• U.S.

Business: Bonded Trouble

4 minute read
TIME

The sick Government-bond market last week had its worst sinking spell. As prices of old issues hit new lows, their yields rose as high as 4.28%. exceeding the 4¼% ceiling on coupon rates the Government can set on new long-term bonds. Not since the hectic, tight-money days of early 1932 have yields risen so high. The sinking spell came at a particularly bad time for Treasury Secretary Robert B. Anderson; he needed $5.3 billion to carry the Government through June 30.

To get it, Anderson took an unorthodox step: instead of setting a rate on a single issue of short-term securities, the Treasury this week will auction off $3.5 billion in such notes to see what the buyers will pay. Then it will set the rate on a $1.8 billion short-term issue. Anderson tried no long-term bond, simply because the Treasury can not get an interest rate high enough (i.e., above 4¼% ) to sell it. Publicly, the Treasury is keeping a stiff lip. Privately, it trembles.

No informed investor thinks that there is the slightest risk that the Treasury will not be able to raise funds on some kind of terms. But Treasury officials know that their financing problems are a great deal bigger than outsiders realize. The chief source of the trouble is deficit spending and fears of more inflation. Not only did the Treasury have to make up for an estimated $13 billion gap between income and outgo this fiscal year, but by the end of 1962 it must refinance $129.5 billion in public debt, most of it incurred during World War II and Depression days.

Disappearing Buyers. Just when Anderson’s need for financing is ballooning, the market for Government bonds is shrinking. For years, while income of Social Security, unemployment compensation and other Government investment accounts was greater than outgo, the Government could count on selling an average of more than $2 billion a year to the funds. In 1958. with outgo greater than income, the funds had to sell $800 million worth of bonds.

Furthermore., the state-and local-government market for Government bonds is drying up. Once, most states specified that a large portion of their pension funds had to be invested in federal bonds. Today many permit them to be invested in higher-yielding corporate bonds. An even bigger Government market used to be insurance companies, mutual-savings banks, savings-and-loan associations and corporate pension funds. From 1952 through 1958, these institutions trimmed their federal-bond holdings from $23.9 billion to $20.6 billion, bypassed the Treasury entirely in putting more than $90 billion in non-Government investments.

The Treasury must even compete with other federally backed obligations to find customers—often coming off second best. Many investors who once insisted on a Government bond are now happy to buy a Government-guaranteed mortgage. Not only is the interest rate higher than what the Government pays on bonds, but the investor does not have to wait until maturity date to get his money back.

Raise the Rate? The one factor that would help Anderson most would be a balanced 1960 federal budget, eliminating new borrowing. But with Treasury facing the need to refinance old debts, many now wonder if even a balanced budget, which seems improbable anyway, is enough.

There is a growing feeling at Treasury and at the Federal Reserve Board that the 4¼% limit will have to be raised by Congress, even though economists and businessmen worry that raising the rate would cause a general rise in long-term rates and tighten money enough to choke off gains in business. Finding a solution to the Treasury’s problems cannot wait much longer. In July the Treasury will have to borrow additional billions. A sudden sharp contraction in the stock market might conceivably cause a shift back into bonds, but nobody regards that as a real solution.

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