The last week of September witnessed some very hard knocks for the bond markets and set the stage for a move to higher interest rates. There were so many unsettling events that the markets never really got on a firm footing and, as the week progressed, the walls came tumbling down.
And rightfully so. The news was all bad. Because Congress failed to pass a bill lifting the temporary debt ceiling, the Treasury was forced to postpone its auctions of two-year and four-year notes as well as the weekly bill auction that was scheduled for Friday because Monday is a holiday.
Initially this helped the market, and as investors sought short-term securities -- which turned out to be scarce -- short interest rates fell and the prices of longer Treasuries went up as well.
Two municipal deals, the $90 million State of Wisconsin, and a $75 million Missouri Housing issue, were priced attractively and were well received.
But the corporate market never got on track. Even the highly regarded Louisville Gas and Electric Co. bonds sold poorly when they returned 10 percent. Eventually when the underwriting syndicate terminated, these triple-A securities traded down to return 10.125 percent.
From Tuesday on it was all downhill as far as the news was concerned. Inflation, as measured by the Consumers Price Index, averaged 13.2 percent for August. Members of the Organization of Petroleum Exporting Countries were talking about changing payment for oil from dollars.
Rumors of a gigantic $1 billion IBM offering were confirmed by midweek. News of declining Iranian oil production and our widening merchandise trade account deficit rocked the foreign exchange markets and the dollar. Finally, the OPEC countries are to meet to decide on whether to raise the price of oil because the dollar has declined by more than 5 percent since June.
Gold soared, and even the price of copper went wild on the upside.
So we are basically returning to the fundamentals, which are a high rate of inflation and continued balance-of-payment problems.
From all this gobblegood does arise great investment opportunities. Long Treasuries are almost at their all-time highs. For those with $25,000 or more to invest, the GNMA market is extremely attractive, with returns on these government-backed securities touching 10 1/2 percent.
Municipals are closing in on their 1974-1975 high levels and, with a large calendar over the next four to six weeks, new highs could be established.