By constantly looking at numbers, yield curves, various spread histories and different indices when following the bond markets, we overlook the human element, which is the heart of the market.
As the market sank even lower this past week, an ominous pall settled over the many participants. Sales persons were agonizing over their customers being decimated by severe losses as the market continued its downward march. "Imagine giving a guy a 36 ($360) bid for his bonds," a First Boston salesman said. "These guys are getting wiped out when they are forced to sell. Small accounts are being killed," he concluded.
Money managers themselves are feeling the same twinges of remorse. Now both the stock market and the fixed-income markets are declining. There are few places to hide, and most managers do not have the luxury or flexibility to put the bulk of their funds in short money market instruments. So they are suffering along with their bewildered clients.
And Wall Street itself slowly is being sapped of its capital as dealers continue to lose money. It is tough for sales persons to keep making calls to customers when the markets deteriorate, when there are no bids or when they have just lost a bundle on another unsuccessful underwriting. A trickle of firms have closed their doors, and surely more will follow.
Lastly there are the clients of Wall Street for whom the bonds are sold to raise money. Many corporations need money to keep operating. The high costs of capital reduces their debt service coverage and weakens their credit standing. If the present fiasco continues, marginal corporations will be cut off from money and bankruptcies will follow. Even larger corporations can quickly find themselves on the rocks.
Last week all the participants in the market kept an ear cocked toward Washington, hoping for news of a meaningful anti-inflation package that would lift the market and turn things around.
Some dramatic action could be initiated by the Federal Reserve, possibly another increase in the discount rate by 100 to 200 basis points and perhaps the raising of reserve requirements along with certain credit controls. The market is beginning to perceive that the inflation battle will fall on the shoulders of the Fed.
As the week wore on and nothing was heard, the market sank lower and yields went to new record levels. A 16 percent BAA utility sold slowly, as did a double-A Southern New England Telephone 40-year debenture that returned 14.16 percent.