Last week's nomination of a professional central banker, Paul A. Bolcker, of the New York Federal Reserve Bank to be chairman of the Federal Reserve sytem was enough to reverse the downward spiral of the bond markets domestically and the direction of the dollar on the foreign currency exchanges.
In fact, the dollar came under heavy selling pressure most of the week. To offset this pressure, the Fed authorized U.S. banks to have their foreign branches in Hong Kong and Singapore, plus the central banks of those areas, start buying dollars at the first sign of weakness. As the day dawned in Europe and the dollar slipped, the Swiss and German central banks also bought dollars.
As a result, the dollar did not decline, and the Treasury bond market - seeing the dollar do better - continued to improve.
However, none of the real fundamentals that we have become so accustomed to have changed. Until positive results begin to flow, interest rates probably will move higher as the markets remained confused and uncertain.
In the accompanying graph, curve A of May 4 simply shifted to a lower level - curve B. Both curves are inverted, or negative-yield, curves, which means that you go from higher yields in the shorter maturities. This is abnormal: The reverse generally is true.
The negative-yeild curve basically is caused by the Federal Reserve's "tight money" policy which keeps the short-term federal funds rate at a high level - in this case, 10 1/4 percent.
The largest overall yield change (as measured in basis points - a basis point is one-hundredth of a percentage point) occurred in the 2-year note - a decline of 104 basis points.
The smallest decline occurred in the long bond area, a decline of 52 basis points. But the greatest dollar gain occurred in the long bond area (5 1/4 points, or $52.50 for a $1,000 bond). This is true because it takes a greater dollar change in the longer maturities to change one basis point of yield.
On curve A, from the 3-year note to the 15-year bond, we had a positive to a flat curve (no pickup in yield). On curve B, from the 3-year note to the 30-year bond, the curve was positive, picking up yield as it extended.
Curve C shows yields on Friday. Basically, in the short area, half the gains from the rally have been given up becuase the Fed raised the federal funds rate to about 10 5/8 percent.
The shpe of the negative part of the curve remains the same, but the curve is flat from the 3-year note out to the 30-year bond, offering no incentive for extending in the way of yield pickup.
Curve C is a good guide for pricing the new $7.25 billion Treasury refunding. CAPTION: Graph, U.S. TREASURY YIELD CURVES