The market was very nervous again last week, and it looks as if it is going to stay that way. If only the market were open three days a week, we would be in good shape. But Thursday and Friday spoil it all.
The economy still is giving off mixed signals, and most of the pundits agree that the phantom recession has not arrived, but a lot of peopleare scared and most investors are uncertain.
The feeling is certainly evident in the various bond markets. The short-term money market area (maturites within a year, and especially within six months) still is performing well for several reasons. There has been a decline in the issuance of new commercial paper; money market funds are growing by leaps and bounds, are buying all the short paper in sight. Finally investors, being unsure, are staying in short paper. Put it all together and you have a strong shortterm market.
The international problems along with the domestic uncertainties have put many of the buyers of long-term taxable bonds on the sidelines. There has been a good stream of corporate merchandise this year, about $1.5 billion. And despite record returns, issues have encountered buying resistance.
For instance, the $450 million triple-A Southwestern Bell Telephone issue came to market last week with a record return of 11.47 percent. Buyers were reluctant to commit cash, so most of the issue sold on swaps. Buyers sold bonds and purchased the new bonds at a certain spread. As an example, long Treasuries were sold, and the new issue was purchased at a pickup of anywhere from 105 to 110 basis points (a basis point is one one-hundredth of a percentage point) in yield.
On Thursday when gold soared past $800 an ounce in New York, the bond markets noesdived and left the Telephone issue only 85 percent sold. On top of that, the dealers still had many of the bonds they had purchased on swap against the Bell issue. On Friday the 30-year Treasury fell to a new low in price and a record high yield of 10.58 percent.
The new-issue, tax-exempt market fared much better. There was great demand, expecially from the casulty insurance companies, who have been the surprising strength being the tax-free market. In all likelihood, they have more money than was anticipated and are spending it before anything occurs to change their situation.
Last week housing bonds were offered with returns in the range of 8 percent to 9 percent. New York City BAA-rated MAC bonds came on a 9.10 percent basis. The long Georgia Municipal Electric Authority bonds returned 7.94 percent.
This week the states of Maryland and Minnesota will offer general obligation issues plus the usual housing issues.
The corporate area will offer a smorgasbord of new issues. For those investors who want to have funds come due in a specific year, you mignt look at the serial bonds of the two railroad equipment trust issues that sell this week.