The fixed-income markets have reacted with a lack of conviction in the past several days. The markets have moved so far so fast that buyers have become wary. In a market turn that has been bolstered by grim economic and poor financial news, the market has run way ahead of itself.
As one participant noted: "In five weeks, the market has run through the recession phase of the cycle and into the recovery." Buyers want to see more proof that the move is justified. Lower inflation numbers must be seen to validate the current yield levels.
Initially, dealers had no inventory due to the high cost of carry and market risks, because few new issues were being offered and because secondary market trades were scarce.
Now the various sectors have hit the jackpot. The Treasury market is faltering under the weight of bonds from the recent refunding. The corporate market is selling close to a billion dollars of new issues a week, and the tax-exempt area has been just as prolific -- led by the endless supply of housing issues.
And most important now for the dealers, the cost of carrying inventory -- as measured by the repurchase agreement rate -- averaged about 9 percent last week. Because the coupons on their inventory is higher than the carrying rate, the dealers are able to earn a positive return and are willing to take on merchandise.
But the markets are still jittery. The dealers remember the losses they suffered just a few weeks ago.
The current indigestion could lead to a back-up of rates in the near future.
Keep an eye on the new-issue calendar as many new taxable and tax-free issues are being marketed. If issues sell poorly keep in touch with your broker to see if you can purchase the bonds you want when the syndicate cuts the prices.
For buyers of Virginia tax-exempt paper, about $100 million in new issues will be sold over the next four weeks.