A decidely better feeling permeated the bond markets last week. This mainly was caused by the continued decline in short-term interest rates. Most of the new issues were fairly priced and well-received. Marginal buyers drifted back into the market place as a more hopeful outlook concerning the administration's economic plan, coupled with lower rates, changed investor psychology slightly.
But the action was in the short maturities. In fact, it could be said that we have been in a roaring bull market in money market instruments whose maturities run out to nine months.
Even though short rates are descending of their own force, technical factors are giving them a big assist. To begin with, loan demand at commercial banks has fallen around $6 billion since the first of the year. With banks not making loans, reserves that back these loans are freed up. Consequently, the demand for reserves in the banking system has declined. This has been reflected in the fall of the federal funds rate (the rate banks charge each other for the use of their excess reserves) by 600 basis points since early January. Most other short-term rates take their cue from the federal funds rate.
Since bank loans have declined, the rate that banks charge their top borrowers for money, the prime rate likewise has declined by 400 basis points. And because banks are not making loans, they do not have to obtain money by issuing large certificates of deposits.
The long-bond market advanced last week, but its strength was not as dramatic as in the money market area. But the psychology among dealers seems to be improving. The lower short rates made it cheaper for dealers to carry their inventory, at around 14 1/2 percent. This will help dealers to take on inventory and perhaps will give more depth and breadth to their markets.
In spite of these hopeful events, the markets must face enormous supply. During the next four weeks the Treasury will sell over $12 billion in coupon issues alone. The municipal calendar is building with a large supply of high-grade general obligation bonds and public power authority bonds ontap. And Moody's rating service -- which judges future debt sales based on the requests for credit ratings -- stated that $26 billion of possible corporate financing was waiting to come out of the starting gate.
The Treasury will offer a two-year note on Wednesday in minimum denominations of $5,000. One day this week, American Telephone & Telegraph Co. will offer $600 million in 10-year debentures in minimum denominations o $1,000. They will probably be priced with 50 basis points more yield than the 10-year Treasury. These AAA-rated debentures will be noncallable for five years and then at the price of $101.5 ($1,0l5.00) per bond. Consult your brokers for more information.