The outlook for the direction of interest rates and the success or failure of the Treasury's $21.75 billion refunding this week is anything but clear.
For one thing, the massive refunding is a record, and the market will have to have all positive factors to induce buyers to become involved. And that is the problem -- there are just too many uncertainties confronting the market.
If you ask several economists about the health of the economy, one-half will say it is stronger, and the other half will say it is weaker. If you ask about the direction of interest rates you get a similar split opinion. There seems to be no majority of opinion on any of these topics. Many observers seem to feel that the dollar will hold the key to the success of the Treasury refunding. Should the dollar stabilize or strengthen, foreign buying will rescue the auctions. However, if the dollar continues to weaken, foreign buyers would more than likely shun the huge offering.
As an aside, a staggering figure from a foreign exchange expert came to my attention. With the $100 billion trade deficit, the expert reasoned that it took an inflow of $500 million per day from foreign countries to keep our economy running. The math is as follows: The merchandise trade deficit was $130 billion in 1984. $130 billion divided by 52 equals $2.5 billion per week. Dividing that figure by five (business days each week) equals $500 million per day. Our trade deficit has to be offset by a cash inflow. Unbelievable!
The congressional budget conferees finally reached an agreement, but how good is the agreement. It's probably fair to say that the Senate caved in to the House's wishes and garnered much less than it wanted. One analyst felt that the real savings in 1986 would be around $25-$30 billion and that the deficit would still be around $200 billion in fiscal 1985 and close to $200 billion in fiscal 1986. Another analyst pointed out that where the Senate wanted to cut or elminate many programs -- i.e., Amtrak, the Small Business Administration and so forth -- it was forced to settle for freezing the programs, as the House wanted, and few programs were actually eliminated. At best, no matter how disappointing, something was accomplished, and at least the "budget battle" will be taken off the front pages of our newspapers.
An outgrowth of the "budget battle" is the bad blood that has surfaced between Senate Republicans and the president because of the president's torpedoing of the Senate's budget-reduction program and his siding with House Speaker Thomas P. (Tip) O'Neill. In late September, the Treasury must ask Congress to raise the current debt ceiling so that the government debts can be financed. Senate Republicans already are talking of holding up such action. This could play havoc with the operation of the government (as it always seems to do) and the government bond market. It's especially worrisome because a large $50 billion to $55 billion of new money must be raised during the last quarter of 1985. If no money is raised in October, the entire amount would have to be raised in just two months, which would cause market dislocations.
Therefore, as we approach this week's Treasury refunding, we realize that the auctions could go in any direction. Nevertheless, the Treasury will offer a three-year note on Tuesday, a 10-year note on Wednesday and a 30-year bond on Thursday. The shorter issue is in minimum denominations of $5,000, while the other two issues come in $1,000 minimums. They should return 9.55 percent, 10.65 percent and 10.82 percent respectively.