For the past several weeks the overall general activity in the markets has been the same. The only thing that changes is the names of the new issues and the different interest rates placed on them. But the trend in short money-market rates has been to decline.
This past week I attended a bond seminar where various outlooks for interest rates were bandied about. Larry Kudlow, the chief economist of the Office of Management and Budget articulated the adminsitration's economic game plan with the hope that rates would be declining by year end. His material was well reasoned and the game plan well thought out.
Sen. Bill Bradley (D-N.J.) was in partial agreement with the plan but raised what he felt was the real underlying uncertainty for our economy. And that uncertainty is the possibility of a future oil shock, such as having eight million barrels of oil cut off from the Persian Gulf area. Bradley raised this specter to point out that if we don't have a plan to counter such an event and that if, in fact, an oil cutoff should occur, inflation and interest rates would move much higher and a great disillusionment with the government would be brought about.
The gentlemen who has to deal more with reality than anyone else is Frank Cavanaugh, the director of the office of government financing at the Treasury. Cavanaugh is responsible for seeing that the red ink, the budget deficits, along with the outstanding government debt, are financed. He had no game plan, nor any interest-rate predictions, but explained how awesome the tasks has become.
Currently the markets are being influenced by a growing supply of new issues, a lack of legitimate retail buying, and the uncertainty that exists about the success of the administration's economic game plan.
The municiplal market has been hurt by the glut of high-grade issues in recent weeks. The states of Maryland, New York, Connecticut, Illinois as well as Baltimore County have all sold in the last month. Most of these issues were poorly received and each ensuing issue sold at cheaper prices to hopefully effect sales. With banks being absent from the market, many bonds went unsold at the original prices.
The state of New Jersey will sell $150 million general obligation bonds on Tuesday. Unfortunately for the dealers, the past unsold issues will be forgotten and the focus will be on the New Jersey issues and other new issues.
The Treasury sold a two-year note at the average return of 13.97 percent and the five-year note at 13.79 percent. Most of these issues were bought by the government dealers who are suffering from a case of new-issue indigestion. When the long bonds hit their low price levels recently, the dealers were afraid to short any bonds before the auction for fear of being caught in a rally. Consequently the dealers now own a lot of bonds with no buyers in sight.
And there is still more treasury financing to come. Around $9 billion in new money must still be raised this quarter and Cavanaugh reminded us that although only $2 billion to $5 billion of net new money must be raised next quarter, there is still $11 billion in short cash management bills that will be maturing April through June which will have to be refinanced. Ordinarily during the second quarter the Treasury repays debt.
The corporate area saw a new record set for a Bell Telephone issue when the New Jersey Bills returned 14.8 percent last week. The low consumer price index number gave the entire market a boost and enabled the Jersey issue to sell out. However, when the administration announced that it had underestimated the budget outlays, the markets plummeted. By the weeks' end the new Bell issue was selling 2 points below the issue price, for a return of 15%.
We want to believe Kudlow, but there are many obstacles in the administration's path that create doubts and keep buyers from purchasing bonds. Unfortunately it looks as if the busiest guy in Washington will continue to be Cavanaugh.