STARTING in October, the government will begin its public financing of the thrift bailout. Investors will have the opportunity to buy bonds issued by a new quasi-government agency, the Resolution Funding Corporation (Refcorp), created to provide $30 billion in bailout funds for the government's 1990-91 fiscal years. First Boston economist Neil Soss estimates the government will sell $5 billion to $6 billion in Refcorp bonds in the fourth quarter. The proceeds from the Refcorp bonds will go to the Resolution Trust Corporation, which is liquidating some 250 ailing thrifts.
The Refcorp bonds will be different than ordinary Treasury bonds. The government over the next six weeks will issue $20 billion of regular notes, bills, and bonds to pay for the closing of some thrifts and the redemption of expensive certificates of deposit issued by many of these institutions.
The Refcorp bonds will carry a higher rate of interest than those Treasury offerings. A Treasury official says the government hopes to pay 25 basis points - about one quarter of a percent - more than the going interest rate on Treasury bonds because the 30-year Refcorp bonds will essentially be guaranteed by the government.
However, major institutional buyers of the government's debt may force the Treasury to pay higher interest rates, perhaps as much as 40 basis points over a comparable Treasury bond.
Marcia Zercoe, a portfolio manager at Provident Capital Management in Philadelphia, says a quarter of a percent is ``too tight for me'' considering the uncertainties surrounding the thrift industry.
``We don't know how often they will have to come to the market,'' she says referring to the uncertainty over how long the thrift problem will persist.
Bob Vitale, president of the 1838 fund, a bond-debenture mutual fund, believes the government will have to pay a premium for the lack of liquidity in the new bonds. Institutional investors like to trade the bonds, buying them when interest rates are falling and selling them when rates are rising.
``I used to own some bonds issued by the Federal Financing Bank [nicknamed French fries by the traders], but it was frustrating because they did not have the liquidity,'' says Glen Insley, director of fixed-income management at One Federal Asset Management, a subsidiary of Shawmut National Bank in Boston.
``The history of this kind of thing is that there is a reluctance to buy what looks like and smells like a Treasury bond but does not trade like one,'' says Mr. Insley, whose group manages $1.5 billion.
To obtain liquidity will require market makers. First Boston Corporation, Shearson Lehman Hutton Inc., Merrill Lynch & Co., and Salomon Brothers Inc. all say they intend to make a market in the new bonds. But as Richard Mohlere, director of agency trading at Salomon Brothers, notes, this fall will be particularly busy with other government agency bonds. The World Bank plans a global bond issue and the Tennessee Valley Authority plans a $6 billion debt offering - its first in 15 years.
The competition ``would argue for a wider spread,'' says Mr. Mohlere. A wider spread would mean the Refcorp bonds would provide investors with a higher interest rate.
Brokerage houses will likely try to sell the Refcorp bonds to individual investors as zero-coupon bonds. These are bonds that have had the interest stripped out of them, leaving only the principal. Such bonds are popular with people planning for retirement, college education, or anything that requires a long-term investment. For only a small fraction of the face value of the bond, an individual can buy a zero-coupon bond with the knowledge of what that bond will be worth in 30 years. The major brokerages houses have successfully stripped other government agency bonds before.
Zero-coupon bonds, in fact, are part of the government's plan to guarantee the Refcorp bonds. Refcorp will collateralize the principal by buying 30-year United States government zero-coupon bonds, pledged to the new bond holders.
The interest paid to bond holders will partially come from premiums paid by the savings and loans to the insurance fund now operated by the Federal Deposit Insurance Corporation. Since it is not expected that those premiums will generate enough income to pay the total interest, the US Treasury will pay the difference. A Treasury official says the bonds will be exempt from state and local taxes.