The U.S. Treasury muscled its way in and completely dominated the fixed-income market last week. When you have massive amounts to borrow and when you can pay any interest rate necessary, the stage is yours. Two weeks ago the Treasury announced that it would raise $40 billion by April 2, $19 billion of it new money. Most of the $40 billion would be raised through the sale of Treasury bills.
In reality the Treasury really did not have to flex its muscles too much because, in their heated condition, the markets have few new issues to offer. Many loans either have been cancelled or postponed. And to prove that the government is its own worst competition, the Department of Housing and Urban Development attempted to sell $1.5 billion of short-term, tax-extempt, government-backed project notes. Because of interest-rate restrictions in various localities, only $1.32 billion sold. Seven- and nine- month paper returned an attractive 8.75 percent.
The Federal Farm Credit Bank sold six-month taxable paper at 17 1/4 percent and nine-month paper at 17 percent.
The marketplace has perceived the administration's fiscal policies as being weak, and so the job of combating inflation is being placed upon the shoulders of the Federal Reserve with its monetary policies.
Accordingly, a squeeze on the extension of credit has begun to occur in earnest. With short-term rates using rapidly, significant business failures will occur and various credit problems will arise. For example, the cost of carrying securities or commodities on margin is extremely high, about 19 1/2 percent. As the prices of these commodities and stocks fall, investors are forced to ante up more money to keep their margined positions at their required levels. At times, many investors are unable to do so, and positions must be liquidated. Last Thursday, silver dropped to $10.80 an ounce, and there was panic in the commodity markets -- a victim of high rates, perhaps the first of many. But it did cause a flight of money into the safe haven of Treasury bills.
Investors should choose their investments to withstand any type of severe credit crunch which we might face. Treasuries, of course, are the top of the line, being backed by the federal government and risk-free.
Ed Table, who manages the Rowe Price Prime Reserve money market fund pointed out the virtues of that fund: "Diversification of assets -- a portfolio with an average mautiry of 23 days -- well-researched, high-quality paper (in the fund) and a return of 16 percent." According to Tabor, the new 15 percent reserve requirments initiated by the Fed doesn't post too much of a problem at this time. New clone funds that most of the money market funds are starting will be mirror images of existing funds. The only difference is that the clones will have the reserve applied against them. Because of the time lag in reporting, Tabor feels the yields on the clones will be little affected.
In the tax-exempt field, one municipal specialist favors quality double-A revenue issues for credit protection as well as income. With the possibility of general obligation issues coming under some credit pressure from a potential recession, he feels that it is easier to monitor a utility revenue (water, sewer, electric) name than a general-obligation. Information on pollution-control issues, for instance, must be reported periodically to the Securities and Exchange Commission and the Internal Revenue Service, so their financial health is easy to follow.
There are two items of interest this week. On Wednesday the Treasury will offer a 15-year bond in minimum denominations of $1,000. A price guesstimate would be between 12.70 percent and 13 percent.
On Monday the State of New York will offer between $3 billion to $3.5 billion of tax revenue anticipation notes in minimums of $5,000. Maturities of 6, 9, 10 and 12 months are anticipated. A return of between 10 percent and 11 percent is probable. If the notes receive the top MIG-1 note rating from Moodys Investment Service, they would be a good purchase.