A pall blankets the fixed-income world, thanks to two holidays and anticipation of President Reagan's economic announcements Thursday.
Pressure from unsold government bonds in the hands of dealers has pushed long taxable bond yields higher. On Tuesday, $4.75 billion of the new Treasury 10-year notes and 30-year bonds must be paid. Eighty-five percent of these bonds were purchased in the New York Federal Reserve district. This would indicate that they were bought mostly by government dealers.
Since they were unable to sell these bonds at the original issue price, dealers have lowered prices by more than four points. Still, there are a few buyers. As the dealers tried to sell their long bonds in the financial futures market, the prices there fell to new lows. Barring a miracle, a lot of red ink will flow on settlement day this week.
New municipal bond issues had to be sold at cheap levels to entice purchasers. The $500 million state of Michigan notes due in September 1981 sold out at a 9.25 percent yield.
The triple-A revenue issue, Washington Public Power System, was priced with the exceptionally attractive tax free yields of 10.75 percent in 2001, 11.125 percent in 2005 and 11.18 percent in 2010.
The market now looks to Washington for the unveiling of the administration's economic program. The package probably will feature four salient points: reduction in the rate of government spending; reduction in taxes a la the Kemp-Roth program; proposals for numerous regulatory changes and suggestions as to the growth in monetary aggregates.
The purpose of this well-devised package is to remove as many inhibitations to economic growth as possible. The program must be viewed in it's entirety and is dependent on each facet for it's success.
An especially important feature for the bond market, other than reducing budget deficits, is seeing that the Federal Reserve allows moderate monetary growth. To accomplish this, the Fed must refrain from purchasing Treasury securities. When the Fed buys Treasuries it creates reserves for the banking system and fosters creation of credit by banks, which leads to monetary growth.
Two competitive tax exempt issues of interest this week will be $40 million Baltimore County, Md., and $125 million state of Connecticuts. Both are general obligation issues.
Two negotiated tax-exempt issues of note are the $40 million Virginia Education Loan Authority (VELA) issue and the $200 million New York City note issue.
The VELAs, rated A, have a variable-rate interest feature that will be calculated and changed quarterly from a yet undetermined percentage (probably 72-75 percent) of the average bond equivalent rate on 91-day Treasury bills that are auctioned during the previous quarter. The initial coupon could be between 10.39 -- 10.82 percent.
The New York City notes will be rated M1G3 by Moodys investors service and will feature two maturities, $100 million tax anticipation notes (TANs) due April 22, 1981 and $100 million revenue anticipation notes (RANs) due June 22, 1981. For New York investors, there is a triple tax exemption benefit, and the price talk is around 9 percent. The TANs mark the first time New York City has visited the market in its own right in five years.