Creating New Strains

More than $1.5 billion of debt securities surged onto the nation's financial markets last week, as the effort to borrow before interest rates went even higher turned into a scramble. Many of the new offerings paid interest rates higher than at any time since the 1920s. The Federal National Mortgage Association came in for a controversial $410 million. Cash-short corporations borrowed $226 million through bond issues, and municipalities tapped the market for another $112 million.

High interest sent the biggest issue of all surging back from the market the same day that it was to come on. The New Jersey Turnpike Authority withdrew a scheduled $440 million of income tax-exempt bonds because the only bid from underwriters meant a 4.23% interest rate, quite a bit more than had been expected. The bonds would have financed doubling the six-lane width of the 30 miles of turnpike nearest to New York City.

The New Jersey withdrawal was a significant sign that scarcer and costlier money-that classic tranquilizer for a souped-up economy-was finally starting to restrain spending. Another sign: the National Industrial Conference Board reported that the nation's 1,000 largest corporations, which account for 75% of business capital spending, are making plans to expand less rapidly than they did a year earlier.

Impossible Volume. It is just as well. There has never been a year when so many people wanted to borrow so much money-more, in fact, than the stock and bond markets or banks seem likely to supply. "There will have to be more disappointments and cancellations," predicts Bond Analyst Sidney Homer, a partner in Manhattan's Salomon Brothers & Hutzler. "The $68.5 billion volume of proposed financing is impossibly large."

One reason is large issues by federal agencies, such as last week's FNMA sale of participation certificates in a pool of FHA and VA loans, which it owns. That sale, the final installment of $1.6 billion of FNMA financial assests put up for private investment since last July, furthered President Johnson's goal of holding down the apparent level of federal spending. Reason: the income from the sale goes to the Treasury, which uses it, at least as a bookkeeping matter, to make the federal deficit appear smaller. The certificates bore an average interest of 5.44% a year, a rate so high that congressional critics grumbled that the Administration was using them to dodge the legal 41% ceiling on new issues of Government bonds. What irks some critics even more is that FNMA, in effect, had to sell the certificates at a loss. The pool of old, low-rate mortgages on which the participations are based brings the agency-only a 4.78% return. To attract investors at all, FNMA had to make up the difference between that and today's higher level of interest rates. That cost, $5,100,000 a year, amounts to a subsidy in support of Johnson's budget ledgerdemain.

Savings Battle. The cost of borrowing has leaped by 15% to 20% since last spring, and most rates are still climbing. Interest on three-month Treasury bills rose to an alltime high of 4.718% last week. General Motors Acceptance Corp. pushed its rate for commercial notes up another 1% to 51% . Battling for savings funds, some New York commercial banks lifted their top rate on so-called certificates of deposit to 5.375%. At week's end, the average yield on corporate bonds rated as middle-grade (Baa) risks by Moody's Investors Service moved up to 5.35%, as against 4.91% at the end of last September.

With interest rates that high on new issues, prices on old, outstanding Treasury, corporate and municipal bonds have been depressed to their lowest level in a generation. Last week the bellwether Treasury long-term bonds maturing in 1987-92 sold for only 930 per $1 of their face value. One leading utility bond maturing in 1983 bears a fixed interest of 3+-%, but its market price has fallen from $1,000 to $800. As a result of all this, bargain hunters and fugitives from the stock market have begun buying, although not in great quantity. On the other hand, commercial banks, which own about one-third of all tax-exempt municipal bonds, have been selling some of their holdings to raise funds to meet soaring loan demand. Manhattan's Morgan Guaranty Trust Co., sixth-largest bank in the nation, last week said that it lost $3,250,000 so far this year on such sales. Interest rates have risen so much, however, that the bank expects to recoup by making new loans. Some banks have also begun calling loans used by customers to finance securities purchases. This delights the Federal Reserve Board because it makes it easier for the board to keep the nation's money supply-currency in circulation plus demand and time deposits in banks-from inflationary growth (see chart).

Next Test. If the pace of the U.S. economy continues to accelerate, and if the Administration continues to dally about boosting taxes or cutting spending, Wall Street expects that the price of money will keep rising, perhaps until midyear. "Interest rates are getting dangerously high," says former Treasury Undersecretary Robert V. Roosa, "creating strains within the whole financial structure." In the capital market, the next big test will come next week, when American Telephone & Telegraph Co. puts a $250 million bond issue on the block. Most professionals expect the company to pay about 51% to get its money.

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