In Sunday's Business and Financial section it was reported that the Treasury notes scheduled to be auctioned Wednesday could be purchased in minimum sizes of $10,000. The Treasury securities can be bought in denominations as small as $5,000.
When the bond market is dominated by unusually high interest rates, as it has been for the past several weeks, price movements tend to repeat themselves constantly. The market wants to rally and all the participants want to see lower rates.
So week after week, based on continuous worn-out, but well-reasoned ideas, the market will advance in price. And then the same old technical considerations like the high cost of carrying inventory (around 19 percent), an increase in the supply of new issues or deflated expections, just as surely cause bond prices to decline.
And so the pattern is set. But hope springs enternal because sooner or later the Federal Reserve will fall. When that time comes, if any of the participants are left, there will be money to be made.
There were many new issues last week. When they were fairly priced, they sold well, but when prices were pushed, they sold poorly.
Three hundred and twenty-five million dollars of short tax-exempt notes were sold by Chicago and Massachusetts. The state had a top note rating of MIG-1 but they were priced too aggressively at 8 1/4 percent for 10-month paper. Chicago, on the other hand, carries a lower note rating of MIG-2 and is a hard name to sell even with a return of 9 percent for the 2-year paper. Barring any quick decline in short rates, both these notes are readily available, and prices probably will have to be cut to facilitate sales.
Over the next few weeks, close to $1 billion in tax-exempt power authority bonds will be marketed. These bonds would have been sold in December but the crush of housing bonds caused their postponement until 1981. Consequently for those investors who are courageous enough to purchase long maturities, several attractive revenue issues are on the horizon.
The corporate market continues to be a surprise as another $800 million in new bonds was offered at high rates. Seventy-nine percent of the volume were long bonds that returned between 13.875 percent and 14.50 percent on a Baarated utility.
The interesting story here is that because few buyers are willing to purchase 30-year bonds, the underwriters are offering the new industrial issue at historically wide yield spreads over long Treasuries to entice buyers to purchase the long bonds.
For example, in June of 1979, Honeywell Co. sold a long bond that returned 54 basis points more yield than a comparable Treasury. Last week Aluminum Co. of America sold a similar issue, but with 180 basis points more than long Treasuries.
Because everyone wants to buy intermediate bonds (5 to 10 years), there are no gifts offered. The 10-year Cincinnati Bell Telephone issue returned only 45 basis points more yield than the 10-year Treasury.
A dealer suggested that individuals perhaps would do better by keeping their money in the 1-year Treasury bill at 12 1/2 percent, which is free from state and local taxes, and forego purchasing these intermediate maturities until an increase in supply forces the spreads to widen to more attractive levels. Either that or investors would do better to purchase agencies when they return at least 50 basis points more yield than comparable Treasuries.
The Treasury will offer a 2-year note at auction on Wednesday. The smallest denomination will be $10,000. These notes are available at any Federal Reserve bank or the U.S. Treasury in Washington. They should return around 13.2 percent.