The main attraction in the bond markets last week were the five Treasury issues totaling about $27 billion. The average returns on the coupon issues were higher than initially anticipated, with the three-year returning 10.62 percent, the seven-year 10.80, and the 20-year bond 11.22. Continued investor uncertainty and nervousness accounted for the higher rates. And with good reason.
Aside from the twin threats of growing monetary aggregates and a stronger than anticipated recovery, there has been a tremendous increase in the amount of financing done through the first five months of the year, and a lot more financing is either scheduled or in preparation.
Interest rates have declined dramatically from a year ago, we have moved from recession into what has all the earmarks of a typical healthy business recovery and we have enjoyed a booming stock market. In this atmosphere, the Treasury has raised $97 billion in new money so far this year, up from $45 billion in the similar period of 1982. The municipal market through May has sold $36 billion of long-term securities, up 44 percent from the $25 billion sold the first five months of last year. Corporate bonds sold through mid-June total $21 billion, a 36 percent increase over $16 billion in the same period last year. Preferred stock sales have jumped 150 percent through May, $5 billion versus $2 billion. And according to Investment Dealers Digest, $17 billion in common stock has been marketed through May versus $5 billion sold during the similar perod in 1982. That's a whooping increase of 240 percent.
Moody's Bond Survey publishes a financing calendar that estimates that $52 billion of corporate and foreign bonds, $8 billion of municipals and $6 billion of equities are waiting for the proper market conditions in order to be sold. Then there is the $120 billion of new money that analysts feel the Treasury must raise during the second half of 1983.
Current estimates for the federal budget deficit in fiscal 1984 are around $200 billion. Goldman Sachs research estimates that if that number is correct, the Treasury will absorb 60 percent of the economy's net savings, a factor that could lead to higher interest rates during the next 18 months.
With these thoughts in mind, conservative investors should consider bonds maturing in one through five years. In the taxable area, the Treasury market best offers those maturities.
In the tax-exempt area, an unusually large amount, $3 billion to 4 billion, of short-term notes will be sold over the next two to four weeks. With about $500 million unsold notes already in the market, and with rising short-term taxable rates, the short-term tax-free area should offer some excellent purchases for investors over the next several weeks. Further, notes under one year will not have to be registered, unlike longer municipals, after July 1.