Securities Markets in the 1980s: The New Regime, 1979-1984

By Barrie A. Wigmore | Go to book overview

6
U.S. Treasury Markets

Nowhere was the impact of the new regime, particularly monetary policy, more obvious than in the U.S. treasury markets. After a decade in which monetary policy appeared subservient to political goals, it became the principal government policy lever to control inflation, and the actions of the Federal Reserve were so aggressive in this respect that they overrode many of the other influences on interest rates. The academic literature gives little attention to the institutional role of the Federal Reserve in determining interest rates, especially long-term rates, but between 1979 and 1984 it was dominant. Insofar as the direction of long-term rates varied from monetary policy pressures, it reflected the prospect of a dramatic increase in the federal deficit during the 1981 budget debate and its ultimate long-term financing, which began in 1983.

In this chapter I will review the course of the treasury markets and the influence on them of the Federal Reserve, the budget deficit, inflation, economic growth, and the dollar. I will then examine how the volatility, size, and high returns of the treasury market made it a hothouse for the development of derivatives products and highly leveraged speculation.


The Direction of Interest Rates

The early 1980s were a fulcrum point at which the Federal Reserve's aggressive fight against inflation altered the trend of returns on long-term treasuries from a long period of negative nominal and real returns that

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Securities Markets in the 1980s: The New Regime, 1979-1984
Table of contents

Table of contents

  • Title Page iii
  • Preface vii
  • Contents ix
  • 1 - Introduction 3
  • 2 - The Change in Regimes 15
  • 3 - The New Regime Revives the Common Stock Market 79
  • Summary 107
  • 4 - The Underperforming Industries 118
  • Summary 174
  • 5 - The Overperforming Industries 178
  • Summary 210
  • 6 - U.S. Treasury Markets 211
  • Summary 240
  • 7 - The Mortgage Securities Market 242
  • Summary 252
  • 8 - The Corporate Bond Market 253
  • Summary 295
  • 9 - The Merger and Acquisition Market 301
  • Summary 361
  • 10 - Conclusions 366
  • Notes 380
  • Index 401
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