The trauma of an unexpected, large increase in the money supply Friday a week ago, plus the Federal Reserve's raising of the discount rate -- the rate member banks have to pay to borrow funds from the Fed -- late Monday so repelled the market that by Tuesday morning every straight fixed-income security (other than convertibles) that had ever been issued was selling at a loss.
In spite of these shocks and others -- the prime rate going to 19 percent, a huge jump in consumer spending and a $6.75 billion Treasury refuneling to absorb-- the markets responded by giving a pretty good account of themselves.
The first bombshell to hit a demoralized market early Monday was the freeing up for trading of the unsold bonds of the $208 million Intermountain Power Authority of Utah. These 12 percent bonds, priced at par (1,000) and due in 2020, were estimated optimistically to have been half sold. They plunged to 92 ($920) bid where the return was 13.04 percent. This represented a gross loss of $16.6 million on those particular bonds. However, by the end of the week these bonds rose in price to 96 1/4 where they returned 12.47 percent.
By Tuesday several new issues had been canceled and prices were at their lows as dealers prepared for the first part of the Treasury auction, the $3 billion, 3-year note. Initially dealers were talking of returns above 16 percent. From a technical standpoint the 3-year note was in great shape. $600 Million of the maturing issues were owned by foreigners who rolled their funds over into the new note. And individuals stepped in and purchased a whopping $1.3 million of 3-year notes and the average return was an eyecatching 15.81 percent. The strength of this sale set the tone for the rest of the week. The 10-year bond offered an average return of 14.56 percent while the average return on the 30-year bond was 13.99 percent.
The short-term, tax-emempt HUD project note offering was reduced in size, and buyers devoured the September and October maturities that were offered. This week HUD will offer approximately $1.2 billion of November and December maturities. They should return around 8 percent.
The New York State TRANS issue was still delayed, but if they should come this week a return of 9 percent or cheaper is probable.
Although better by the end of the week, the bond markets still have problems and basically need to be convinced that inflation will be reduced.
A $50 million municipal investment trust with a maximum maturity of three years and a current return of 8.7% will be offered this week by Merrill Lynch, Bache, Dean Whitter and Shearson. The units will cost approximately $1,000 and the securities in the trust will be A rated or better.
The new corporate issues sold well with returns of 16.35 percent on a single A rate 10-year utility, 17 percent on a 30-year A rated utility and 17.51 percent on a BAA rated 20-year maturity.