This was a great week to own bonds! Prices exploded on the upside and yields tumbled to their lowest levels in two years. Several new corporate issues that were previously on the back burner were quickly whisked forward and sold to eager buyers. Investors had it both ways as stock prices also soared. The only investors hurt were those unfortunate people who had shorted the market, or who were holding cash.
The long Treasury issue jumped 5 1/2 points in just three days. Municipal issues were gobbled up by all types of funds and, for the first time in a good while, commercial bank portfolios earnestly purchased the new issues. The short-term tax-free project notes that sold on Tuesday and returned 5 1/2 percent in six months were returning 5 percent three days later. Similarly, one-year project notes that came on a 6 percent basis quickly jumped in price to return 5.85 percent. The stock market joined in on the advance as, according to one stock portfolio manager, investors felt that price-earnings multiples would increase from their current low level of 9 to the higher historic levels of the past 50 years -- that of 13 to 14 times earnings. Further strength came to the equity market, according to this portfolio manager, from the institutional-performance orientation of many equity managers who had previously missed the market rise and were forced to jump on board as the train hurried down the track. They did so with huge amounts of cash.
The basic impetus to the fixed income market came from the growing realization that the economy was truly stagnating, along with the perception that the Fed could not allow interest rates to move higher in spite of the growing money supply. In effect, the Fed was in a box. An article in Thursday's Wall Street Journal indicated that the Fed had decided to allow the money supply to grow above it's previously determined targets in hopes of lowering interest rates and stimulating the economy. This "leak" added further strength to bond prices, as did the Fed's cutting of the discount rate -- which the Fed charges its member banks for loans -- late Friday afternoon.