Tighter Money

The squeeze on money, which many experts had hoped would start easing soon, got tighter last week. The Treasury's interest rate on 90-day notes rose to 3.374%, the highest since the 1933 bank holiday. The rate on short-term commercial loans also rose to the highest in nearly a quarter-century: four-to-six-month notes of the nation's leading corporation borrowers carried ah interest rate of 3.75%. Said a Wall Street bond dealer: "Money is so tight it squeaks."

The squeaking in short-term paper was nothing compared to what was happening in bonds. The demand for long-term money by expanding corporations was so great (eight bond issues in the week totaled $103, 575,000) that the corporations had to keep upping their bids for the available supply. The interest rate on top-quality utility bonds rose as high as 4.58%, while the cost on bonds that were rated a bit lower was as much as 4.68%. On some bonds the yields topped those of blue-chip stocks; Columbia Gas System's 5 1/2% debentures were sold at a premium that made their yield 5.40%, while Georgia Power Co.'s 5 1/4% first-mortgage bonds had a yield of 5.10%.

Down with Pessimism. With the interest rate on new bond issues skittering upward, the market for old bonds with a lower coupon rate inevitably sagged to new lows. The Dow-Jones bond average of 40 representative rails, utilities and industrials dropped to 88.14% of face value, the lowest since 1942. The drop wiped out the gains since last winter, when for a short time bond prices seemed to have reached the bottom and started upward (TIME, Feb. 4).

The tightening money market did not, as some thought, reflect business pessimism; it showed confidence in the future. Early this year, with exaggerated recession talk rampant, there was a tendency for investors to get out of the stock market and seek the security of bonds and their guaranteed return. This made money easier to borrow, helped check the rise in interest rates. But the return of confidence and the recovery in the stock market checked the shift; even though the Dow-Jones index of the yields on top bonds was about 4.40% v. 4.50% for the blue chips, many investors no longer cared. They were interested less in yields than in the capital gains of growth stocks.

Up the Rate? As interest rates rose, Wall Street wondered whether the Federal Reserve System would raise its 3% rediscount rate, which for some time has been less than the short-term borrowing rate the Treasury pays. Ordinarily the Fed raises the rediscount rate to prevent "riding the rate," i.e., a member bank borrowing from the Fed to have more funds for lending at a higher rate. But member-bank borrowing last week averaged $888 million, up only $5,000,000 from the week before. Since there was no evidence that banks were riding the rate, best guess was that the Fed would not raise its rate.

In the competition for available funds, many borrowers decided to wait. The U.S. Public Housing Administration, which borrows funds for subsidized-rent public-housing projects, announced it would be out of the bond market until fall unless money loosened up considerably. Southern California Edison Co., after taking a look at the market, withdrew a $30 million preferred-stock issue until the time for borrowing was more propitious.

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