The strength in the bond markets continued this week although it followed a zig-zag course in the process of improving. It's direction depended on which factors the market participants focused at any given time.
In the beginning of the week, Iran was the center of attention. It is all too apparent that the dollar has also become hostage to the turn of events in Iran. As the dollar declined early in the week, so did our markets. But as the dollar improved, due to short covering on the part of exchange dealers, so did the bond markets.
For most of the week, the focus was on the slowing economy. Completely overlooked was the producer price index. Which showed inflation was still strong, running at better than 15 percent on an annualized basis during November. The market blinked and proceeded to higher levels.
But a psychological shift to the opposite direction could develop at any time. Market participants could reason just as easily that inflation still needs to be curtailed and more tightening by the Fed is necessary. With that, the market would shift direction.
The municipal market offered more than $400 million of highgrade general obligations to the market last week. Institutional buyers responded by devouring the merchandise with ease before they closed their books for 1979.
The center of attention was the $300 million State of Oregon deal. This AAAA-AA+ state bond, because of its size and because it is a frequent visitor to the marketplace, came at a shocking spread of 40 to 50 basis points more yield than the AAA State of Wisconsin loan. The Oregons were priced to sell quickly and did, moving to a premium of 10 basis points so that the spread was narrowed to 30 basis points versus the Wisconsin in a day.
The corporate calender continues to offer little, mainly being made up of low-rated loans. The calendar dwindles as we head for the last three weeks of the year, although, a few AA-rated bonds will be available.
The municipal market will continue to offer its share of housing authority bonds for the next several months. This week several smaller general obligation issues will be offered.
After this week, the market should be quiet except for a couple of Treasury offerings, which should be announced this week. Tax sweeping should be carried out where possible.