Bond buyers were perplexed with current events last week and did little purchasing. A sluggish market was the end result.
In view of the bearish news of the past two weeks, one would have expected the markets to sink further. This was not the case and, on the whole, the various fixed-income markets were unchanged.
The uncertainties concerning Iran and possible effects on inflation probably kept many buyers on the sidelines.
With respect to inflation, there is a growing feeling that even a mild recession will do little to bring down the inflation rate. If inflation averages 8 percent for 1979, we will be fortunate. Consequently, if the 1978 inflation rate of 9 percent (as measured by the consumer price index) is averaged with a possible 8 percent rate in 1979, the two-year inflation rate becomes 8 1/2 percent.
The present return on long taxable bonds offers little attraction when viewed against this prospect. Perhaps this is what the buyers felt last week.
The municipal market offered some sizable issues, but the reception was poor. The $175 million Washington Public Power Supply System issue which featured 7 1/8 percent bonds due in 2010 and the 7 1/4 percent bonds in 2018 all sold extremely well. The same could be said for the $150 million Iowa Housing bonds that offered term bonds at 7 percent. In essence, the long-term bonds on these issues sold out while the shorter serial bonds on these and other issues were not in demand. Casualty insurance companies were the main purchasers of the term bonds.
The Dade County, Florida, issue was poorly priced and was the candidate for the disaster-of-the-week award.
New corporate issues sold slowly, and most still were available at the end of the week. The $300 million Province of Ontario issue returned 9.828 percent and was about 90 percent sold.
Similarly the government market had its trouble. Two billion dollars in Federal Home Loan Banks did not clean up despite a 9.65 percent return in 1981, a 9.30 return in 1983 and a 9.35 return in 1985.
The Fed added reserves to lower the federal funds rate (the interest rate on free reserves in the banking system that banks lend to each other) and also purchased Treasury coupon issues to add reserves to the banking system. These moves probably helped keep the Treasury market from declining.
Moreover, for a change, the monetary aggregates showed large increases on Thursday But technical short covering caused the Treasuries to do better Friday.
The municipal market will offer two state general obligation issues on Thursday, and the corporate market will offer three utility issues ranging from a triple-A to BAA in ratings. The difference in yields would be from about a 9.50 to a 10.30 percent.
Lastly, the Treasury will offer a two-year note in minimum denominations of $5,000 on Wednesday. Subscriptions may be entered at the U.S. Treasury here or at any of the Federal Reserve banks or their branches. They should yield between 9.63 and 9.73 percent.