From Wednesday, Oct. 8 until midday this past Thursday, we had a good bond market. Long bonds rose 2 to 3 points in all sectors. The first sizable corporate and municipal calendar in some weeks enjoyed a good reception.
The bond buyers 20-bond municipal index depicted the strength in the municipal market by declining from 9.01 percent a week ago to 8.81 percent this week.
On Thursday, Henry Kaufman, the sage of Salomon Brothers bond house brought the world back to reality by presenting his thoughts on inflation and bond rates. In essence, Kaufman said inflation would be a problem for some time to come and that interest rates would continue to be volatile over the next 18 months.
His statement took the steam out of the mini-rally, and long bond prices declined about 1 1/2 points. Traders admitted that weakness was beginning to appear before the Kaufman speech. In fact, little retail buying occurred during the rally, but some sellers had begun to appear over the last few days.
The main focus in the corporate market continued to be on the new issue or primary market. Particularly attractive was the 7-year Quebec Hydro issue which returned 12 1/2 percent to investors.
In the municipal area, buyers continue to seek out the high-yield situations. Bonds with coupons of 9 1/2 percent to 10 percent or higher had outperformed lower couponed bonds and are therefore in demand. The higher quality items like the double A Washington Suburban Sanitary, Maryland loan, was priced on the high side and sold poorly.
Other municipals that sold exceedingly well were the short-termed $961 million government-backed project notes as well as two- and three-year pollution revenue issues. With the uncertainty that exists, short-term paper is in great demand.
For the bond markets to even return to normal, inflation will have to decline to the 5 percent to 6 percent level. With the many ills that exist in the economy, it seems highly unlikely that this will occur in the near future. And as Kaufman pointed out, interest rates will be highly volatile, especially with an underlying inflation rate of 9 percent to 10 percent.
Under these circumstances the following strategies should prove rewarding. For an investor in the 44 percent tax bracket or higher, long municipal bonds with coupons around 10 percent would be desirable. Otherwise short tax exempts in the one- to five-year purchases are advisable until real signs that inflation is being curtailed are evident. Further, any time a sizable rally occurs, long maturities should be sold and shorter maturities purchased. The losses may be used as tax losses.
The Treasury will sell a two-year note on Wednesday. Minimum denominations are $5,000. These notes should return about 11.95 percent to 12.1 percent. This Tuesday the Maryland Department of Transportation will offer $59.2 million revenue bonds for sale. The issue will have serial maturities from 1981 through 1995. Previous issues have been rates double A.