"What goes up, must come down." This adage was proven correct last week as gold and silver tumbled from their lofty heights. West Germany's central bank introduced restrictions to curb gold speculation, and rumors of further restrictions by the central banks of the United States and other nations sent gold into a tailspin.
The major commodity exchanges in the United States imposed restrictions on the trading of futures contracts in silver which closed down that market.
Initially this lifted bond prices but, by the end of the week, the markets had suffered serious declines. In effect, the fundamentals have enveloped the marketplace, and retail buyers have withdrawn to the safety of short-term investments (six months maximum).
Given this scenario, Henry Kaufman, the highly respected interestrate pundit from Salomon Brothers, predicted much higher interest rates than most other economists envisioned.
Put it all together and you had a sharp drop in prices with record high long interest rates. As one broker said pleadingly, "The market needs help."
The odd part is, that as long Treasury and corporates set new highs in yields, the short rates are declining. To dwell on this phenomenon again, the demand for short investments as a defensive strategy is huge. Also, the assets of the money market funds in January 1979 were $10 billion. Currently they are $50 billion, a growth of 500 percent.
Finally, a few years ago, portfolio managers could and would buy only short Treasuries in a short position. And they never would think of having 25 percent to 50 percent of their portfolios in short maturities. Today that is all changed, and there are many more instruments to buy and a lot more funds to buy them with.
As the long market is abandoned over inflationary fears, long rates continue to rise. And as the short area becomes inundated with funds, the short rates fall.
Last week saw the 2-year Treasury return a surprising low average yeild of 11.52 percent, and promptly fall in price as the dealers purchased a lot of the issue and then had no place to go with it.
The corporate area saw new records established on the triple-A General Motors Acceptance Corp. 7-year paper with an 11.90 percent return, and a 12.13 percent return on the 25-year debenture.
A double-A utility returned 12 3/4 percent, while a BA utility returned 14 1/2 percent.
The municipal market will offer two state general obligation issues this week, California and Louisiana, plus Anne Arundel County, Maryland.
The corporate area will be light, while the Treasury will offer a year bill at auction on Wednesday. They will come in minimums of $10,000.