The Treasury has completed its $7.5 billion refunding, but its success from the standpoint of the marketplace was mixed.
Without a doubt, the 3 1/4-year note -- which came at an average return of 9.32 percent -- was a great success. It was three times oversubscribed, and 30 percent of the issue went noncompetitive to individual buyers.
But the opening of the 9 1/2-year issue was a poor auction. Because the market had moved prior to the refunding, the average bid was 105.27 ($1,052.70 per bond), which returned 9.88 percent. In essence the premium scared buyers away, so the issue was poorly placed.
The 30-year looked good before the auction as prices moved higher. But after the sale (the average yield was 10.12 percent), there was no follow-through and sellers came into the market. Prices fell, and many dealers were faced with immediate losses on the two new longer issues.
This week General Motors Acceptance Corp. will offer a 10-year double-A debenture that could be interesting since the finance companies have lagged the market. They also are offering a 25-year debenture.
The housing issues ran into a stumbling block. In most single-family issues, unexpended bond proceeds are earmarked for certain reserves. These funds are then invested in Treasuries that afford a return above the net interest cost of the housing issue. Since it takes time to get the bond proceeds to work in mortgages, the income from the Treasuries carries the debt service on the housing issue.
With Treasury yields having declined, the necessary cash flow falls short of covering the housing issues' needs. As a result, four issues were cancelled or postponed during the week.
To appreciate what has happened to bond yields during the past few weeks, we need but look at the U.S. Treasury yield-curve graph. A curve is simply the yields of various maturities plotted on a given day.
From the 3/24/80 curve, we see the effects of the tight-money policy of the Fed. With a high rate of inflation, the Fed tightens money, makes credit more costly and scarce, forcing short rates to rise to greater levels than the longer rates. The higher short rates reduce short-term credit demands.
The 3/24 curve is referred to as a negative-yield curve since the returns on the short maturities are higher than the returns on the long bonds. If you were to move from the 3-month Treasury bill to the 30-year bond, you would give up 450 basis points of yield.
The 5/5/80 curve reflects a change in Fed policy (allowing short rates to fall) and with it a change in investor psychology. In effect, a recession curve has now taken shape, anticipating a slowdown in the economy and easier credit.