It was another bad week for the bond markets. Feverish gold buying spread to other precious metals, copper and, surprisingly, grains. Uncertainties were created in the world markets as the dollar and gold went up and down like a yo-yos.
These uncertainties and anxieties were not lost on the fixed-income markets. On Monday, long Treasures dropped three-fourths point. On Tuesday, on the rumor that a new dollar rescue package was imminent, long Treasuries went up by the same amount.
On Thursday, the 1.4 percent rise in wholesale prices was announced, sending the bond market into a slump again.
Rumors were rampant that Federal Reserve Chairman Paul A. Volcker had returned from Europe to put in place a new plan to stabilize the dollar and calm the world markets. So everyone was waiting for the other shoe to drop.
One problem is that the economy is beginning to show signs of renewed vigor. So how do you curtail inflation with prices going up, credit still growing and the economy not so dead after all?
Another big problem is that, so long as individuals and corporations can borrow money under the stated rates of inflation, no one will stop borrowing. If interest rates are to be used by the Fed to slow down inflation, interest rates will have to be pushed higher than the current 13 percent rate of inflation as measured by the consumer price index, so that it will really hurt to borrow.
From the investor's standpoint, why should a 10 1/4 percent bond be purchased when the expected rate of inflation is 10 percent. The real interest rate is then only one-quarter percent. Traditionally investors have wanted a 2 percent to 3 percent real interest rate.
And that is why the marketplace is waiting for further tightening plus other moves by the Fed to curtail inflation.
All of these events affected the new-issues market. The$1 billion IBM offering returned 9.62 percent in 1986 and 9.41 percent in 2004. The issue was priced close to similar maturing Treasuries. Within a day after the IBM pricing, the Treasuries fell, pushing up the available returns.The end result is that one-third of the huge issue remains unsold.
The triple-A Pacific Northwest Bell issue was only 40 percent to 50 percent sold even though the return was 10.20 percent. But the single-A Duke Power issue sold out when it was priced at 10.95 percent.
The $342 million Tarrant County Texas tax-exempt water revenue bonds sold well after the bonds were cheapened. The $240 million Salt River power revenue bonds had to be cut to $170 million and then prices were reduced before it was sold. Long bonds on both of these issues returned 7.25 percent and 7.30 percent.
Record highs were hit on the new six-month Treasury bill that came at 11.08 percent (coupon equivalent) as well as the two-year note at 10.21 percent and the four-year note, which returned 9.79 percent.
On Tuesday, the Treasury will auction a 15-year bond in minimum denominations of $1,000. A price guesstimate would be 9.55 percent to 9.65 percent.