Despite attractive returns on various new issues last week, retail buyers remained on the sidelines and underwriters suffered more losses.
This was particularly true in the corporate area, which the BAA rated Connecticut Light and Power Utility issue was originally priced to return 14.5 percent. The issue sold poorly, and when it was freed to trade in the open market, it fell over 3 points to return 15 percent.
Alabama Power, another BAA issue, was priced to yield 15.3 percent. After the first day of sales, only about 50 percent had been sold.
In the tax-exempt area, the $300 million State of Oregan issue was a disaster. The issue was only slightly better than half sold when the first balance was reported. The next day, the account had to cut prices substantially which increased returns by 20 to 25 basis points, in order to attract buyers.
The $520 million New York Power Authority issue, after being repriced twice from the original offering, finally sold out. However, dealers took down much of the issue, hoping to sell to individual accounts. The shorter serial bonds did sell well.
The common denominator for all these issues is that buyers did not want long bonds, at least at the original pricing. There was lacking any strong initial demand to make the sales successful.
As to the why for this buyer reaction, the answers are several. Basically it is the uncertainty on the direction of interest rates. And as we have pointed out this takes in the unpredictability of the Federal Reserve policy and fiscal policy plus the health of the economy and the strength of inflation. a
Inertwoven into these elements are the losses present in the holdings of all types of buyers. Coupled with this is an unstoppable flood of Treasury and municipal debt. And when yields are lower, the continued flood of new corporate issues.
One salesman offered an interesting observation about the corporate market. He observed that there had been so many $100 million issues in the past several months that buyers could not keep up with them. A few years ago when a $100 million issue was sold, there was a good trading market for several months in that issue.
Now, with the plethora of new issues, traders only make markets for about a week. This in turn takes away liquidity for the issue. And with the price volatility being so great now, it becomes too difficult for portfolio managers to keep up the the new issues, especially when there are no viable markets being made. This in turn impairs a portfolio manager's decision-making capability.
Consequently it is easier to pass up the corporates and to take positions in the $1, $2 or $4 billion Treasury issues. It makes life simplier for the managers. For them to purchase the corporates, they demand much larger returns (a wider spread) on the corporate issue over comparable Treasuries. And this is one reason why the yield spreads have continued to widen over Treasury securities or else they just don't sell.
A 2-year Treasury note was auctioned on Thursday with an average return of 11.93 percent. A good reception led to a rally in Treasuries on Friday, aided by the release of the poor GNP numbers for the second quarter of 1980. a