You had to be quick to follow the Treasury market last week. The prices never stayed in the same place for more than 10 minutes, and anyone who tried to trade the market must have felt as if he was playing a very fast pinball machine.
The price fluctuations continued to confuse everyone but, amazingly enough, the Treasury sold three new issues totaling $6.75 billion, all at record levels. An important fact to remember is that it costs bond dealers 15 1/4 percent to carry bonds in inventory. They earn the coupon interest on their inventory. Because these coupons are all below 15 1/4 percent, they lose money on the deal.
Equally important, the Treasury market is now gyrating 1 to 2 points in either direction in a day. Ordinarily a quarter-point move is considered significant. Consequently dealers can suffer sizable price losses before the ink dries on the trade.
Finally dealers have suffered losses due to the sharp drop in prices, especially in October. Consequently their capital for underwriting has decreased, and "operation survival" is in effect at many firms.
With all of this in mind, you must realize that a big game was played last week. It was extremely hard to find anyone who professed to have a buying interest in any of the three auctions, except for the 3 1/2-year note.
The dealers did not want to buy the issues for the aforementioned reasons, and the buyers were not saying what they would do.
It was quickly realized that the 3 1/2-year was a good auction with an average return of 11.64 percent. The market rallied when it was learned that legitimate buyers had taken most of the issue and little was available to trade. It was a good deal for all.
However, when the 10-year note sold, the buyers meant what they said about not having any interest. The result was a sloppy auction, with the surprised dealers buying 76 percent and the return averaging 10.75 percent.
Now the market began to sink as the dealers seemed stuck with a lot of 10-years. And just as the new 30-year auction looked as if the return would be over 10.55 percent, genuine buying came into the auction at higher prices and lifted the market a point. The average return on the 30-year bond was 10.44 percent.
In a much more stable atmosphere, the municipal and corporate market sold large amounts of attractively priced new issues. However, I am sure they did not have half the fun that the players in the government market did.
In a related note, usury laws are prohibiting the sales of many municipal issues. For example, Ohio limits the interest rate to 8 percent.
The City of Columbus has to roll over $30 million short-term, tax-exempt notes. It was clear that it would require an interest rate above 8 percent. Rather than taking a chance of having to reject the bids and defaulting on the repayment of the notes, the Ohio legislature lifted the usury rate to 10 1/2 percent, so that Columbus and other entities might sell their bonds.