Down Bonds, Down Interest

From the all-time peak of 106 set last Dec. 12 by the Dow-Jones averages the bond market drifted downward to a low of 99.5 on June 29. In July it was up again almost to 102, but last week, in a market so thin that the offer of 100 bonds started amazing rumors, the averages slumped to 100.4. Conspicuous in the fall, of course, were Japanese issues (see p. 18), some of which plummeted five points in a day. Otherwise greatest pressure was upon U. S. Government issues, some of which dropped more than half a point. To U. S. banks, which in 101 leading cities are currently stocked with $8,209,000,000 of "Governments" (one-third of their portfolio), this near break meant a substantial paper loss.

Governments were under pressure partly because of expectation that the Treasury may require up to $500,000,000 new financing on Sept. 15,* but more because, a new stage of the recovery cycle having been reached, many banks are beginning to need cash for commercial loans. Banks have lately met this demand from excess reserves, but increased reserve requirements have in the past twelve months cut these from $3,000,000,000 to $780,000,000. This is still a goodly sum, but it is largely distributed in country banks, not in money centres. Faced with borrowing from the Federal Reserve or selling securities, big banks chose the latter, began liquidating Governments.

To check this, the Federal Reserve last week reduced discount rates for the first time since 1934. In the past three years discounts have been largely inactive because of the huge excess reserves. With this abnormal monetary ease departing and demand for loans increasing, present unusually low open market money rates would be expected to rise. The discount reduction was aimed to prevent this as well as reinforce Government bonds. First discount reductions are a cut from 2% to 1 1/2% in the Atlanta and Chicago districts, agricultural zones where loans are particularly needed for crop movements. Similar reductions are expected in other districts, particularly New York, where the rate is already 1 1/2% and may fall to 1%.

* On that date the Treasury must refund $350,000,000 in bills and $817,500.000 of 3 1/4 notes.

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