When one looks back on the fixed-income markets for 1979, several events stand out. The markets endured everything imaginable, from steep price declines to strong rallies and everthing in between.
But the key element that hung over the marketplace and influenced it the most was inflation. Along with inflation was the oil-energy problem and the fate of the dollar on the foreign exchange markets. All were tied in with the high level of interest rates that existed throughout the year. And all of these events were interrelated and affected one another and the direction of the fixed-income markets.
In a nutshell, interest rates were high because inflation remained high, with the consumer price index probably averaging 13 percent for the year. Up through August interest rates were way below the inflation rate. This in effect gave investors a negative return, and it also made it cheap for borrowers to incur debt.
The increase in oil prices reflected the lack of fiscal responsibility in the United States. As members of the Organization of Petroleum Exporting Countries received payment for their oil in dollars, they saw these dollars debased due to continuing inflation in the United States. OPEC in turn raised oil prices to recoup these losses. So the fate of the dollar took center stage. Money Markets
The money markets witnessed fantastic growth in volume in all sectors within a high short-term interest rate structure.
In fact one of the most notable events for the market was the continued inversion of the yield curve through 1979. This means that higher rates were available in the very short maturities, especially for one year or less. This is in sharp contrast to the more normal positive yield curve where higher rates are available in the longer maturities.
As a result, these high rates that were available on the short money market instruments attracted the public's attention. They also allowed borrowers to finance heavily in these short maturities as the high rates attracted tremendous flows of funds from investors.
Consequently the bankers acceptance market grew by 29 percent to a record $44 billion outstanding by year's end. Most of these BAs were issued to finance Japanese payments for their imported oil.
The commercial paper market showed even greater growth. This market of short-term corporate borrowings grew by 33 percent, reaching close to $112 billion by year's end, another record. With the prime rate having jumped to 15 3/4 percent in November, it was decidely cheaper to borrow in the commercial paper market at 12 1/2 percent.
But the most staggering growth of all came in the six-month money market certificates that are issued by thrifts and commercial banks. They began June 1, 1978, and by the end of 1979 more than $235 billion worth were outstanding.
Similar phenomenal growth occurred in the money market funds, which by year's end were paying between 12 percent and 14 percent to their shareholders. These funds rocketed to more than $45 billion, up 350 percent for the year. U.S Treasury and Agency Market
The biggest market of them all can best be identified in 1979 as the most volatile market. The government market usually sets the pace and direction for the other markets, not only because of its huge size but because it is used by the Treasury to finance the federal debt and by the Federal Reserve to influence its monetary policy.
Until this year price moves of between one-quarter point and one-half point were considered unusual. With the advent of the Federal Reserve's new policy in October, many uncertainties were created. The new high costs for dealers to carry their inventory produced thin markets and wide price quotations.
Coupled with this, dealers had begun to rely heavily on the mercurial futures market to hedge their positions or to speculate on market swings. As relationships developed between the futures and the cash market, wide price changes in the futures market affected similar changes in the cash market.
The results were chaotic price swings. During one trading session, long Treasuries rose 3 1/2 points, only to reverse themselves and decline 2 points for an unheard of 5 1/2-point swing in one day. Municipal Market
The apparent switch from general obligation financings to revenue financings continued. In 1977 and 1978, 60 percent of all the financings were revenue issues. In 1979, this total grew to 69 percent or approximately $29 billion.
Perhaps the biggest story of the year was the increase in volume of state and local housing finance agency paper and related factors.
About $11.5 billion of housing paper was sold, which represented 28 percent of the total amount of tax-exempts sales and 38 percent of the total revenue debt sold.
Allied with this was Rep. Al Ullman's move in April (without legislation at that time) to stop the issuance of single-family-housing debt. Corporate Market
The sales of straight corporate debt increased 20 percent over 1978 with a volume of approximately $27 billion in 1979.
Away from the high-interest-rate levels, the big event of the year -- and perhaps in the history of the coporate market -- was the sale of the $1 billion International Business Machines Corp. issues. They sold poorly for various reasons and, when freed up to trade, they plummeted 5 points. So the IBM issue set several dubious records. Apart from being the largest single corporate offering ever marketed, the issues suffered the largest paper loss ever on a break (about $50 million) plus the largest loss to an underwriting group (estimated at $10 million to $15 million).
The utility area ran into trouble as certain companies such as Georgia Power failed to receive rate increases and their bonds sold at sizable discounts to the market. Further, any utilities that had nuclear involvement traded poorly to the rest of the utilities. Outlook for 1980
Nineteen eighty looks as if it could be similar to 1979. The economic considerations certainly will center on inflation and the oil-energy crisis.
The demand for short-term credit will be high at least during the first half of 1980. The Treasury will have at least $50 billion in new money to raise, without a tax cut being considered.
Municipal offerings probably will amount to $42 billion. However, the real growth is expected in the corporate area, where estimates run between $30 billion to $40 billion of new issues.
As we slide into a recession, we should see the quality spreads between the various credit ratings widen, especially in the municipal area where the spreads have remained relatively narrow.
Nineteen eighty looks as if it could be an interesting introduction to the new decade.