The Treasury completely dominated the marketplace this past week by selling securities every day of the week. Aside from marketing $8.5 billion of coupon securities on Tuesday, Wednesday and Thursday, the Treasury also sold $8.6 billion of three- and six-month bills Monday and $4.5 billion of 52-week bills Friday.
The sale of the coupon issues was accomplished with relative ease, although it required record yields in all three securities to facilitate the sales. The average return on the 3.25-year note was 15.96 percent; on the 10-year, 14.98 percent; and on the long bond, 14.06 percent.
The demand by the public, as measured by the noncompetitive bids that were entered at the average return, was especially heartening on the two shorter issues. The noncompetitive awards, in order of the auctions, were 40 percent, 27 percent and 22 percent.
Essentially this means that approximately $2.75 billion of the coupon issues were purchased by buyers who will hold these issues for a reasonable amount of time -- more than likely, to maturity.
Unfortunately, this leaves $5.75 billion in the hands of mostly speculators, dealers and some permanent holders. And therein lies the problem. How do these holdings get redistributed in this chaotic market to legitimate long-term owners?
From another perspective, the coupon on the short note is 16 percent; on the 10-year, 14.875 percent; and on the long bond, 13.875 percent. These securities do not have to be paid for until Aug. 17. But how can a dealer be expected to hold these securities for any length of time, in a volatile market, when it will cost 18 pecent to 20 percent to finance these bonds past the 17th?
As Jim Stanko of the government bond house Carroll McEntee and McGinley groused, "you have chaotic markets, and you can't trade these markets when you haven't any feel. And the feel is gone because of the volatility you have in rates. Traders normally like volatility, but when you can't judge the volatility or the reasons for the volatility, you lose your feel. Because the cost of money to finance your position is dependent on the federal funds level, and no one can explain the federal funds market or even forecast the federal funds rate for tomorrow, you end up with uncertainty and chaos."
Stanko added that on top of these problems for dealers, few retail buyers are emerging in the face of a continuing large amount of supply.
A municipal salesman offered an observation concerning Tuesday's sale of close to $2 billion of government-backed project notes. These short tax-exempt securities are issued by HUD. The salesman commented on the poor marketing procedures that the Housing Authority Agency follows.
Underwriters must enter separate bids on a multitude of local issues. As a result, it sometimes takes three to four hours to see who won what. On top of that, the authority has canceled recent sales, only to double up the following week with a much larger offering and many more separate issues.
Consequently, because of the irregularities, the salesman noted, many trust departments are only using the project notes as a last resort despite their high credit factor. Instead, the trusts and tax-exempt money market funds are switching to the approximately $700 million of tax-exempt commercial paper being sold through dealers. The size of this new paper market is rapidly expanding and should top $1 billion dollars by the end of the year.
In spite of these objections, the project notes that will be sold on Tuesday, the bulk of which will mature in Februrary and March of 1982, should return about 9 percent.