January is over, and bond market participants are greatly relieved. As the year opened, many thought that the ample supply of new corporate and municipal issues would be sought eagerly by cash-rich investors and rates would decline. That was not to be the case as we sadly learned by month's end.
Instead the political ramifications of events in the Mideast evolved into a call for more spending to rejuvenate our military machine. Visions of increased economic activity along with the necessary demand for funds to support this activity suddenly became fact. This, added to an inflation-ridden and fairly healthy economy, meant trouble for the fixed-income markets.
The 30-year Treasury bond began the year being offered at a dollar price of 102 to return 10.15 percent. By month's end the issue could be purchased at 94 to return 11.07 percent.
The Southwestern Bell Telephone 40-year debenture was offered on Jan. 15 at a dollar price of 99.15 to return 11.47 percent. At the end of the month the issue was selling 90 to return 12.11 percent.
The Bond Buyers 20-year-municipal-bond index registered 7.23 percent at year's end. One month later it had climbed to 7.52 percent.
By any standard, these price declines and quantum jumps in yields have been costly to all participants, the buyers as well as the underwriters. Losses and red ink are the rule. Few successful deals are marketed. And this poses the question, Why own long-term bonds?
The answer is twofold. First, at some point (the question is when) these returns will offer super value. But this can be realized only if inflation is curtailed. Even if long Treasuries return 20 percent, there is little reason to purchase long bonds if inflation is also at 20 percent.
The second part of the answer is that until inflation is brought under control, investors will abandon the long market. The evidence for this is the continued decline in short rates as funds pour into short money market instruments and the long bond prices continue to tumble.
Consequently, if inflation continues, it would make sense to restructure new long-term bond offerings. This occurred in Europe. The types of loans that are marketed abroad are 20- and 15-year bonds with strong sinking funds. The sinking funds give an issue an average life of anywhere from 7 to 12 years. In an inflationary environment, this type of debt issue makes sense. You begin receiving some of your principal back at an early date to reinvest at higher rates. And if worse comes to worst, you can be saddled with losses for only 15 to 20 years, not 30 or 40.
You probably will see a lot of short issues offered now; three years through 10 years. These should be considered over long bonds.
The Treasury announced its quarterly refunding will be offered this week. A 3-year, 6-month note will be sold Tuesday with minimum denominations of $5,000.
A 7-year, 3-month note will be sold on Wednesday, while a 30-year bond will be offered on Thursday. Both issues will come in minimum denominations of $1,000.
Price guesstimates on all three issues would be 11.20 to 11.30 percent.