T-Bill Investors Bet on Lower Interest Rates
The federal government had a relatively easy time selling $12.6 billion in new notes on Tuesday, suggesting that many investors are betting on a sharp decline in interest rates ahead.
The Treasury’s auction of three-year notes attracted $47 billion in bids, a very healthy level of activity, traders said. The average yield on the notes was 7.78%. The note sale was the first stage of a record three-day borrowing binge by Uncle Sam.
The government may have a tougher time selling 10-year notes today and 30-year bonds on Thursday, experts say. But the biggest surprise of the three-day sale already seems clear: the reluctance of individual investors to step up and buy.
Small investors had been heavy buyers of three-year notes at previous quarterly Treasury auctions. This time, many brokers say, individuals were unhappy with the expected yield, so they stayed away.
However, the desire for higher returns is likely to force more small investors to make a decision soon about their investments, experts say. With the economy weakening and short-term interest rates falling rapidly, more individuals may soon opt to lock in whatever yields they can find on longer-term investments.
Institutional investors were clearly taking that step Tuesday in bidding strongly for the three-year notes. Lacy Hunt, economist at CM&M; Group in New York, said commercial banks in particular were hungry for the notes. As loan demand falls with the slumping economy, the banks have a growing pile of idle cash and relatively few safe places to invest it, Hunt notes.
Bidding also was healthy from Japanese investors, traders said, especially considering how weak the dollar has been lately. The Japanese bought an estimated 20% of the three-year notes.
Saudi investors, flush with cash from the surge in oil prices since the Iraq-Kuwait crisis began in August, also were said to be big bidders.
All of the aggressive buyers are basically making the same bet: They expect interest rates to continue falling as the U.S. and world economies slump into or near recession. After all, if you thought interest rates were going higher soon, you’d be better off waiting to buy Treasuries or other bonds later on.
The issue of safety also is playing a major role in the auction. The worsening economy is raising the risk of investing in corporate bonds, stocks and other securities. So super-safe Treasury securities win partly by default. “There’s definitely a flight to quality continuing,” said Doug Brown, government securities chief at brokerage Wedbush Morgan Securities in Los Angeles.
But while a 7.78% annual yield was enough to lure institutional investors Tuesday on the three-year notes, many brokers say small investors expected more:
* “We didn’t see a lot of participation” in the auction from individuals, Brown said. “Rates just went too low.”
* At St. Louis-based brokerage A. G. Edwards & Sons, which serves more than 1 million individual investors nationwide, orders for the three-year notes came to just 13% of the amount purchased last spring, said Jim Hodapp, vice president of government securities.
* James Phillips, bond manager at discount brokerage Jack White & Co. in San Diego, described investor interest as “real slow compared to the last auction.”
The Treasury confirmed the waning interest by announcing that non-competitive bids--the way most individuals buy bonds--totaled about $1 billion, less than half the sum of such bids at the May auction.
Is 7.78% a lousy yield? Compared to the 8.74% that investors nabbed on three-year notes sold last May, it is. But many experts believe that interest rates are almost guaranteed to drop in the months ahead as the Federal Reserve eases credit further to prevent the economy from free-falling.
Just since last August, rates on three-month Treasury bills have fallen nearly a half-percentage point, to 7.07%--the lowest in two years.
Yields on 30-year T-bonds have fallen more slowly but are down about a third of a point just since mid-October--to 8.63% now from 8.93%.
Jack White & Co.’s Phillips says the quandary for many investors is that “long-term interest rates aren’t high enough anymore, and short-term rates are too low. What do you do?”
Unfortunately for the fence-sitters, that unhappy choice may only become a bigger problem soon. CM&M; Group’s Hunt believes that the T-bill rate could fall to 6.5% by early 1991 as the economic slump deepens.
The 30-year bond yield could drop to 8.25%, he says.
For many investors, the only option now is to lock in higher yields wherever they can be found--as long as the investments are perceived to be “safe.”
That generally means long-term bonds backed by home mortgages. Yields of 8% to 9.5% are still available on such securities, including the popular Government National Mortgage Assn. bonds, says A. G. Edwards’ Hodapp.
Tax-exempt municipal bonds also are drawing new buyers, brokers say, especially with federal income tax rates rising next year.
If you’re sitting on a large money-market cash hoard, and you haven’t at least begun to look around for other places to invest, now’s the time to start, experts say.
Et tu, Pollution Control?Another supposedly recession-proof industry showed Tuesday that, well, it isn’t.
Key pollution-control and waste-management stocks got zapped after Browning-Ferris Industries, a leader in those fields, announced disappointing quarterly earnings.
The company said operating earnings plunged 59%, to 21 cents a share, in its fourth quarter ended Sept. 30.
The big hit was a $67-million writeoff related to problems in securing new licenses for some of its landfills, but Browning also confirmed a general slowing of business.
The news sent the stock plunging $6 to $24.25, a 20% drop. Some rivals also were bludgeoned, including Waste Management Inc., down $2 to $33.
However, investors didn’t sacrifice the entire group. But maybe they ought to think about it, some analysts say.
Browning, which does a big business in the depressed Northeast, apparently is showing that a recession can mean less industrial and residential waste business to handle, despite what Wall Street has always held dear about trash--that it only gets worse.
The moral, says Prudential-Bache Securities analyst Vishnu Swarup, is that “garbage is less affected by the economy, but it is still affected.”
Swarup reiterated his “sell” recommendation on the stocks Tuesday. Likewise, analyst Richard Rossi at Dean Witter Reynolds advised investors to steer clear of the stocks. “I think you’ll get them cheaper later,” he said.
Big Rate Break Coming? Short-term interest rates have fallen nearly a full percentage point since spring,while long-term rates still are holding up. Some experts see a big break t lower levelssoon for both short and long rates. Thre-month Treasury bill discount rates are for Mondayauctions. Thirty-year Treasury bonds yields are Monday closes. Figures are every other week except latest.
