Bond Failure

The U.S. Treasury offered $9.1 billion in new securities last week to private holders of maturing debt and got a shock. It had hoped to persuade most of the holders of maturing issues, bearing 1 7/8% and 2 1/2% interest rates, to trade them in for new Government securities paying 3 3/4% and 4%. Instead, owners of more than 20% of the old issues demanded to be paid off in cash, the biggest such demand in six months. To help make up the difference, the Treasury must go to the public this week with a $1.5 billion emergency issue.

The failure of the latest debt "rollover" attempt was a fresh sign of softness in the Government bond market--and of the size of Secretary of the Treasury Robert Anderson's task of refinancing $42 billion of Government securities falling due this year. At a time when most investors want to buy stocks, real estate or other things as a hedge against inflation, Anderson is finding the public increasingly uninterested in bonds. Furthermore, Wall Streeters thought he had made a mistake in trying to sell securities with one year as the shortest maturity. At a time when investors were trying to figure how high interest rates might go, too many of them did not want to tie up their cash for a year.

Anderson's troubles began last spring when it became clear that the Treasury would have to raise up to $12 billion to cover the Government's deficit for this fiscal year. But they did not become acute until summer. Then Government bonds, which had been providing speculators with fat profits as they rose while interest rates fell (TIME. Aug. 18), went into a slump when interest rates began to climb again with the economic recovery. As bond prices slid, their yields rose. Secretary Anderson found himself in a vicious circle; to sell his securities he had to keep edging up the interest rate. Yet every time he floated a new issue at a higher rate, prices of older issues edged down, making it necessary to put a higher rate on his next offering.

His job was not made any easier by the Federal Reserve Board. The F R B has tried to ease credit to help the recovery without making it so easy that the boom gets out of hand and brings another puff of inflation. Although both Anderson and the F R B cooperate closely to try to keep the economy stable, they necessarily work at cross-purposes. If the F R B eases credit enough to stop the interest rise, it makes Anderson's job easier. But if this happens, it makes its own job of controlling inflation harder.

The increasing difficulty of raising money to finance the deficit is one of the reasons Anderson and President Eisenhower are battling so hard to balance the budget. A still larger question revolves around the growth of the U.S. economy (see U.S. Expansion). Nevertheless, if interest rates keep edging up, Anderson's problem will only get worse. The Treasury is approaching the maximum interest rate of 4 1/4% set by Congress back in 1918. Before Secretary Anderson can pay more, he will have to ask Congress to raise the rate. Then the choice will be up to Congress either to raise the rate--and make money more expensive for everyone--or to cut spending.

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