The interest savings to Treasury on a bond issue mentioned Sunday in a column by James E. Lebherz was incorrectly stated as $215 billion. The correct figure is $215 million.
Even though the bond market has been on the dull side since the beginning of the year, it is still an extremely interesting market. The dullness has arisen because investors have become more cautious as a sense of uncertainty has crept into the marketplace. Currently, investors are probably more bearishly inclined, but bullish crosscurrents keep them from going completely bearish. This cautious feeling is borne out graphically in the Treasury yield curve.
The yield curve is simply a graphic presentation of the yields, or returns, of the various maturities at any given time. During the past year, the Treasury curve, when measured from the yield on the 3-month T bill out to the yield on the 30-year T bond, has averaged 256 basis points. A basis point is one-one hundredth of a percentage point. Currently, the spread is about 360 basis points (11.50 percent minus 7.90 percent equals 360), which is almost the maximum spread of the past 12 months. This is a cautious yield curve, because some investors who fear rates will rise soon are selling longer bonds and buying short one-year-and-under T bills. Since November, the yield on T bills have plunged 150 basis points, while the yields on long Treasuries have changed very little.
Yet, the easing by the Federal Reserve, low inflation, recent mixed economic numbers and the strong rhetoric concerning budget deficit cuts all have combined to keep the market from declining. Further, when investors who have more than a half-trillion dollars invested in money market funds and money market demand accounts at financial institutions realize that they are receiving about 8 percent on their money, they more than likely will be inclined to move out along the yield curve to pick up higher yields -- for example, a 9.95 percent in the two-year Treasury. These and other factors have, for the time being, placed a support under the market. Yet there is always that element of uncertainty among investors and bond traders. A recent definition of a bond trader is a person who can steal a hubcap off a moving car.
On the other side of the argument lie a couple of meaningful factors. First, and perhaps foremost, is supply. The Treasury probably will have to raise $200 billion in net new money in 1985. Research by Salomon Brothers estimates that $163 billion of that amount will come from new notes and bonds. On top of this, Salomon Brothers states, the Treasury also will have to refinance a record $153 billion of maturing notes and bonds, for a lopsided total of $316 billion in note and bond financing. The total coupon volume in 1984 was $265 billion.
The bond markets always have been sensitive to strengthening economic numbers because in time they lead to heavier corporate borrowing. With the economic numbers coming in mixed, investors reason that it is only a matter of time before a string of positive numbers is forthcoming. Also, since the taxable fixed-income market has performed so well, many investors are inclined to take their profits and move elsewhere; that is, to the tax-exempt market or the stock market.
This, too, is a negative for the Treasury market and will certainly will make stealing hubcaps a little more difficult.
The Treasury will offer a two-year note on Wednesday in minimum denominations of $5,000. This should return 9.90 percent.