The falling price of gold and the $7.25 billion Treasury refunding dominated the fixed-income markets last week.
It was a week where the government bond dealers made some money for a change, and the corporate and municipal boys didn't fare badly either.
Two weeks ago, Wall Street was all doom and gloom, the dollar was in trouble and it paid to own soaring gold.
Then the administration appointed Paul Volcker of the New York Fed to be chairman of the Federal Reserve system. Some strong anti-inflation and dollar-support rhetoric filled the air, and sagging spirits began to lift.
When events look darkest, dealers usually unload their inventory. From a technical standpoint, the Treasury market was in a strong position for the large three-issue refunding. Inventory was nil. In fact, the scarcity made it difficult for the Fed to carry out it open market operations.
Last Monday began slowly and then gold began to plunge on the world markets. The dollar began to recover and more negative economic figures were released.
At this point, the government bond dealers, who are smart enough to see a good thing, having no inventory and having two weeks before the new Treasury issues had to be paid for, decided to push the market by bidding aggressively for the new issues.
They first bought the 3-year notes, which came at an average yield of 9.06 percent. Because of the strong bidding, the markets began to move, and the dealers then bought the 7 1/2-year notes, which came at an average yield of 9 percent.
The steamroller had started, and for all those folks who had missed the market on the first two issues, the dealers had plenty of notes to sell, at higher prices.
That left the long issue to be auctioned, and because many buyers saw the market moving, they bid aggressively for the long bonds. They came at an average return of 8.92 percent, approximately 13 basis points below the price talk on Monday.
The Treasury bill auction on Monday was actually a forerunner of the week's events.The 90-day bill sold (in minimum denomination of $10,000) at a cost of $825 more than the prior week.
Needless to say, the Treasury market has moved too far, too fast, with little fundamental support to sustain the surge. Although yields on long Treasuries may have peaked in May, short rates probably will rise further, and the increase could spill over into the longer maturities.