Strong technical considerations continue to fuel the bond market's advance. These considerations include a lack of new issues, a lack of secondary merchandise and a large amount of investible funds in the hands of buyers.
Added to these factors is the growing feeling among investors that rates have peaked, so they should buy now. The continued drop in the weekly money supply figures has caused many buyers to seek scarce bonds.
The continued good performance of the dollar overseas and the downtrun in the leading economic indications (with could imply a recession) also aided in the advance. The thought is that the Feberal Reserve Board, with good fortune going its way, will not have significantly in December and January.
This theory helps to explain why deposits fell at banks and, therefore, why the money supply declined.
The noew municipal issues were fully priced last week but, in light of the good market, these issues sold well. The same is true of the corporate area.
What probably will occur now is that, as interest rates decline, new corporate and municipal issues will be rushed to market and new-issue calenders will grow. This increase in supply could be a factor in stopping the rally.
The municipal calender in small this week, but the corporate calender will offer a variety of quality.
The Treasury's rather small quarterly refunding will feature two issues. The eight-year note will to push rates higher, at least for now.
Chase Manhattan Bank even dropped its prime rate to 11 1/2 percent. If the money supply figures are correct, the demand for money has slowed and this is a competitive move to secure bank loans.
It should be added that a similiar move occurred in the prime rate in 1973 causing short rates to fall. Later they reversed themselves and the prime rate rose to 12 percent in 1974.
a thought on the rapid decline in the money supply: M1 is simply the currency in circulation plus demand deposits in the commercial banks. M2 is M1 plus net time deposits in commercial banks. Both have been dropping since November.
On Nov. 1, the Federal Reserve raised short-term interest rates with the increase in the discount rate by one percentage point. Short rates we to record levels and real disintermediation began.
Private investors withdrew deposits from banks and purchased money market funds paying 10 percent. Other investors withdrew deposits and began to purchase Treasury offerings. The noncompetivive tenders on new issues began to rise be bid for on Tuesday. A 29 3/4-year bond will be bid for on Wednesday.
Both issues come in minimum demoninations of $1,000. Initial payment required will be 5 percent of the face amount applied for. Final payment will be due on Feb. 12.
A price guess on the eight-year would be 8.8 to 8.9 percent, while on the long bond it would be 8.75 to 8.85 percent.
Subscriptions for the new issues may be entered at the Treasury Department no later than 1:30 on each day.