The "debt ceiling" rally continued for most of last week. All sections of the bond markets participated in the upward price movement although most of the steam was gone by week's end.
Technical factora and a fluke occurrence fueled the latest market move. Once again, investors waiting to pounce on new issues as interest rates rise have astronomical cash positions.
Because legislation to raise the debt ceiling did not pass, about $12 billion in Treasuries could not be financed. The dealers, unaware that the ceiling would not be passed by Congress, "shorted" the market. That is, they sold issues they did not own with the hope of buying in those shorted issues at a lower price and profit. In the meantime, dealers must borrow the issues they have have shorted to make good the deliveries of the issues they have sold. This can be costly because they pay a fee to borrow the bonds.
Ordinarily, a dealer will hedge his short sale by purchasing (going long) similar issues to protect himself in case th emarket goes up instead of down.
Last week, the dealers shorted outstanding issues with the idea of hedging their positions by going long in the new Treasury issues, the 2- year and the 15-year.
The end result was that the dealers borrowed to make their deliveries, but because the new issues never made it to market, they had to scramble around to buy other outstanding issues as a hedge. Inventories were light, and the buying caused the market to improve. The dealers were squeezed between the cost of borrowing and a rising market. They were forced to "cover," or buy in the issues they had shorted at higher prices and with resulting losses. This covering caused the debt ceiling rally to feed on itself and prices moved higher most of the week.
At the same time, corporations were trying to improve their end-of-quarter financial statements by showing interest-earning assets, like short Treasuries insted of cash. Their buying also gave impetus to the market rise and hurt the "short" positions all the more.
When the debt ceiling is passed, approximately $16 billion in Treasuries and agencies will be marketed, which should push prices lower.
The municipal market continued to pick and choose its way through the new issues. The insurance companies, with continuing good cash flows, seemed ready to devour any housing bonds that returned 7 percent or higher. Consequently those issues priced too far below that level did poorly and those at or above did well.
The Montgomery County issue with an unusual pricing sold well in the term maturities but poorly in most of the serials.
The corporate deals went quickly because the demand was there. Nervous buying helped push prices of scarce merchandise lower. Some buyers felt that rates may have peaked or were close to the top, so they bought.
Oregon, Dallas and Memphis general obligation loans will be offered this week. The usual stream of housing bonds will be available.