We are two weeks into 1980 and so far the crosscurrents and direction of the markets have been most baffling. The first week was a disaster but last week the market performed admirably for no apparent reason.
There are probably good reasons why the markets should go in either direction, but last week the bullish reasons prevailed.
From an overall viewpoint, there has been no supply in the corporate market for three weeks. The municipal market has had a few housing issues and that's all. Buyers have funds to invest; and as we mentioned last week, January is the big month for the investment of institutional money. During the first week, the market was jarred by Middle East problems, and bond prices declined.
Consequently when $730 million worth of new corporate bonds of all different maturities and ratings were offered this past week at higher yields, the buyers had a feast. Triple-A intermediates returned 12.10 percent while a BAA intermediate utility returned 12.75 percent. A long double-A utility returned 11.875 percent, while a long single-A utility returned 12.60 percent.
The current market psychology, right or wrong, brought investors in. They reason that they have money, the new issues are available and attractive, the economy is weakening and will continue to slow and the inflation rate will decline, and therefore interest rates will fall, so now is the time to buy. And they do.
On the other side of the coin, it can be pointed out that the Commerce Department was surprised to see that the output of the economy grew by between 2 percent and 3 percent during the fourth quarter of 1979. So we can't be in a recession yet, and there still will be a demand for funds, at least for awhile. And what about inflation and the energy problems and the Middle East headaches as well as the growing federal deficit for fiscal year 1980?
As I mentioned, the crosscurrents are unbelievable. Short rates are declining, probably due to a lack of demand for funds at this time, the desire for short-term liquidity due to the uncertainties that exist and, finally, because of the insatiable appetite for short-term paper by the burgeoning money market funds, whose assets jumped by $2.23 billion during the first week of 1980.
The municipal market also offered many new issues at levels some thought were a bit high-priced. However, the State of Illinois general obligation loan and the Oregon and Connecticutt housing loans all sold well. The Oregons returned 8.50 percent in their long maturity.
A sizable amount of new short project notes were offered, too, and quickly went to a premium due to the scarcity of such paper. Shareholders of Belridge Oil Co. have been reinvesting much of the $3.6 billion they received from Shell Oil Co. in these short tax-exempts. This to a large measure accounts for their scarcity.
But this week is another ball game. The corporate market will be tested with a $450 million Southwestern Bell Telephone issue. The municipal market will offer a small amount of general obligations and surely a good-sized housing issue. There are at least $4 billion in housings on the horizon. (TABLE) (COLUMN)Week of 1/11(COLUMN)Week of 1/4 6 Mos. U.S. Treasury Bill (coupon eq. yield)(COLUMN)12.61%(COLUMN)12.76% 1 Yr. U.S. Treasury Bill (coupon eq. yield)(COLUMN)11.87%(COLUMN)12.07% 2 Yr. U.S. Treasury Note(COLUMN)11.30%(COLUMN)11.39% 10 Yr. U.S. Treasury Note 10 3/4% 11/15/89(COLUMN)10.65%(COLUMN)10.60% 30 Yr. U.S. Treasury Bond 10 3/8% 11/15/09(COLUMN)10.34%(COLUMN)10.29% New AA Long Public Utility Bonds(COLUMN)11.85%(COLUMN)11.85% Bond Buyer 20 Bond Index(COLUMN)7.30%(COLUMN)7.32% 30 Day Muni. + Blue List Volume(COLUMN)$2.44 billion(COLUMN)$2.14 billion 30 Day Corp. Bond Calendar(COLUMN)$1.39 billion(COLUMN)$1.63 billion(END TABLE)