The market abhors uncertainty. The market needs direction but for the past few weeks, doubts about the direction of the bond markets have been building until now sheer uncertainty prevails. This has caused rates to continue their climb.
In fact it was shocking to realize that 90-day Treasury bill rates have risen 190 basis points from mid-June. Long Treasury bonds have risen about 65 basis point -- a price decline of over 6 points. Long double-A utility bonds have surrendered 50 basis points -- around a 5-point price decline. And the story is the same in the municipal area, if not more so.
Several factors have brought the market to this state. Interest rates plummeted in record time along with the collapsing economy. But now the questions are being asked, how long will the economy continue to decline? Will the Federal Reserve ease the credit reins to facilitate a turnarund in the economy? What about fiscal policy, what will the administration do to halt the decline? How big a tax cut and when? And what about inflation -- it remains strong?
Into the marketplace itself, has been poured an unprecedented supply of new issues. In the corporate area, $21.5 billion of new issues have sallied forth during the first half of 1980, up 53 percent over the similar period in 1979. The total volume for all of 1979 was $26.9 billion.
The Treasury is expected to raise between $16 billion and $19 billion during the next three months. The tax-exempt area also is running at close to record volume.
Further, it has become obvious recently that the deficity for the current fiscal year will be over $52 billion and given the growth in unemployment and the need for a tax cut (in an election year) the 1981 deficity could run between $60 billion and $80 billion.
So what do all these dark clouds mean for the individual investor? It is estimated that $76 billion in money market certificates will mature in July that will need to be reinvested.
With all the uncertainty, it would be preudent to keep invested in short maturities until these questions can come close to being resolved and a clearer perspective is possible.
In the meanatime, the owners of these maturing certificates should keep invested in shortterm instruments. Currently, 6-month money market certificates are paying 8.597 percent at thrifts and 8.347 percent at commercial banks. The 30-month certificate returns 9.5 percent. The problem here is the lack of flexibility and the stiff penalties (your principal can be affected now) for early withdrawals.
Treasury bills are returning more than 8 percent on a coupon equivalent basis. And money market funds are returning between 9 and 11 percent. Both of these offer flexibility and liquidity.
For those investors who need tax-exempt income, $1.9 billion of government-backed project notes will be sold Tuesday. These notes will mature from 3 months to a year. The returns should run from 4.1 percent on a shorter issues to 5.1 percent at about a year.
Keep your eye on the Fed. The next move will come from there.