The release of bearish minutes from two February meetings of the Federal Reserve's Open Market Committee late Friday a week ago resulted in a chaotic, volatile market throughout last week. Most new corporate issues were postponed to this week, while municipal issues still in syndicate plunged in price when the issues were freed up for trading.
Investor fears of higher interest rates with resulting losses of principal were again rekindled. Dealers who were caught with sizeable Treasury and municipal inventories suffered more losses as they had no buyers to sell bonds as prices plummeted.
The Fed's Open Market Committee, which sets the policy for the Fed's market operations, released the news that the Fed had wanted the federal fund's rate (the rate the banks charge one another for the use of their excess reserves) kept above 15 percent. This completely surprised Wall Street, which thought that the central bank had favored a lowering of the key funds rate to the 12 percent to 13 percent level.
In fact many market participants felt that the Fed had misled them by supplying reserves to the banking system (a sign of easing) when the funds rate traded at 14 1/2 percent some weeks ago. Because of this misconception and because few buyers could be found for the some $20 billion in Treasuries that sold in March, government bond dealers were carrying near-record bond positions when the devastating news was released.
The market's volatility was most pronounced in the long maturities of the State of Massachusetts general obligation issue. The 1999 maturity fell 6 1/2 points when the issue was sold from an account. The 30-year maturity of the North Carolina Municipal Power Authority fell 5 points when the issue was freed up for trading.
The Treasury market was the one area that prices could at least be tracked. The 30-year bond fell 2 points on Monday, rose 2 3/4 points on Tuesday, fell 1 point on Wednesday, rose 1 1/4 points on Thursday and fell 2 1/4 points on Friday. This volatility caused a lot of red ink to flow from the Street.
But from all this chaos, opportunities arise for investors. Right now the 30-day municipal calendar is extremely large ($2.4 billion). With the Bond Buyers index at a peak level of 10 3/4 percent, many attractively priced issues should be available over the next few weeks. This is especially true in maturities out to five years and on a number of longer maturities of quality issues. The $3 billion of New York State notes are now on a day-to-day basis and cannot be sold until the state budget is passed. Price thoughts on this 6- to 12-month paper are 8 1/4 percent or cheaper.