The events of the past two weeks have been responsible for some dramatic changes in the fixed-income markets. The inverted yield curve [higher rates in the very short maturities with lower longterm rates] that has existed in the Treasury market began to flatten out up through Thursday. This could indicate a lowering of interest rates. But what had happened was that rates under one year had fallen while long, 30-year rates had risen.
To put it into perspective, two weeks ago, you could have sold the 30-year Treasury bond at a 9.07 percent level and purchased the one-year bill to return 10.18 percent, a pickup of 111 basis points for shortening 29 years. Thursday, if the same move had been made, the pickup would have been only 85 basis points. On March 1, it would have been 124 basis points. The larger the pickup, the greater the inversion.
There were several reasons for this change. First, when Federal Reserve Chairmam G. William Miller said he was not going to tighten intrest rates, short rates began to fall. People decided to buy short maturities, but the cupboard was bare and rates dropped.
Next, when $6 billion worth of Treasury cash management bills matured, and were paid off, that money actively sought short-term investments, forcing money rates even lower.
However, money supply figures released late Thursday afternoon showed substantial gains. And Friday morning, the Fed moved interest rates higher through open market operations, pushing the federal funds rate toward the 10 1/4 percent level. This action eventually should force short rates to move proportionately higher than long rates with the swing-back to a more inverted yield curve.
Rep. Al Ullman also had provided some fireworks for the tax-exempt market late Wednesday. He introduced legislation eliminating federal tax exemptions on mortgage revenue bonds issued by states and local housing authorities for financing single-family homes retroactive to April 25.
On Thursday morning, the long dollar bonds of the issues Ullman described jumped 3/4 to 1 point. The possibility of a sharply reduced supply of mortgage bonds also aided the general obligation market which rose a quarter of a point. If, in fact, the sweeping legislation does pass as it was presented, we may have seen the high rates in the municipal market for this year.
The Treaury announced a $4.25 billion quarterly refunding. A 10-year note will be auctioned Tuesday and a long, 30-year bond will be sold Wednesday Price guesstimates would be 9.25-9.35 percent on the 10-year and 9.15-9.25 percent on the long bond. Both returns would be records.
The Treauries will come in minimums of $1,000. Bids either may be mailed in or made in person at the U.S. Treaury here or at the Federal Reserve banks or one of their branches. A check for 5 percent of the face amount applied for must accompny tenders.