Fixed-income markets remain highly volatile, both in the short-term money market area, as well as in the longer maturities, known as the coupon area, or the capital market. The initial driving force that caused prices to rise and interest rates to fall was the greater than anticipated decline of $3.1 billion in the M-1 monetary aggregate. This information was released by the Federal Reserve on Feb. 19. Long bond prices quickly rose two points.
Short rates plummeted during the week as the key federal funds rate fell 500 basis points to the 9 percent level on Wednesday. Although this low level was a fluke, the decline of the fed funds from the lofty 16 3/4 percent level reached the prior week was a welcome sight.
Perhaps the most striking decline in rates occurred in the three- and six-month Treasury bill auction on Monday. From the previous week's auction, the average rate on the three-month bill fell 231 basis points, a record decline, while the average yield on the six-month bill fell 166 basis points. Before the rally came to a halt, the three-month bill declined an additional 50 basis points as a large buyer of that bill was active in the secondary market.
Despite all these wonderful gains, it is obvious that something is wrong with the market. One trader observed, "when a market remains volatile and trades from one piece of news to the next, it's a sign of an unhealthy market." And this is just what has been happening. The market has been speculating on and trading on the weekly money supply numbers; on whether or not the Fed would tighten credit; or on whether or not the federal funds rate would rise or fall. The financial futures market is used extensively and speculators set up arbitrage situations against the cash market and the financial futures market. In effect, the long Treasury market has become an artificial market, one that legitimate long-term investors avoid. With the advent of options to this market in a short time, more confusion can be expected.
The corporate market is going to undergo a drastic change on how new corporate stock and bond issues are to be underwritten. Previously, corporations filed a registration or information statement concerning the new issue with the SEC. For a major corporation, a period of two days would elapse before the company's investment banker could form a syndicate and sell the issue to the public. This meant that the head underwriter had a lot of power in choosing the syndicate members and allocating securities to the members.
Now, with such volatile markets, and in an effort to expedite the bringing of new issues to market, the SEC is allowing the top 1,300 corporations to file a single registration statement that would be good for two years. Anytime the market seems receptive for the new issue, it can be sold immediately. In the trade, this procedure is known as a "shelf registration;" at the proper time, an issue is taken "off the shelf" and sold.
The new procedure will be tried for nine months before a final decision is made on adopting the change. For the bond investor, it could mean that at certain times the market will be inundated with new issues with little, if any, notice to the public. It will simply be harder to follow the new-issue market.
The improved market early in the week helped $975 million of new corporates to sell. The Treasury auctioned its five-year note at an average return of 14.01 percent. Finally, the $597 million Austin, Tex., revenue refunding issue sold with attractive returns, especially in the serial maturities. Few new issues are scheduled for this week.