporate area, this merchandise is extremely scarce.
The Treasury inventory of dealers was light to make room for the two new issues that sold last week. Also, most government dealers felt prices would fall further and so they pared their holdings.
The municpal market still had a few older issues around that had to be sold, with only one sizable new offering on tap for the week.
Next, the latter part of the year is always a time when investors sell to take tax losses. This generally forces the market down. At the first of the year, these sellers become buyers and the market moves higher.
Visions of record returns on the two Treasury auctions created a strong demand, especially for the 15-year. Initial talk on that issue was about 9 1/8 percent. But the strong demand, especially from the public and Treasury dealers, brought an average return of 9 percent.
Even though both issues came at lower rates than were initially anticipated, the one-year bill came at 9.605 percent. Both returns were new highs for a U.S. Treasury bill or a bond.
On top of these factors, the economy showed some signs of slowing as new factory orders declined noticeably in November.
Once again, the monetary aggregates declined to help investors feel that perhaps the growth in the money supply was being brought under control.
When all these items flowed together, a strong buying interest resulted for a scarce amount of bonds and a rally was on. In such a situation, the rally will feed on itself and continue until either adverse news curtails the advance or a large supply of new issues turns the tide.
It is not uncommon for a newyear rally to run into February. In this instance, the bad news could be the continued decline of the dollar, increasing inflation or further strong economic news.
The problem for the investor is to decide whether rates are actually peaking now or not. Is the rally for real? With the various crosscurrents of data, the answers do not come easily and this is what makes markets.