Question: What will it take for investors to buy the near-record yields available on most fixed-income securities?
Answer, from a dispirited bond salesman: "The only thing that's going to move our market is when homes are selling for $30,000 in Georgetown and people are in bread lines."
Obviously the answer is very overstated, but to many people who see the record returns go begging, this answer might almost have a ring of truth to it. For at the bread-line stage we would be in a depression, and inflation would no longer be the problem. Interest rates would plummet as bond prices zoomed into the unknown.
Don't get your hopes up just yet, as the market put in one of its roller-coaster performances this past week.
Without a doubt, the returns on the three new Treasury issues of the recent refunding attracted buyers, and for a while the market moved ahead. Unfortunately there was no follow-through from retail buyers. By midweek, after the long bond had risen almost five points from its lows and the two shorter issues were up about 1.75 points, the market faltered and began to slide.
On Monday, the August refunding must be paid for. With this in mind, nervous dealers began selling Thursday to stay ahead of the herd, and market prices fell all the more.
Away from this typical week's performance in the Treasuries, an interesting $600 million Kentucky Turnpike refunding stood the municipal market on its ear.
The sheer size of the offering and the stratospheric returns demanded everyone's attention. There were actually two loans, $352 million of the A1, A+ rated Resource Recovery issue and $248 million of the A rated toll-road issue.
The three managers acted as agents between the seller, the Commonwealth of Kentucky's Turnpike Authority, and the buyers. As agents, they received $2.50 per bond. The term bond on the Resource Recovery issue returned 13.26 percent, while the term bond on the toll-road issues returned 13.375 percent. When these were priced, the 30-year taxable Treasury bond was returning about 13.83 percent. In effect, the tax-exempt yields on this issue were within a hair of returning the same yield as a taxable Treasury.
The other interesting feature here is that this $600 million issue refunded $1 billion of outstanding Kentucky Turnpike bonds. This is possible because the proceeds from the sale are to be invested in governments at much higher interest rates than are being paid on the old bonds.
This will enable the $1 billion of old bonds to be retired at maturity from the interest income and principal from the new issue. Incidentally, since the old bonds are escrowed by governments, they will receive an AAA rating.
The State of Hawaii loan was priced with the highest returns ever placed on a AA rated state general-obligation issue. The long bonds returned 12 percent.
This week the states of Oregon, Washington, Rhode Island, Montana and New Mexico are expected to offer their paper to the market. At current levels, these high-grade issues deserve a good look.
The Treasury will offer a two-year note on Thursday in minimum denominations of $5,000. A possible level would be 16 percent or higher.