The fixed income markets gave the illusion of being mortally wounded this past week. The markets lay there, barely quivering, ambushed by an endless supply of new issues, large unsold dealer positions and investor apathy. Usually good news like a lower inflation number, as revealed in the consumers price index release, would spark a rally. But as soon as prices rose sellers came into the market and forced prices lower than they had been before the number was released.
The amazing point is that each new bond issue comes at a record level. In the corporate area, the triple A issue, Bell Telephone of Pennsylvania, was initially offered to return 15 1/4 percent, a record for that type of long bond. The issue sold poorly and when it was freed from syndicate for trading, the price quickly dropped and the yield rose to 15.47 percent.
A double A Pacific Gas and Electric long 33-year bond sold to return 16.35 percent. And the BAA utility, Alabama Power Co., sold a 30-year bond to return 17 1/2 percent.
In the corporate area alone, about $1.5 billion in new issues were marketed, all at super high levels. It is interesting to note that as these new bonds are offered at higher levels, the prices of outstanding bonds are declining in value as the new yield levels move higher. Also interesting is that all these companies who are financing at these record rates have given up waiting for lower yields. They need their funds now, regardless of cost. This does not engender optimism for lower interest rates.
But the municipal area seems to be the most devastated market. Unsold inventories are high. The market flip-flopped so quickly in March that many dealers are still holding high-grade bonds they bought six weeks ago with losses of at least 100 basis points.
The two state issues that came two weeks ago, Connecticut and Louisiana, looked like give-aways, so dealers took on many of those bonds in hopes of a rally. Now they have lost as much as 30 basis points in these issues too.
The end result is that the dealer's capital positions are being strained. A bit of fear is creeping into their psyche. They are unable to sell what they already own and are almost unable or at least unwilling to take on more inventory.
The Treasury action of the two-year note was also a disaster. The bidding was extremely sloppy, with an unusually wide spread between the high and low bids of 24 basis points. In fact there were barely enough tenders entered to cover the size of the offering, and 91 percnt of the tenders were filled at the lowest (cheapest) bid.
In the short tax-exempt area, the mammouth $3.2 billion New York State TRAN issue is still waiting for the state budget to be approved. At the same time, the Department of Housing and Urban Development announced the largest tax-exempt project note issue: $2 billion, for the first week in May. Record returns will probably result if both issues should be offered at the same time.