Bonds in Disarray

An arcane and specialized corner of Wall Street, the bond market is usually a place where corporations can count on raising enormous sums of money --$12 billion in just the first three months of this year--with little fuss. But recently the market has been anything but placid. Prices have been dropping so fast, interest rates rising so rapidly and bonds going unsold in such numbers that some veteran traders say that the market is "in disarray."

Barely a month ago, interest rates on high-quality industrial bonds averaged 8.45%; two weeks ago they were at 9.1% and now they are between 9% and 10%. Because of such market instability, major corporations have postponed at least seven big issues in the past two weeks. The latest: $300 million in Texaco bonds, withdrawn from the market last Wednesday. Market analysts had expected companies to raise $5.5 billion by selling new bond issues in April; now they think that the total may be as low as $3.2 billion. Underwriters, who buy newly issued bonds from companies and resell them to the public, have had to unload some at profitless prices. Complains J. Perry Ruddick, senior vice president of Manhattan's Smith Barney & Co.: "All of a sudden, every time you bought, you were wrong."

Partly, the troubles were a result of simple market congestion brought on by a mistiming of bond sales by corporate treasurers. Many had scheduled spring issues to raise money that their companies would not really need until later, in hopes of getting their cash before the Government began heavy competitive borrowings to finance the superdeficits expected this fiscal year and next. But the Government, which had been steadily revising its borrowing estimates, last week announced that it would invade the capital markets for $17.5 billion--far more than had been expected--between now and June 30.

An even more important reason for the market break is investor worry over the possible consequences if the federal budget deficit for fiscal 1976 does soar above $70 billion or so--a concern given far more substance by President Ford's signing of the tax cut and Treasury Secretary William Simon's lugubrious talk. Many investors fear an overstimulation of the economy that would re-ignite inflation, kite up interest rates and set off a damaging competition for funds between the Government and private borrowers. In that case, they believe, there might not be enough money to meet both federal and corporate demands and to fuel economic recovery. Beset by such doubts, many investors decided not to buy bonds for a while, just as corporations were lining up to sell them.

Passing Storm. It is possible, though, that the current difficulties will prove to be only a passing storm. If recovery from the recession proceeds gradually, with little renewed inflationary pressure, and the deficit is held within manageable limits, bond interest rates should rise slowly to levels only slightly higher than now and new issues should be readily marketable. In any case, the recent tempest does not yet seriously threaten industry's ability to raise the funds it needs for expansion, modernization and paying off of short-term debt.

Some corporations that are now putting off bond issues can do without the money for a while; those that cannot have other ways in which to raise it. Banks have ample funds to make short-term loans. Corporations are borrowing many millions of dollars through private placements--direct sales of bonds to life insurance companies and other institutional investors. But the bond-market break is a disquieting sample of what can happen if inflation does re-ignite and the budget deficit gets out of hand.

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