Nervous Scramble

Apprehensively, New York City Controller Mario Procaccino last week opened the little tin box in which he receives bids on municipal-bond issues and managed to look relieved. Inside lay a bid (which he promptly accepted) for a $119.1 million bundle of tax-exempt bonds with an average 7 1/2-year maturity at an annual interest cost of 4.91%, the highest paid by the city since mid-Depression 1932. It was uncomfortably close to the 5% ceiling beyond which the financially pressed city may not legally borrow at all and would bring the total interest cost of the issue to $43,194,648. Yet the rate, as Procaccino noted, "only reflects what is going on all over the country."

Climbing almost without interruption since July, interest rates on municipal and corporate bonds have pushed back up to--and in many cases above--the levels reached during tie 1966 tight-money squeeze. Last week the rate paid on high-grade corporate bonds advanced to 6.44%, up from 6.10% the week before, and 5.73% a year earlier. Even so, investors have spurned several recent issues, in the expectation that fu ture offerings will carry still juicier rates. Last week a $40 million issue of Carolina Power & Light Co. bonds went 80% unsold by underwriters on the day it came out, despite a 6.375% interest yield, highest for comparably rated securities since the 1870s.

Drag on Stocks. The high cost of money has also begun to drag down the recently ebullient stock market. The impact falls heavily on utility and blue-chip industrial snares because many investors buy them for dividend income and tend to move into bonds when the gap between bond and stock yields widens to an enticing point. Commercial banks are the chief buyers of federal and municipal bonds, but corporate issues attract trust and pension funds, life insurance companies and, when yields are high, individuals. So vast is the U.S. bond market--by far the world's largest--that last year it soaked up 20 times as much new capital as stock issues. So far in 1967, the ratio has been equally high--and total demand higher still. Many analysts insist that something has to give, if only because there is too little investment money around to support both today's level of stock prices and corporations' growing appetite for loans.

Scrambling nervously to replenish their coffers after last year's credit crunch, U.S. corporations floated $11.8 billion of bonds and other debt securities during the first nine months of this year, 50% more than during the comparable period of 1966. The dash for cash shows no sign of slowing. After waiting most of the summer in hope that rates would fall, bellwether Standard Oil (New Jersey) this week plans to sell $250 million of debentures--a move that bond men predict will only spur other companies to accelerate their own borrowing. For the first nine months of the year, state and local borrowing has jumped from $8.5 billion in 1966 to $10.8 billion this year, even though high rates have caused some municipalities to withdraw proposed issues.

Last week the pressures in the U.S. money market led the Bank of England to raise its interest rate from 5 1/2% to 6%, hoping thus to stem a flow of funds toward the U.S. Though the British move steadied the sagging pound, it means that businessmen will have to pay more for loans to finance new plants and that consumers will pay more for installment purchases. Both consequences will tend to slow Britain's recovery from recession. Continental bankers predicted that the British action will lift the cost of short-term borrowing, but voiced guarded confidence that other European central banks will be able to resist retaliating with increases in their own much lower rates (3% in Switzerland and West Germany, 3 1/2% in Italy and France, 4 1/2% in The Netherlands).

Cut & Increase. "The financial community," says Executive Vice President Ralph F. Leach of Manhattan's Morgan Guaranty Trust Co., "needs a strong signal to break the inflationary psychology which dominates its thinking. Seeds of disaster have been sown." Like many other bankers and economists, Leach insists that both federal spending cuts and a tax increase have become "absolutely imperative" to avoid financial chaos. Ordinarily, the Federal Reserve Board would clamp down on credit. But the Treasury's need to finance at least another $5 billion of federal deficit by year's end--and much more in 1968--locks the Reserve Board in the meantime into a policy of monetary ease. So far this year, the board has stuffed banks with enough money to cause a 7% expansion in U.S. money supply and a somewhat more inflationary 11% increase in bank credit. "We don't have the maneuvering room we had last year," admits one Reserve Board governor. While the stalemate drags on between the White House and Congress over taxing and spending, the problem can only grow more acute.

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