The rally in the stock market over the past few weeks has in large part been fueled by a massive rise in the bond market, where yields have plummeted and prices soared.
The party came to an end last week, however, as bond traders realized that the hefty calendar of government offerings over the next two weeks would provide a major test for the willingness of participants to keep buying. Over the next two weeks the government will auction off $16.6 billion worth of notes and bonds. Although only $6.2 billion of this is "new cash," with the rest being "rolled over" from maturing issues, it is still a significant amount of money. This huge supply, says William J. Sullivan Jr., senior vice-president at the Bank of New York, represents "an added obstacle" to further progress in the bond market rally.
Mr. Sullivan notes that professional bond traders last week started cashing in their chips -- taking profits -- as the rally rolled along. Their first sign that rates may have temporarily bottomed out came when the federal funds rate, the rate at which banks led one another money, halted at 13 percent. Mr. Sullivan says that "the decline in the fed fund's rate has been a major catalyst behind the bond market's rally."
When the government comes to market this week, one of its new issues will be a $1.75 billion issue of 20-year bonds. This offering will be for all new cash and it will extend the maturity for government bonds beyond 15 years. Mr. Sullivan says that based on "current conditions, which like the weather can change overnight," they should carry a 12 5/8-percent interest rate.The following week, a seven-year note should have a 13 percent coupon attached to it.
How these bonds are accepted by the market is important. As Mr. Sullivan notes, "They set the tone for the whole market-place."
In addition to the $16.6 billion being offered by the government over the next two weeks, the Treasury will be selling $10 billion of short-term "cash-management bills" to help it get through April 15, when it expects more cash to be flowing into its coffers from taxes. Even though these are only short-term notes, they will compete against short-term commercial paper, issued by the private sector.
Over the very short-term period, bond traders were eyeing the government's report on durable goods, issued March 20. The report noted a slight increase last month in factory orders for such goods. Bond traders will have to figure out whether the fence-sitting figures mean continued recovery or the start of an economic slowdown. Sluggish economic growth would give bond prices a boost, and vice versa.
Even though Congress is busy hacking away at the budget, the expectations on Wall Street are for interest rates to firm up. One advance indication of this was the stronger dollar Friday morning. The next two weeks, analysts agree, will reveal a lot about the future trend of rates. And this is turn might be helpful to those wondering where the stock market moves next.