Traditionally January is when many institutions have funds to invest in the bond market. Corporate treasurers try to schedule their new issues during this month to take advantage of these funds that are waiting to be invested.
January is also when borrowers pay down their loans at banks and the money supply descreases. The results of these two phenomena is that interest rates usually move lower at the beginning of the year.
But the first week of 1980 has been a disaster. The problems in Iran and Afghanistan have overshadowed the marketplace and have wreaked havoc on our financial markets.
The dollar declined against most currencies. Countries in the Middle East have renewed their movement from the dollar into commodities, the West German mark and the Swiss frank. There was considerable support for the dollar by the Federal Reserve and also by foreign central bank during the latter part of last week.
Precious metals prices exploded as people sought such assets. If nothing else, there was panic buying of gold.
Against this backdrop, the bond markets sagged. Long Treasuries fell 3 points in three days. A 15-year Treasury bond was auctioned on Thursday with an average return of 10.60 percent. Earlier in the week it was thought that the return would be 10.35 percent. With little buying interest in evidence, dealers let prices fall so that they could buy the new bond cheaply and hope to resell it to investors at a profit.
The frightening aspect of all of this is that in the corporate and municipal markets there has been no new supply for three weeks, yet market prices have fallen.
This week the corporate calendar picks up somewhat, and $150 million triple-A State of Illinois bonds will hit the municipal circuit. The parade of state housing bonds also will begin in earnest.
So far, the markets have not been pushed by supply and the dealers have not had to put their money up to underwrite bonds. So this week will give us a better picture of where rates are headed.
The best strategy until the Mideastern problems are settled would be to remain in short-term instruments. Again, money market funds would be good because of their liquidity and because they are returning between 12 percent and 14 percent.
Because of no supply and due to a huge buy order, two-year and under short-term, tax-exempt paper is scarce and is selling at high prices. Once the supply comes into the market later in the month, the yields will rise and be more attractive. So if you have money to invest in short-term tax exempts, stay short for now and do not extend until the yields on the one-year and two-year paper move higher.
Right now the near-term outlook is ominous, and 1980 will see a large volume of all types of bond offerings. There are so many uncertainties that I don't think anyone could get hurt by staying short and waiting for the dust to settle. (TABLE) (COLUMN)Week of 1/4/80(COLUMN)Week of 12/28 6 Mos. U.S. Treasury Bill (coupon eq. yield)(COLUMN)12.76%(COLUMN)12.64% 1 Yr. U.S. Treasury Bill (coupons eq. yeild)(COLUMN)12.07%(COLUMN)11.82% 2 Yr. U.S. Treasury Note(COLUMN)11.39%(COLUMN)11.25% 10 Yr. U.S. Treasury Note 10 3/4% 11/15/89(COLUMN)10.60%(COLUMN)10.36% 30 Yr. U.S. Treasury Bond 10 3/8% 11/15/09(COLUMN)10.29%(COLUMN)10.12% New AA Long Pulbic Utility Bonds(COLUMN)11.85%(COLUMN)11.75% Bond Buyer 20 Bond Index(COLUMN)7.32%(COLUMN)7.23% 30 Day Muni. + Blue List Volume(COLUMN)$2.14 billion(COLUMN)$1.68 billion 30 Day Corp. Bond Calender(COLUMN)$1.63 billion(COLUMN) 1.25 billion(END TABLE)