Government bond dealers spent last week attempting to distribute the huge amount of securities that they underwrote in the recent $15.75 billion Treasury refunding. It is estimated that they purchased 76 percent of the three-year note, 88 percent of the 10-year, and 88 percent of the 30-year bond. With a jittery market and fears of rising interest rates, selling bonds to investors is no easy task.

Currently, there are several forces working to push interest rates down, namely a low inflation rate and a strong dollar abroad. At the same time, there are several forces pushing interest rates up. These would be an emerging strong economy coupled with the recent growth of the monetary aggregates and fears of Federal Reserve tightening due to these two factors. And finally, the constant supply of new Treasury issues which are a direct result of the federal budget deficits.

The chart points out how much of a problem the deficits can be in constantly increasing the Treasury's needs in the market. The gross financings shown are for T-bill maturities out to five years. This heavy financing has placed incredible upward pressure on interest rates out to five years, regardless of what policies the Fed has been following.

During the last two months the whole yield curve, as measured by the yield returns from the three-month T bill out through the 30-year bond, has shifted up to higher levels. This makes it possible for dealers to carry their inventory profitably. If it costs a dealer 9 1/2 percent to carry his inventory, he is able to offset that expense with coupon income of 11 percent on two-year notes, to 12 percent on the new long bond. He therefore has a positive cost of carry from 1 1/2 to 2 1/2 percent.

It is also interesting to note in the chart how the interest on the public debt keeps growing geometrically with the deficits and the debt itself. As a result, paying the interest has become a major reason for increased financings.

This discussion has not touched on the "crowding out" aspect of the government's needs versus the private sector's needs. Perhaps the only positive aspect of the budget deficits is that it has made the government bond business a growth industry.