Are you confused as to what will happen with interest rates or the direction of the bond market? If you are, don't be upset because everyone on Wall Street is in the same fix. "The market is befuddled by analysis" is the explanation one salesman gave for the uncertainty in the bond markets over the past several weeks.
Investors have scrutinized the administration's economic package to death. At first a great deal of skepticism was raised against supply-side economics. Then people said it did make sense but, recently, economists have had second thoughts as to the end results of this supply-side economic package.
Questions are asked about too large or too small tax cuts versus too small or too large budget cuts. Or will the Federal Reserve be able to control monetary growth and inflation? "After all," some point out, "The Fed's been the only agency battling inflation for the past two years and so far its success isn't too hot."
The bottom line is that no one really knows how or when the administration's original package will emerge from Congress. And on top of that there is no concrete evidence of how effective the plan will be regardless of its final form.
The bond dealers too are trying to figure out what the Federal Reserve is up to. Is the Fed allowing short rates to decline? Until this week, the federal funds rate (the rate at which banks lend their excess reserves) had declined 500 basis points. But this week the rate jumped about 100 basis points. And the money supply, which had been declining since January, had moved up $3 billion in the last 3 weeks. More consternation for the dealers.
With short rates declining, the seeds for a rally were being sown, but now with these rates reversing it will cost dealers 16 percent to carry their inventory overnight. And that's a losing proposition, especially if the bonds are taxable.
And then there is the question of the economy itself. Many economists predicted we would be in a recession by the end of 1980. But we are almost through the first quarter of 1981 and it looks as if the economy will show a positive gain for the quarter.
So, put all these ideas in a cocktail shaker, give them a good shake and out will come confusion, indecision and an outlook that is impossible to predict because the variables are so numerous. If you like the Reagan economics and think the plan will pass Congress, then the market holds little downside risk for you. On the other hand, if you hold opposite views, the market, especially the longer maturities, could be a real bear trap.
The Treasury market received a boost from foreign buyers last week. The returns were high and they also had a good currency play with the strengthening dollar. A lower-than-expected producer's price index and a decline in the money supply also helped price advance.
The municipal market had mixed results. The $150 million the state of New Jersey issued had an extremely poor reception. The unsold balance at the end of the first day showed that only $25 million had been retailed. Price adjustments followed with yields rising 10 basis points to facilitate sales. Short project notes were in demand and yields fell by 20 basis points from the original pricing. By week's end, August and September notes were available on a 7.50 basis, and October notes on a 7.60 basis.
Bond anticipation notes of Jacksonville Electric Authority in Florida, due in 1983, were an immediate sellout with a 9 percent return.
On Tuesday Montgomery County will sell $70 million general obligation bonds which will mature serially from 1982 until 1996. These AAA bonds will come in minimum denominations of $5,000.
Don't expect any real direction in the markets for a while. With all of the confusion keep your cash invested in money market funds but if you feel the urge to extend, don't go out beyond five years.