This past week the bond markets genuinely wanted to better. Technically they were in a position to improve and, with an assist from President Carter, the markets turned in a creditable performance.
The overall feeling by bond people is that the higher rates eventually will slow the economy to the point that interest rates will decline.
The Treasury market ran into buyer apathy with the sale of the 15-year bond, which came in at an average return of 11.61 percent.
Among the taxable corporates, the $300 million Southern Bell Telephone issue sold out when it returned 12.94 percent. At the lower end of the quality scale, BAA-rated bonds last week returned 14 percent on a 10-year issue and 14.87 percent on a 30-year issue.
However, the unwanted 15-year Treasury bond placed a pall over the taxable markets until President Carter criticized what he said were excessively high interest rates. His speech greatly assisted the markets, and prices rose while yields declined. The longer maturities improved by between 2 and 3 points.
We have been suggesting that investors take tax losses in their bonds to offset gains on ordinary income. Because of the scarcity of bonds in the secondary market as well as the volatility of the market, dealers are making unusually wide spreads between their bids and offerings, especially on odd lots. A few years ago there might have been a spread of between 1 and 2 points. Today that spread is closer to 4 and 6 points and is most unfair to investors.
To counter this, the investor might consider selling his bonds and buying shares in a professionally managed no-load mutual fund. The shares are valued daily (net asset value -- the market value of all of the bonds divided by the number of shares), and no commissions are paid. A variety of funds offer a good choice of investments at a fair price.
For the tax-exempt buyer, there has been a plethora of short investments in the marketplace these past few months. One of these types, the student loan assistance revenue program, is being marketed more frequently and offers attractive returns. South Dakota sold last week, and Wyoming and Idaho offerings are expected in the next two weeks. These 2-year to 3-year bonds have recently offered returns of between 7 percent and 7 1/2 percent.
The loans are complex, but basically a corporation sells a bond issue for the purpose of raising funds to acquire student loans from eligible lenders. Pledged revenue from federal programs and federal subsidies, loan repayments and escrowed funds provide debt service over the life of the bond. Finally a third party (a bank or Sallie Mae) contracts to buy the loans back from the issuing corporation so that the original bond holders may be paid off at maturity. These bonds are generally rated A by the rating services. Check your local bondsman for more detailed information.