A skyrocketing Federal funds rate -- the interest rate member banks charge one another for the use of their excess reserves -- created havoc in the fixed-income markets, causing bond prices to fall and money market and bond rates to rise. Contrary to what was generally anticipated, Wall Street and bond investors were greatly surprised and obviously bewildered at the turn of evens which saw the funds rate rise to 28 percent on Wednesday and trade above 20 percent until Friday afternoon.
Short one-month commercial paper rates rose 25 basis points (a basis point is one-one hundredth of a percentage point), while rates on one-month certificates of deposit increased 155 basis points. As prices on long bonds fell, their returns increased by 25 or more basis points.
This sudden reversal in direction occurred at an inopportune time as many corporations are preparing to visit the bond market to obtain badly needed long-term funds. In spite of the setback, over $900 million was borrowed in the corporate market last week.
Along with the large corporate and municipal supply of new issues, the Treasury will sell $8 billion of coupon securities by the end of June, and dealers will unfortunately purchase most of these, which unfortunately will add to their inventory problems.
Given the high Federal funds rate, a massive supply of new issues, large dealer positions coupled with few retail buyers, the bond markets should perform poorly over the next few weeks. If this is the case, opportunities to purchase securities maturing in one to five years at lower prices would be desireable.
The Treasury will offer a four-year note this Tuesday. The issue will come in minimum prices of $1,000.
Two issues of Maryland tax-exempt paper will be offered this week. Baltimore Co. will sell a pollution-control revenue bond for the Baltimore Gas & Electric Co., which will mature in 2011. These bonds are expecting an AA rating and should return 10 3/4 percent to 11 percent.
A single-family mortgage revenue loan for the City of Baltimore will feature a put-option exercisable in 1987. These bonds expect an A rating and should return 9 3/4 percent to 10 percent.