Short-term interest rates climbed again today and bond prices took another beating as the nation's financial markets try to adjust to the Federal Reserve Board's new tight monetary policy.
But like stock prices, bond prices recovered near the end of the trading day. And short-term interest rates did not climb nearly as much as they did on Tuesday, the first business day following the Fed's Saturday announcement of its new monetary policy.
Markets were less panic-stricken today as well. "If you'd call Tuesday chaotic," said William Sullivan, vice president of the Bank of New York, "you'd call today hectic."
The federal funds rate, until last Saturday the primary tool the Federal Reserve used in conducting its open market monetary policy, declined sharply in today's trading after skyrocketing Tuesday.
The Federal Reserve, for its part, made a lot of phone calls to traders to check on market behavior but made no move to buy or sell government securities. c
The federal funds rate is the interest banks charge each other for overnight loans of excess reserves. In part because the new Fed policy increased the amount of reserve bigger banks must maintain (in an effort to reduce funds banks have to lend), many bank managers were bidding for reserves Tuesday.
That sent the federal funds rate shooting up. At times the rate hit as high as 18 percent Tuesday and averaged just below 14 percent.
Today, Sullivan said, the rate slipped back to about 11 1/4 to 11 1/2 percent, lower than last Friday when the Federal Reserve still tried to control the rate. Other short-term rates -- such as those on certificates of deposit and commercial paper -- continued to rise. But the increase were on the average of one-fourth to one-half point. On Tuesday, these rates climbed as much as a full percentage point.
"The last two days reflected the first efforts by both the money and bond markets to adjust to the tighter montary policy signalled by the Federal Reserve and the new monetary policy signalled by the Federal Reserve and the new monetary techneque the central bank said it will use," according to Henry Kaufman, chief economist of the investment banking firm, Salomon Brothers.
In the government bond market, where issues lost two percentage points (in other words prices on a $100 bond fell $2), issues lost another point today, according to Peter Goldsmith, chief of fixed income research at Merrill, Lynch, Pierce, Fenner and Smith.
Because bonds -- whether government or private -- carried fixed rates of return, bond prices often fall when interest rates rise.
Today, the syndicate that managed the huge $1 billion note and debenture offering of International Business Machines and those investment bankers who still had IBM securities in their inventiories took a price beating if they sold them, Goldsmith said. More than 200 securities and investment firms participated in the underwriting. Merrill Lynch and Salomon Brothers led the syndicate.
When the syndicate breaks apart, individual firms are no longer bound to sell the IBM securities at the initial offering price. Goldsmith said the price dropped about 4 1/2 points.
Analysts estimate that between 20 percent and 50 percent of the IBM offering was unsold when the syndicate broke apart, meaning that the securities firm involved in the sale could take a loss of $20 million or more.
In the hectic two days of trading, several bond issuers -- such as the state of Louisiana -- have decided to postpone sales. The syndicate managing an offering by the state of Oregon, however, was forced to cut the selling price today, Goldsmith said.
Sullivan, of the Bank of New York, noted that government bonds reached their low price of the day early and that nearly all issues closed higher than their lowest point today, although down from the close on Tuesday.