Apprehension that the worst is yet to come and that rates might move higher permeated the bond market last week.
The many problems facing the markets-but especially the Federal Reserve's surprise move two weeks ago nudging the federal funds rate higher, which signaled a firming in monetary policy-seemed to weigh heavily upon the markets. Buyers withdrew to the sidelines to reassess the future direction of interest rates. The fundamentals are again gaining control over the technical situations that have dominated the markets for the past several weeks.
In the Treasury market, two new issues sold at record interest rates. The 10-year note sold to return an average yield of 9.37 percent, while the new 30-year bond returned 9.23 percent. The prices of both issues fell once they started to trade. Most of the returns available throughout the Treasury maturity spectrum reached new highs.
Taxable corporates were in a heap of trouble. In fact, a dichotomy has begun to appear within the corporate market. In the public utility sector, the yield spread is widening between those companies which have and have not been granted rate relief. Two utilities especially hurt are Georgia Power and Alabama Power.
Also, utilities having anything to do with nuclear energy have had a stigma placed on them. Not only that, but the marketplace even is differentiating among utilities according to the percentage of nuclear fuel in a company's fuel mix. The larger the percentage, the poorer the issue trades. Consequently the entire utility sector has come under a cloud and is likely to remain there for some time.
The upshot of all this is that the industrial sector of the corporate market has been in great demand and these bonds have become more expensive than other taxables. This is because new issues have been scarce, because industrials may have up to 10 years of protection from begin refunded or called (which is important during periods of high rates) by the issuer and, finally, because the utility market is in such disfavor.