The rally in the fixed-income market, for the time being, seems to have run its course with the announcement of a massive new issue calendar in both the Treasury and tax-exempt markets.
The Treasury's announcement of its record $19 billion quarterly refunding halted the decline of rates in the taxable area. From this refunding, the Treasury will raise $11 billion in new money.
Even though the refunding is a record in total size, the Treasury raised $11.8 billion in net money in their similar type refunding in February 1984.
The three securities being auctioned are a 3-year note, which will be offered on Tuesday in minimum denominations of $5,000; a 10-year note to be offered on Wednesday and a 30-year bond to be offered on Thursday.
The latter two issues will come in minimums of $1,000. They should return 10.4 percent, 11.25 percent and 11.1 percent, respectively.
With this refunding, the Treasury will inagurate its "STRIPS" program with the new 10-year note and 30-year bond. Basically, this program enables the designated securities to be maintained in book-entry form (no physical delivery) at Federal Reserve banks in a manner permitting separate trading of principal and individual interest components.
This is accomplished by assigning each principal and coupon interest payment a unique identifying (CUSIP) number. In effect, each component will then be tradable separately under its own CUSIP number and marketable as a zero-coupon instrument in the secondary market.
A purchaser will own a bonafide Treasury zero-coupon security maintained on the record books of a Federal Reserve bank.
This differs from the other types of Treasury-backed zero-coupon issues such as Treasury receipts, TIGRS, CATS, COUGARS, and the like, where the treasuries are "stripped" and the coupons and principal are placed with a trustee, and against which various certificates or receipts are issues to buyers, denoting ownership.
Since mid-1982, about $45 billion (principal value) of Treasury securities have been stripped, either by the physical separation of coupons from bearer securities or by the issuance of receipts based on the treasuries. This is a major innovation on the part of the Treasury and is being done in an effort to save the government money by creating a broader demand for designated issues, which will therefore help lower interest rates on the new securities.
From early "when-issued" trading, it looks as if the new STRIPS will sell with 20 to 30 basis points less yield than comparable receipt-based zeros.
In time, as the supply of Treasury-zeros grows, those spreads should narrow and should afford swap oportunities from one type of zero to the other. These Treasury STRIPS may be obtained from banks or from brokerage houses that have government bond departments.
They will be available in minimums of $1,000; they will have semiannual maturities and be sold at a discount; they will pay interest only at maturity and the appreciation on accretion on the securities will be taxed yearly for individuals.
The low interest rates have finally spurred issuers to offer securities in the municipal market. About $1.4 billion in state general-obligation issues are slated to be offered this month by 11 states. Similarly, more than $1.3 billion in new revenue issues are scheduled for the first two weeks of this month. This should cause tax-exempt rates to rise somewhat in the weeks ahead.