The Magic Fives

The U.S. Treasury wanted to raise only $2 billion on its new 5% note, aimed to attract the little investor. But the demand was so great that $11 billion in orders poured in last week. "There was such a crowd on the floor," said the vice president of a New York mutual savings bank, "that for a moment I thought there was a run on the bank." All over the U.S., investors pulled their money out of their institutionalized socks to buy the four-year, ten-month issue, which finance officials have gleefully dubbed the "magic fives."* The New York Federal Reserve Bank reported that savings deposits in local commercial banks fell by $45 million following the Treasury's announcement--an unusually large one-week decline.

All told, 108,000 individuals and organizations bought nearly half of the $2 billion issue. Only 26.6% went to commercial banks; thus Treasury officials were highly pleased that most of the issue was kept out of the commercial banking system, which pays for Government securities with newly created dollars. The Government increases the nation's purchasing power when spending these dollars, thus adds to inflationary pressures.

There were other reasons for the smiles in Washington. The new bonds promptly sold at a premium on a when-issued basis. This reduced their yield to buyers to 4.79%, but it also stirred interest in other Government bonds, perked up the market to the best level in weeks. Though nearly $9 billion of Treasury securities fall due Nov. 15 and must be refinanced, they continued strong on the hunch that if the Government comes back with another 5% issue next month, the holders of these notes would receive valuable subscription rights.

Furthermore, the 5% bonds loosened the pressure on the short-term market. The discount rate on the three-month bills offering dropped noticeably (4.194% to 4.007%) before a new issue at week's end was offered at a record high 4.262%. Treasury officials, however, called the jump temporary, expect that the rate will decline again this week.

The success of Treasury Secretary Anderson's magic fives caused many private money authorities to think that the worst pinch in the money market may be over and rates may level off. While Anderson will be competing with the heavy seasonal demand by business for funds to finance the building of Christmas inventories, the fact that the issue was so heavily oversubscribed suggests that the 5% note was anything but a one-shot wonder.

*Bond traders refer to bonds in the plural to save time in buying and selling, e.g., the fives of '64.

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