The bond market continued to be hammered as retail buyers remained absent from the market in the wake of continued bearish news. Two other events added to the market's woes.
Projects Nos. 4 and 5 of the Washington Public Power Supply System were declared in default. Although that news was widely anticipated, it was certain to have adverse effects sooner or later. For one thing, it should make it more difficult or more expensive for Northwest borrowers to finance. One indication of this is that the State of Washington may be forced to insure the payment of its principal and interest on a coming general obligation issue to facilitate the sale because of all the adverse feeling among buyers against the region.
Another is the black eye that has been given to all the other major electric revenue bond issuers whose bonds are supported by "take-or-pay" power sales agreements. Investors must exercise care to see if these issuers have had their take-or-pay contracts validated by either being approved in the courts or approved by virtue of legislation.
Eileen Austeen, a municipal analyst for Drexel Burnham Lambert, feels that projects 4 and 5 are a very poor speculation and would still not want to own projects 1 and 3 because of their association with projects 4 and 5. She believes that the whole situation will be a long time in the courts and that 4 and 5 should not be purchased because she does not believe the federal government will intervene to rescue bondholders..
Another negative was the Treasury's announcement of its record $15.75 billion quarterly refunding. Perhaps it was negative because it was slightly larger than hoped for, but more than likely because it just added to the many other unfavorable factors in the market. The Treasury will sell a three-year note on Tuesday, a 10-year note on Wednesday and a 30-year bond on Thursday. The two longer issues will be available in minimums of $1,000 while the three-year will be in minimums of $5,000. Investors may subscribe at no cost to these issues at the U. S. Treasury, or at any of the Federal Reserve banks or their branches. They should return 11.20 percent, 11.85 percent, and 11.95 percent, respectively.
On Tuesday, $1.2 billion of HUD backed, tax-exempt project notes will be sold. They will mature monthly from December of 1983 through September of 1984. Since the size of the offering is $800 million smaller than the usual monthly sales, they should return between 4.70 percent to 5.90 percent.
Sometime this week, if the market permits, a $50 million City of Cleveland waterworks revenue bond will be sold. The bond offers serial maturities from 1985 to 1994 and term bonds in 2002 and 2013. It is expected that the issue will be insured by the American Municipal Bond Assurance Corporation (AMBAC) and will therefore be rated AAA by Standard and Poor's, but only BA1 by Moody's. Should they be insured by AMBAC, the term bonds could return around 10 1/4 percent. If not, they could return 12 1/4 percent to 12 1/2 percent. A prudent investor should only consider purchasing this issue if it is insured by AMBAC.