Higher Interest

When money rates are rising, even well-priced bond issues often meet a cool reception because buyers are waiting for still higher rates. Last week the U.S. found buyers scarce for its latest issue. To holders of $1.8 billion in maturing issues, the Treasury offered to exchange a short-term (one year), attractively priced (4.05%) issue. Instead of taking the new issue, 30% of the noteholders asked for $547 million in cash, highest attrition rate since the record 32% of May 1955.

Though attrition was high, the Treasury had expected it, had enough cash on hand so it will not have to go to market again immediately. The T-men felt that sweetening the issue with a higher interest rate would not have done much good. With the pickup in business, corporations can see other uses for the money, are reluctant to hold an issue for a year. They prefer shorter-term bills, even though the rates are lower (2 1/2-2 5/8%) until they can see where money rates are going.

At week's end the rates went up. Major New York banks hiked their prime interest from 4% to 41%, equal to the prerecession level. The boost reflected heavier demands for bank loans by both business and consumers, also brought loan rates into line with yields on bonds. Most bankers now expect that the Federal Reserve will raise the discount rate from its current 3%. As interest rates climb, they will drive down farther a market already at a historic low.

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