The Treasury preempted other borrowers in the market last week. It borrowed $12 billion in T-bills Monday, $6.5 billion in notes Tuesday, $4.5 billion in notes Wednesday and finally, $3.5 billion in long bonds Thursday. All in all, a busy week, but one that witnessed little other financing from the municipal or corporate areas.
The three Treasury coupon issues came at average returns of 9.98 percent on the three-year, 10.94 percent on the 10-year and 11.01 percent on the long bond. These returns were all more generous than anticipated when the refunding was announced. In spite of the higher returns, retail buying was light, and the government bond dealers were forced to purchase most of the issues. It is estimated that the dealers purchased 75 percent of the short note, 77 percent of the intermediate and 85 percent of the long bond.
With the refunding over, the dealers must now attempt to distribute these issues before they take delivery and pay for them on the fifteenth. This may prove to be a difficult task. The problems with the budget are just beginning to be discussed in Congress.
The reserve and monetary aggregates are continuing to expand rapidly. Because of this, some economists are predicting that the seeds have been sewn for a surge of inflation in 1984. International banking problems are constantly in the news, as are the uncertainties concerning oil prices. Other market participants are fearful that with the economy beginning to show some signs of life, there may well be an increase in the demand for short-term funds, which, if vigorous enough, could push short rates higher. Others fear the Federal Reserve's next move could be a tightening one. If you put all these thoughts together in a paper bag and shake them up, you are left with a lot of "ifs," a great deal of uncertainty and confusion. This feeling has caused many investors to sell their longer bonds and shorten maturities to reduce market volatility. Other investors say it just isn't worth the market risk to extend from a 10-year Treasury to a 30-year Treasury to pick up 10 basis points more yield. So buyers beware: the dealers may have a tough time distributing their newly acquired securities.
Municipal underwriters have produced little new merchandise so far this year. As a result, on a ratio basis to Treasuries, high-grade munis have become less attractive in all maturities. It will take a sizable increase in supply to move the ratios back to the alluring levels reached in November and December.