It is rare for bond prices to go down without some sort of a rebound. Last week was one of those rare occasions -- at least until Friday when the treasury market rellied for technical reasons. In fact, bond prices began tumbling two Fridays ago when the monetary aggregates and nationwide loan demands increased and continued to fall to Friday.
As was mentioned last week, the Federal Reserve is beholden to no one during the change of administrations. They are taking advantage of this situation by pushing interest rates to record levels with hopes of breaking the demand for credit, slowing the economy and hopefully reducing the inflation rate.
Interest rates have been rising since midyear, but the increase in the five weeks since the election has been sensational.
The demand for short-term money remains quite strong and will remain so in the near future. Since a bond market rally was expected by the end of the year, corporations and banks all financed their needs with short paper. Now, as this paper is maturing, the borrowers find that interest rates are much higher and that they must fight for scarce funds.
And beginning the first of the year, the Treasury will have to refund $8 million a week in 3- and 6-month bills. This means that the bill auctions will be raised to about $8.5 billion to accommodate their need for cash. So it looks as if pressures on short rates will continue, at least until there is a break in loan demand and growth in money supply.
Henry Kaufman, Salomon Brothers' interest rate wizard, has the knack of bringing economic and financial reality into focus. Last week he offered his views on the economy and credit markets for 1981. The gloomy picture he painted -- complete with strong credit demands and high inflation resulting in continued high interest rates -- added to the markets' downward slide.
In viewing the many obstacles in our path, the prudent investor should remain especially in short maturities, venturing no further than 5 years. Until permanent solutions to the many economic and financial problems are dealt with, the preservation of one's capital is essential. The short area is the place to be.
One glimmer of light shone through all of last week's darkness. The credit rating of the tiny state of Delaware was raised to A1 by Moody's service.