This week we will conclude the explanation of the information contained in the table at the end of each column.
Following the Treasury data is the "New AA Long Public Utility Bond." This security is priced at a certain basis point yield above the 30-year T-bond. Currently that spread is 125 basis points. Therefore, if you know the yield on the long Treasury, you can calculate the yield on the long AA-rated public utility.
By subtracting 15 basis points from the AA utility figure, you can arrive at the yield on a AAA-rated public utility. Or, by adding 40 basis points to the AA-public utility number you can determine the yield on an A-rated public utility, or BAA-rated public utility, etc. Yields on long industrial bonds can be calculated in the same manner.
A similar exercise can be carried out from the 10-year T-note for other intermediate corporate issues such as finance paper, industrials or utility issues. In essence, you use the Treasury yields as your base and then price the other types of issues off of your base yields. You must know the different yield spreads to obtain the different yields on the other securities.
Next we move into the municipal area. First we use the Bond Buyer's "20 Bond G.O. Index." This index is composed of general obligation bonds that mature in 20 years and is equivalent in rating to an A-rated bond.
Another useful index not in the table is the Bond Buyer's "25 Revenue Bond Index." This index is composed of 25 revenue bonds that mature in 30 years and have a rating of A or A1. The coupons in both indexes are current coupons. Tracking these two indexes continuously will give you a good idea of the trend in general obligation and revenue bond rates as well as their relationship to each other.
This information is followed by the "30-Day Municipal Calendar plus the Blue List Volume." Since the supply of new issues is important in determining the direction of tax-free rates, the 30-day forward new issue calendar is presented along with the the unsold inventory that municipal dealers advertise for sale in the Blue List. All things being equal, the larger these two numbers become, the more likely rates will move higher; conversely, the smaller these two numbers are, the more likely rates will move lower.
The last piece of information given in the table is the "30-Day Forward Corporate Bond Calendar." Again, this figure denoting supply, whether rising or declining, will offer you a clue as to the direction of corporate rates.
Other data worth following would be the inflation rate, the direction of the dollar, the growth in gross national product, the federal budget deficit, the merchandise trade deficit and the current account position. Keeping track of the weekly three-month and six-month T-bill auctions would also be beneficial.
Lastly, one market note. Until the debt ceiling is extended, all Treasury auctions will be postponed. Once extended, the Treasury could very quickly announce new auction dates for the postponed issues, so watch the paper for the latest developments.
James E. Lebherz has 28 years' experience in fixed-income investments.