After the past two weeks, the questions in every investor's mind has to be: "Have I missed the boat? Are the high interest rates gone for this cycle?"
Within 14 days, long-term Treasury rates have declined about 150 basis points (a basis point is 1/100th of a percentage point), which approximates a 15-point rise in price. On Wednesday alone these long bonds were up more than 4.75 points.
During the same two weeks, a 20-point rise was evidenced in the long Oregon bonds which fell in yield from a 9.30 percent to a 7.40 percent. The story is the same with the long corporates as well.
Some short-money market rates decined 350-400 basis points over the same period.
Why the rapid change? And is it justified? Everyone knew that certain sectors of the economy, such as housing and autos, were in trouble. But the economic numbers that have just been released showed that these sectors were not only in trouble, but were disaster areas. Unemployment was sure to rise and without question, this time, we are in a recession.
Last Wednesday, Chase Manhattan Bank lowered its prime rate a quarter of a point, about the same time that Henry Kaufman of Salomon Brothers was telling his sales force that rates had peaked. This gave new life to the young rally.
So what happens now? Will the bulls continue to carry the day? There is an old adage on Wall Street: "Never argue with the market -- go with it." So for now the field belongs to the bulls after having gored the fat bears.
As the supply grown both in the form of new issues and customers selling, the market will look for a new direction. Prices will decline and buying opportunities will be available. This time, be ready.
The problem now is to get a perspective on what is going on and where the market is. In the tax-exempt area, discount bonds and quality general obligations are rich. Revenues are still a buy and housing bonds have lagged behind the market due to the endless supply.
The Treasury will offer a two-year note in minimum denominations of $5,000 on Tuesday. The price guesstimate is 11.875 percent. Beginning with this auction, individuals will have to submit full payment of the face amount with tenders for all Treasury notes and bonds (as is the currently the practice for all Treasury bills).
The corporate calendar will offer little this week, but some size will appear in the municipal area. Included here will be a $150 million State of Illinois issue and an $85 million Baltimore, Md., issue.
Because short rates have declined, the new money market certificates will pay less and the high return on the money market funds will also dip.