Impressive is the only way to describe the bond market's performance during this past week. Unofficially, about $22 billion worth of securities were marketed. Of that total $16 billion were Treasuries, $2 billion were agencies, about $1.9 billion were corporates and around $1.5 billion were municipals. Of that staggering sum, $10 billion represented new money while the remainder was needed to roll over maturing Treasuries and agencies.
As you will recall, the market closed two weeks ago with a lot of unsold new issues and a great deal of uncertainty. Consequently, when last week's issues were prices, there were considerably cheaper than the original pricings of similar issues from the week before. The dealers knew that the merchandise had to be sold, and they priced the issues cheaply.
For example, when the State of Wisconsin issue was priced two weeks ago, the 1990 maturities returned 5.5 percent; the 1995's, 6 percent; the 2000's, 6.5 percent. The Wisconsins sold poorly, and their prices were cut so that their returns became 5.9, 6.4 and 6.8 percent, respectively.
The State of New Jersey, which sold last Tuesday, returned 6.2 in 1990, 6.8 in 1995 and 7.2 percent in 2000. After the issue sold out, dealers raised prices which lowered yields so that by the end of the week the returns were 6 percent in 1990, 6.6 percent in 1995 and a 6.95 percent in 2000. They still returned more than the Wisconsins.
To dramatize this a step further, when the huge $300 million State of Oregon issue sold, the original returns were 7.3 in 1995, 8 percent in 2000 and 8.3 percent in 2006. Ordinarily, Oregon's would be about 25 basis points cheaper than a comparable general obligation. It was definitely sweetened.
But an interesting question remains: Who purchased all these high-grade bonds over the past two weeks? A lot of commercial bank business was witnessed with the cheaper issues being offered last week. However, as the rally continued, many of these bonds kept showing up in the "Street," marked up in price and going from dealer to dealer -- a kind of "hot potato" game.
Some observations are in order. The Oregons are cheap against the world. In some instances, single A revenue issues can be swapped for the Oregons at almost no loss in yield. Also, other high-grade general obligation issues are still somewhat overvalued against revenue bonds.
For instance, the yield spread between AAA general obligation bonds and both housing and hospital revenue bonds are near their widest point in recent years. The revenues are cheap. Further, the recent high-grades could be in weak hands (the dealers who are playing hot potato), and given any market reversal they may show up at lower prices.
The Alaskan housing authority announced a $460 million issue that will be offered during the last part of June. A unique feature here is that if Congress decides that housing bonds should be taxable, the Alaskan authority will buy back the entire issue from investors.
The rally received additional impetus on Friday morning when more weak economic statistics were released. All of the week's new issues were sold out. And almost all of the issues were selling at a premium by week's end.
The calendars will still be heavy this week. It now remains to be seen if the fixed-income markets will be blessed with a good performance for another week.