The bond market ground to a halt last week and gave up rather easily some of the recent gains that had awed everyone. Losses occurred in all sectors and in all maturity ranges. New issues sold slowly and price cuts were necessary to facilitate further movements in the stalled issues.
Buyers deserted the market as they perceived a situation where dealers who already had unsold inventory, were being deluged with more supply. In fact, many of the buyers sold bonds, went into cash and retreated to the sidelines.
These last several weeks the market has advanced a great deal on expectations. The participants expected the Federal Reserve to ease credit and push the Federal Funds rate down. They further expected a continuous stream of bad economic nunbers to help move bond prices higher.
Well, the numbers are still distressing but the Fed has not cooperated. On top of this is the growing realization that the deficit for fiscal year 1980 is growing. In early spring the administration mentioned a deficit of around $35 billion for this year, and a balanced budget for fiscal year 1981.
As the disheartening economic news has unfolded, government revenues have slowed while expenditures have increased. The deficit for this year now looks as if it will top $50 billion with ease. And there is talk of a $30-70 billion deficit next year. All of which means that the Treasury will be making greater demands on the market place to cover the red ink.
To add another dimension to the problem, the nervous dealers who was bearing the brunt of all this, have resorted to the financial futures market to hedge their accumulation of inventory. They simply sell futures contracts to deliver bonds at a later date with the idea that if the bonds they currently own (in the cash market) decline in price, they will offset this loss by buying cheaper bonds to deliver to fulfill the future contract.
The only problem is that as more dealers sold futures contracts, the market sagged -- which in turn forced the cash market to decline. In effect, the strategy became self-fulfilling.
Put all these ingredients together in a bag, shake them up and you get a week of declining prices with little retail activity.
The huge Alaskan housing deal was divided with only half of the issue being sold. The long bonds returned 9.20 percent. Several other state housing issues that had not sold well cut their prices from an 8.60 percent return down to 9.00 percent return -- roughly a 4 point price adjustment.
The long awaited government-backed Chrysler issue was priced to return 10.35 percent for the 10-year notes. Bonds were still available by week's end. Several other large corporate issues were postponed.
The municipal calendars will be light this holiday-shortened week. The corporate market will offer several sizable issues. And the Treasury, providing the debt ceiling limit is lifted, will off a 14-year 10-month issue on Wednesay. These bonds should return around 10:20 to 10.30 percent. All in all, the market should be fairly quiet this week.