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Never before have bond prices been so high, bond yields so low. The previous high was around 1900, when high-grade issues sold to yield something less than 4%. At that time the best opinion was that low interest rates would continue for the first two decades of the 20th Century. The experts were dead wrong. Interest rates rose and bond prices fell almost without interruption until the post-War depression. Through most of the 1920's bonds climbed steadily, then started to fall again when money tightened during the last purple days of the stockmarket boom. The present rise dates from 1932, bonds as usual leading actual industrial recovery by a wide margin.
What has kept bonds booming ever since has been progressively lower interest rates. At first interest rates declined because there was less demand from businessmen for money, a normal depression phenomenon. Since the New Deal, however, the Treasury and the Federal Reserve Board, working in close harmony, have borne down on the money market with every available credit control, chiefly those whose manipulation tends to build up big bank reserves. One purpose of this easy money policy was to make private borrowing cheap, the hoary formula for reviving depressed business. So far U. S. businessmen have done little new borrowing, though they have taken advantage of the cheap money to refund billions of old securities at lower rates.*
Another and more important reason for the Administration's easy money policy was to make Government borrowing cheap. Secretary Morgenthau is raising long-term money for 2¾%. His short-term financing is done at such low cost that it is actually cheaper than it would be to print and distribute greenback currency. Meantime, commercial bankers have had a curious change of heart about Government bonds. Instead of predicting the imminent collapse of Government credit through New Deal spending, they are now buying long-term Treasury issues as fast as they can. Government bonds have been pushed to record highs and the bankers are convinced that they will stay there, if not go higher. Some people are even talking of the day when the cautious investor will have to be satisfied with a 2% return on his money.
A number of professional economists are seriously alarmed by what they consider an inflated bond market. At a meeting of the New York chapter of the American Statistical Association last fortnight no less than three went on record with loud warnings. Said Columbia University's Leland Rex Robinson: "Now hardly seems the time to pay high premiums for bonds. . . . The higher the grade of bond the greater the speculation in buying it now. It is difficult to see how the artificially low interest rates and bond yields . . . can much longer continue."
Economist Lionel Danforth Edie: "My guess is that the bottom of the low money rate cycle ... is right now—I mean in 1936, and the middle of 1936. . . . The high-grade bond market is inflated and inflated relatively more than the stock market was in 1929 and it is just as vulnerable to a very sharp move the other way for similar reasons."