Interest Rates Up

As the pace of U.S. business picks up, so does the demand for money. Last week bankers indicated they expect a rise soon in the discount rate, now 2 1/2%, as well as a corresponding hike in the prime rates. Said Hanover Bank's President R. E. McNeill Jr.: "I would not be surprised to see an increase in the discount rate. There is a high level of business, inventories are down, money is fairly tight, and banks are well invested." With higher rates ahead, U.S. bonds had another sinking spell last week, reached the lowest level in years; many Treasury issues now yield more than 4%. Furthermore, future Treasury issues may meet only a tepid reception, because Government bond yields are now bumping against the top legal limit of 4 1/4%. As the bond market, led by Government issues, drifted downward, the "spread" between bond and stock yields grew still larger; highest-grade corporate bonds now yield an average 4.2% v. 3.3% for the Dow-Jones industrials. Rarely in the past 50 years have stocks yielded less than bonds for any length of time except in 1927-29, when the rising stock market kept stock yields under bonds for almost three years. With rising interest rates and the bull market, Wall Streeters see no early reversal in the spread.

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