During the five and a half weeks since the Federal Reserve's credit controls caused interest rates to begin falling, investors have been scrambling to lock into high yields. Consequently the bond market has risen from the dead, money market certificate sales have set records and money market mutual fund assets have shrunk.
The most dramatic drops have been registered by yields on Treasury securities. Thirteen-week bills peaked at 17.49 percent on March 24. By this week the rate was 13.34 percent, back where it was in February. Between March 10 and April 7, when rates were at their highest, weekly noncompetitive bid sales -- those made by the general public -- topped $1 billion at each auction, half again as much as in the preceding weeks.
Volume on two-year notes also topped $1 billion this week, showing that investors were anxious to lock up their funds for a longer period even though the average yield had fallen precipitously from 15.01 percent at last month's auction to 11.44 percent.
Yields for the popular six-month Treasury bill have declined even more. From a peak of 17.29 percent on March 24, they have dipped to 12.83 percent. The volume of noncompetitive sales hit a high of $831 million one week after the yield peaked and has since fallen back to $691 million.
The yield on the $10,000 money market certificate sold by banks and savings and loans is pegged to that of the six-month Treasury bill. As a result, sales of the certificates soared to $17 billion during March, when the yield reached its peak of 15.7 percent. The increased volume was twice the growth of a month earlier, and it exceeded by almost 10 percent the prior record increase in money market certificate balances achieved in January 1979, according to the Federal Home Loan Bank Board.
No figures are available yet for April, and an informal survey of half a dozen savings and loans in the Washington area shows a mixed picture. Three reported continued increases in sales of six-month money market certificates even though the yield has dropped to 11.89 percent; three said sales had tapered off.
Several reported new interest in the 30-month certificate that had sparked little enthusiasm among investors since its interest rate was capped at 12 percent. This rate, which is based on equivalent 2 1/2-year Treasury securities, will hold until May 1 when it is expeced to fall. Lenders predict many small investors will want to lock in their funds before then because the rate on longer-term money market certificates has passed that of the six-month certificates.
Despite record sales of six-month money market certificates, savings and loans experienced a net outflow of $900 million last month. Statistics suggest some of that money continued to flow into money market mutual funds during the first half of the month. But after the Fed required these funds to set aside 15 percent of new moneys acquired after March 14, the total assets of money market mutual funds dipped for the first time in years.
The phenomenal growth of these funds was halted at least temporarily at $61.3 billion as of March 19. Total assets amounted to $60 billion as of last week, according to the Investment Company Institute, the trade association for mutual funds.
For example Merrill Lynch Ready Assets, the largest fund, dropped $625 million.
Yet yields continue to rise. The ICI put the average for all funds at 16.03 percent last week, up from 13.42 percent on March 19.
Donoghue's Money Fund Report, which tracks money market funds from Holliston, Mass., reported that funds in existence before March 14 were yielding an average of 15.29 percent. Nine new so-called clone funds with less than $100 million in assets, and therefore exempt from the 15 percent reserve rule, were at 15.4 percent.
The yields are still high because money market funs have in their portfolios securities bought at the peak of interest rates.
Spokesman for the ICI and Donoghue's cited several reasons for the dip in assets, including withdrawals to pay income taxes, confusion over the regulations and the switch to long-term, fixed-income investments.
The ICI's chief economist, Alfred Johnson, said some money market funds already have begun to lengthen the maturity of their portfolios to keep their yields up as long as possible.