After several days of good gains, the upward price movements in bonds came to an abrupt end last Tuesday. For one thing, markets just do not move straight up or straight down, so an adjustment was in order. More important, the market looked at other factors that helped curtail the rally.
Congress has been unable to enact a budget resolution for fiscal 1984. At the same time, there is bickering within the White House as to whether or not it actually wants a budget resolution from Congress. Office of Management and Budget chief David A. Stockman warned that no resolution could lead to much larger budget deficits than have already been projected. The market definitely doesn't like this kind of talk.
Then there are the recent stories that President Reagan is giving serious consideration to not reappointing Chairman Paul A. Volcker as head of the Federal Reserve. Those favoring a new appointee explain that the administration should be able to appoint its own man. Other anti-Volcker people say that even though the chairman reduced inflation, he forced unemployment to high levels. The markets definitely do not like this dribble, either.
One appealing concept of the Fed is its independence, and not being in any political party's back pocket. The market likes the independent status that the Fed, and especially Volcker, now enjoy. As far as inflation and unemployment, one probably cannot find a time in this century where increased unemployment has not gone hand in hand with the reduction of inflation. This time inflation was higher than in recent cycles, so the cure was much harsher and unemployment rose much higher. Unfortunately, budget problems and talk of a new Fed chairman are basically political, and we do have an election coming up next year.
The reduced supply of new issues has helped the Treasury market these past few weeks. This will be coming to an end from May through the rest of the year. The supply of new corporate issues, even though 55 percent ahead of last year, is still much less than had been anticipated.
The fact is that many corporations whose balance sheets have become top-heavy with debt, have taken advantage of the excellent stock market to raise money through the sale of common stock. During the first quarter of this year, corporations sold $9.8 billion of new equities versus only $2.4 billion during the same period of 1982. More restructuring of balance sheets is sorely needed.
As the above-mentioned fears plus the uncertainties concerning the direction of Fed policy and the growth of the money aggregates bubbled up, investors were quick to take their profits and head for the hills.
There will be a paydown of Treasury debt during the last two weeks of April, and perhaps a good money supply number or two. But after that, the onslaught of the new Treasury issues could force bond rates to move slightly higher.
Such light grade, general obligation issues as Montgomery County, Fairfax County and the states of New Jersey, North Carolina and Massachusetts will all arrive this week. A sizeable list of revenue issues led by the $300 million Jacksonville Electric Authority also will be sold. The yields on the light grades continue to approach the returns available on revenue issues.