SUPPOSE the stock market had crashed by 100 points on the Dow Jones index? You and I both know that it would have made page-one headlines all over the country. There has been an equivalent debacle -- in many ways worse -- in the bond market. The momentum of the slide has been so great that technicians describe it as a "free fall."
But apart from skimpy stories on the financial pages, this spectacular decline over the period of the past four or five months has not had the attention it deserves.
Since Oct. 6, 1979, when Paul Volcker's Federal Reserve Board embarked on a new monetary-control strategy that forced interest rates higher, there has been a loss of about $400 billion in bond-market values. The great bulk of that write-down in bond prices occurred in the first six weeks of 1980.
For a brief period early last week, financial experts thought they had seen signs that the toboggan might have hit bottom. But a big jolt on Friday from the producer price index, coupled with the Federal Reserve's increase in the discount rate to a record 13 percent, destroyed those illusions.
Hopes for release of the American hostages in Iran, which seem to be rising, might ease international tensions later and help slow the climb of interest rates, but whatever happens, it will be a long road back for the bond market.
A high-grade utility bond issued last September to mature in the year 2005 might have paid an interest rate of 9 percent, or $90 for each $1,000 of face value. A similar bond issued today would have to pay 13 percent, or $130 for each $1,000. That means that the old bond, if resold in today's market, would bring the owner only $692 for each $1,000 of face value. At $692, the $90 interest would give a new purchaser a 13 percent return on his money.That's what has been going on in the bond market, with a vengeance, since last fall.
GIVEN ALL the uncertainties, there have been fewer takers of old bonds, even at the steep discounts which also offer long-term capital gains possibilities. Instead buyers have snapped up shorter-term investments -- such as Treasury bills, commercial paper, short-term certificates of deposit in savings banks and money market mutual funds. In just the month of January, $8 billion was poured into money market funds.
There is little mystery to all of this: Ever since President Carter put out a "guns-and-butter" budget for fiscal 1981, investors have become convinced that inflation will continue unimpeded.
The president's budget not only boosted the deficit projection for this fiscal year but hiked the "off-budget" spending needs sharply. The result in totality is that the Treasury will have to borrow $57.5 billion in this calendar year, up $16 billion from last year, the largest total since 1977.
And that doesn't take into account the sleight-of-hand quality to the Carter budget, which makes unjustifiably optimistic economic projections, including an unbelievable forecast that the government's interest-rate costs will be stable this year, and actually will drop in 1981.
Contrary to those expectations, interest rates on long-term investments have continued to move up sharply, while short-term rates have shown little change from their extraordinary high levels.
The creation of new methods for investing money -- from the new money funds to savings certificates paying high returns for a shorter period -- has helped to shift money out of the long-term bond market.
BUT THERE ARE other factors at work as well: The federal government has been issuing more 15- and 30-year bonds than ever before, soaking up funds that used to go into private long-term issues. And insurance companies and pension funds which used to be big customers for long bonds have been moving into the mortgage market instead.
New York financial expert Henry Kaufman sees an eventual shrinking of the long-term bond market, with some borrowers enticing buyers with long-term floating rates. Such radical changes transforming the bond market "as we know it today" could put a crimp in the next period of expansion in the economy, says Kaufman.
For all of these reasons, thoughtful analysts have come down to two options.
One is a dramatic cut in the "butter" part of the federal budget if the government persists in expanding the "guns" portion. There is little dissent, even among liberal Democratic economists, that without a tighter fiscal policy, the efforts of the Federal Reserve to control inflation through monetary policy will fail.
On the other hand, there is the controls approach, perhaps in concert with a more restrictive fiscal policy, as a way to break the inflationary psychology.
But without some new strategy or change in the new Cold War atmosphere, there is no reason to doubt the financial market's conviction that inflation will continue to feed on itself, and that long-term bonds will command double-digit interest rates for years to come.