For those people who weren't on vacation last week, the fixed-income markets were a jittery and nervous place to be.
The week started off right. Gold was down to $280 an ounce, the dollar had improved and so had the bond markets. But investors kept looking over their shoulders as if they expected something bad to occur. The Federal Reserve did a quickstept in the money markets on Tuesday that left everyone perplexed. Had the Fed tightened again or not? This caused short rates to rise noticeably.
Then fears began to rise concerning Chrysler. A news service reported that Chrysler had about $700 million outstanding in short-term commercial paper which would decrease to below $300 million later in August. This sent a shudder through the paper market, which became even more jittery.
But the story went on to say that because the paper was backed by bank lines of credit, there really was no need to worry. However, the story continued, the company was low in working capital, in fact, close to technical default.
The automaker continued to sell its paper, in smaller amounts and in shorter maturities at returns anywhere from 1/2-point to 3/4-point above returns for the quality GMAC finance company.
The implication of a default, like the Penn Central situation in 1970, would be disastrous. Marginal borrowers would be forced out of the commercial paper market and into banks and bond markets. Borrowing costs would rise as well as the money supply.
Treasury Secretary G. William Miller helped to calm the jumpy market when he announced that the Carter administration would ask Congress to pass a federally guaranteed loan program to aid Chrysler.
Earlier, the Labor Department announced that the producers price index had risen at an annual rate of 13.2 percent in July. The bewildered market also noticed that gold was again over $300, that the dollar was fading (nervous traders there too) and finally that the money supply had spurted ahead.
By now the spastic traders who were working were ready for vacation. So the markets began to give up their gains as the week came to a close.
In the municipal markets, single-family-housing revenue bonds began to be marketed. There was a tremendous appetite for these securities, many of which have tax-exempt returns of more than 7 percent. More are on the way, being held up only by the inability of the rating services to review them.