For all practical purposes, the last week was the final week of the year for the bond markets. If the Treasury had not been financing in the market four out of five days, no one would have known that a bond market existed.
Buyers were intent on closing their books, and the battered and bruised dealers needed some peace and quiet, even if it meant dealing with the kids at home during the holidays.
The focus was on Caracas all week. But the Organization of Petroleum Exporting Countries' participants could not agree on a unified base price for their oil. However, we do know that $24 is the floor, and the ceiling is whatever the traffic will bear. All of this bodes ill for our bond markets in the form of higher prices for many oil-based products, especially gasoline.
There were other straws in the wind that are creating concern about the reduction of inflation. New regulations will allow thrift institutions and commerical banks to pay higher rates of interests on deposits to feed money into the slumping housing industry. A 2 1/2-year savings certificate will be offered after Jan. 1 in as small a denomination as $500. The new certificates will be offered with an interest rate of one-half point below the rate on similar Treasuries.
Further, the administration is calling for the Government National Mortgage Association to be able to purchase home mortgages that have a low rate of interest and are selling considerably below the going market price. This infusion of money also would help to stimulate the housing industry.
The trouble is, no one wants to see the housing market in bad straits. But when you are trying to slow down the demand for money, you certainly are not helping your cause by paying a high rate of interest to attract funds to lend out at a higher rate (at this time) to stimulate the housing sector, which in turn will increase the demand for credit. This delays a downturn and will require even higher rates of interest to curtail inflation -- a continuous treadmill to oblivion.
The $270 million Indiana Toll Road issue never was able to fly. Buyer resistance forced the underwriters to withdraw the issue until next year. With an 8 1/2 percent rate on the term bonds, the debt service coverage became painfully thin, and buyers said no thanks.
Short-term municipal notes were in great demand as investors did their own refunding of issues that mature this week. That, coupled with a scarcity of such paper, lowered these short rates.
Finally, the Treasury sold a 2-year note on Wednesday at an average return of 11.43 percent, and came back of 11.43 percent, and came back the next day with the 4-year note, which offered an average return of 10.52 percent.
Happy holidays to all, and if I had a bit of advice to offer, it would be to keep your funds short for the present. Higher rates could be right around the corner.