Last week's heavy supply of new housing finance bonds, coupled with a logjam of $1.7 billion of unsold bonds held by dealers, finally caused tax-exempt interest rates to move higher. To keep interest costs from rising too high on the new housing issues, the underwriters used MBIA insurance, thereby obtaining an AAA credit rating from both Moody's and Standard & Poor's on several of the new issues.
Even with the triple-A rating, 10-year paper was being priced to yield 10 percent, up from 9.20 percent a few weeks ago, while 20-year bonds returned 10.63 percent, up from 10.13 percent. The attractive pricing of this flood of MBIA-insured housing issues forced a repricing to higher yields on the $200 million Iowa housing issue, which was rated AA and was not insured.
While the spigot on housing bonds was wide open, that on government-backed project notes from the Department of Housing and Urban Development was turned off. A $1.5 billion issue that was scheduled to be sold on Tuesday had to be canceled because of the recent passage of the Deficit Reduction Act of 1984. The act specified several conditions that must be met before an issue can be considered a tax-exempt security, including notification of sale, arbitrage restrictions and public hearings. Because the new law states that all tax-exempts must conform to the IRS' arbitrage guidelines, the agency is considering whether HUD violated those rules. If the answer is "yes," interest on HUD project notes issued after June 19, 1984, will become taxable. HUD canceled the September sale because of the uncertainty of the situation, and will not make delivery on the August offering. Even if the matter is settled quickly and the tax status of HUD's project notes is upheld, the authority must advertise a note sale 45 days before the actual sale date. This means a new project note issue may not be sold before November.
Although the project note issuance has been shut down, the Treasury faces a large financing calendar for the rest of September. Unofficially, $48 billion of Treasury bills and $24.5 billion of coupon issues will be auctioned by the end of the month. However, it appears likely that the $1.573 trillion debt ceiling will be tested within a few weeks. If Congress fails to act quickly on raising the debt ceiling, the Treasury may be forced to cut the size of the T-bill auctions to keep within the ceiling limit. If the ceiling is not raised by the end of September, the mini-refunding auctions could be derailed.
In the scheduled mini-refunding, the Treasury will begin to auction its issues designed for foreign buyers. In the same refunding, the Treasury also will offer a 20-year bond that may be called in and paid off after five years. Previously, these bonds were noncallable for life. It will be most interesting to see not only how foreign investors receive our issues, but also how a 20-year T bond with only five years of call protection is accepted. September may prove to be a very lively month.