Technical considerations triumphed last week as the bond markets turned in a good performance. In the corporate and Treasury market, it was the old story of a great deal of money chasing too few new issues.
Only in the municipal market was there an ample supply of new issues. And the money was available to purchase these issues.
The brighter international picture put investors in a buying mood, not only of fixed-income securities, but of stocks as well.
Once more, the money-supply figures showed a sizable decline. A closer examination of the various money stock measures (M, M, M) shows that the public has merely changed non-interest-bearing demand deposits (M, M) for interest-bearing investments, especially the money market funds that are paying above 10 percent and the 6-month money market certificates. In essence, there is no tightening of the basic aggregates, just a shifting of funds.
The market ignored the 1 percent rise in the producers price index for February. What was also missed was the fact that crude goods soared 3.3 percent for February (36 percent annualized) which "signals future rises in prices of finished goods."
If you also take into consideration that oil price increases have not been factored into these indices, you can appreciate how serious our inflation, problem is now and will be for the next several months.
Release of data Friday showing a slight drop in unemployment and slight increase in the work force in February helped to cut bond prices in the afternoon because the figures were another signal of the strength of the economy.
In fact, this strenth and the growing inflation rate certainly will force the Federal Reserve to raise the federal funds rate in the near future. This means any rally will be cut short.
The municipal market is fast other is the scarce quality triple-A-and double-A-rated state general obligation bonds. Consequently the spreads between the two types of issues have widened considerably. Last week, the mortgage revenue bonds returned anywhere from 150 to 180 basis points (a basis point is one one-hundredth of a percentage point, or 0.01 percent) more yield than the lingest State of Minnesota bond.
The volume of mortgage revenue bonds will continue over the next three months, and the spreads should widen even more.
However, if you are considering buying any single-family mortgage revenue bonds that are issued by local governments (as opposed to being issued by state agencies), do yourself a big favor and read an excellent publication just released by the brokerage firm, Dean Witter Reynolds Inc. The name of this enlightening report is "Tax-Exempt Single-Family Mortgage Revenue Bonds Issued by Local Governments." The report will provide turning into a two-tier market. On the one hand is the deluge of mortgage revenue bonds and on the you with some types of information to aid you in evaluating these unproven loans.
FMMA offered three issues last week. The 2-year returned 10 percent, while the 5-year and 7-year returned 9.50 percent.
The corporate and Treasury calenders are light this week. But the municipal market will offer a considerable number of new issues, led by mortgage revenue bonds and a $300 million Texas Municipal Power Agency revenue loan.