The electronic video screens that daily flash out in headline form important business stories have for the past few weeks been consumed with items concerning what actions the new administration would undertake to cure our economic woes. Such headlines usually accounted for three-fourths of the different news items daily. Finally, the president in his speech Thursday night summed up all of our problems and told us that harsh corrective measures would be delivered to Congress and the public later this month.
Unfortunately, such rhetoric is really the only thing that can be done at this time. The public needs to be reassured that corrective actions are going to occur. And at the same time, the financial markets need to be buttressed so that funds can flow to American corporations.
All this is well and good, but the bond markets do not operate in a vacuum. And it probably will be several months -- late March or April -- if then, before any concrete legislation regarding the curtailment of expenditures or tax cuts can be enacted. Consequently, the markets will be faced with continued uncertainty which will cause more volatility rather than steadiness.
So in spite of all the verbage about the budget, the bond markets will have to take their cue from the economy and the actions of the Federal Reserve. And Chairman Paul Volcker has promised to continue the Fed's tight monetary policy as long as inflation remains high.
Certainly the deregulation of oil prices, the drought and the increase in oil prices by the Organization of Petroleum Exporting Countries will not allow the inflation rate to decline in the near future. In spite of tendencies to lengthen maturities in possible rallies, the protection of your principal should be your No. 1 goal. Stay in short maturities until the success of the administration's proposals become clearer.
The market focused on the three-part Treasury refunding last week. The average returns were 13.37 percent on the 3 1/2-year, 12.89 percent on the 9 3/4-year and 12.68 percent on the 29 3/4-year. As was expected, the short issue was in great demand with the public purchasing $1.01 billion -- 27 percent of the issue.
The corporate municipal market had few new issues scheduled because of the huge Treasury refunding. In the tax-exempt area, the short project note issue sold with returns ranging from 6 percent in June to 7.10 percent in October.
Municipal underwriters have been using different "gimmicks" on their issues to facilitate the sale of long bonds. Last week Brevard County, Fla., sold an issue with a "put-option" feature that was well received. After 5 years, buyers of the long bonds may sell (or put back) their bonds to the issuer at par. This option is available annually from the fifth year on. More of these issues will follow.
The municipal market will focus on a $500 million State of Michigan general obligation note issue that will be offered this week. The notes will mature Sept. 15 and Sept. 30 of 1981. They will be rated MIG-2 by Moodys investment service and should return around 8.50 percent.