The Treasury market tried hard to do better last week but failed. Both the corporate and municipal markets take their cue from the Treasury market, so they, too, declined.
Some of the government dealers, having sizable positions, tried to hold the market, hoping for some good news to push prices up so that losses could be avoided.
But there were two problems. First, no retail buyers appeared, and secondly the economic news was much stronger than anticipated. On top of that, the year bill auctioned Wednesday was poorly received. By Thursday afternoon, dealers had a loss of more than $2,500 per million dollars' worth of bills.
All this put pressure on the market, and prices declined. The main influences on the markets are still the economy and the Federal Reserve and the money supply. Initially, economic data were mixed as we were right between the end of the recession and the beginning of the recovery. But lately, most of the data have been positive, and that has hurt the market. The damage occurs because the figures point to a short recession with little progress in curbing inflation. And a reviving economy also means renewed credit demands.
The direction of Federal Reserve policy also worries investors. As the demand for money grows, and with it the money supply, more inflation is anticipated. For the yfed to slow monetary growth, it limits monetary expansion by limiting the growth of bank reserves. And so, as the demand for a limited supply of money increases, interest rates rise. In effect, the Fed is boxed in, because if it curtails monetary growth and interest rates rise, the recovery will be aborted.
However, for the bond market really to do better, a longer recession would be needed, followed by a slow recovery. Right now, that does not appear likely. Hence the bond markets are doing poorly.
The higher rates have had their effect on the municipal and corporate sectors. As rates have risen, corporate treasures have withdrawn their intended offerings for sale. It is estimated that $2.5 billion to $3 billion in offerings have been postponed until rates move lower.
On the municipal side, agencies, authorities and cities are often limited by law to the amount of interest they can pay on an offering. Last week, over $100 million was shut out because the limit was exceeded. Only the U.S. Treasury can sell its debt without worrying about how much it has to pay for money. In reality, of course, the taxpayers pay the interest.