Evening star., 1926-04-04
FOREIGN BOND DROP
FEATURE OF WEEK
Strictly High-grade Issues
Little Hurt by Stock Price
Fluctuations.
RY GEORGE r. HUGHES.

SPECIAL llSIdttIi W u hC
NEW YORK. April 3.-The sharI
decline in the market quotation foi
foreign bonds was without a doubt
the most important development OF
The week in the investment market.
Thpee explanations are possible foI
the decline, probably all of them re
sponsible> in greater or less degree
%hese are, first, the break in the stock
market, which had a sympathetic in
fluence upon all speculative and semi
speculative securities; second, the
slumn in French and Belgian eX
change, rejecting the financial confu
sion in France and the growing un
certainty about Belgian affairs, and
third, the discussion in the Senate
over the italian war debt funding, ac
companied, as it was, by predictions
that American loans to former bellig
erent European powers would never
be repaid.
Under the influence of this com
bination of adverse developments, the
average price of foreign dollar bonds
listed on the New York Stock EX-
change fell to n new low for the year.
French and Belgian bonds were af'
fected the most seriously. but other
European obligations and those OF
countries the finances of which are In
comparatively good condition went
down with the French. The selling
even spread to some of the South
American obligations, although here
losses were very slight. Part of the
decline all along the line was regalned
az the weeks close, when the French
situation frightened and the success
of new South American Offering or
Ihe better type showed that investors
were regaining some sense of diScrlm-
3nation.
Nevertheless, it was a trying week
for those who have advocated foreign
Investments.
Three Causes of Sentiment.
Now as to the three causes for the
Gnfavorable sentiment:
Such a violent reaction as the stock
parket experienced always brings
Sbout a certain amount of liquidation
IN other speculative markets, but
such sympathetic reaction is always
only temporary. AS to the prediction
that most OF these foreign loans will
never be repaid. if by that is meant
that they will be refunded, it is prob
ably correct in many instances. That
is what happens with the funded
debts of perfectly solvent railroads
and public utilities. There is nothing
. very alarming about the corporation
making a new loan, the proceeds of
which are to be used to pay off an
old bond issue.
Most economists believe that
America will have to continue to
make fresh credit extensions in one
form or another to Europe for gen
erationS to come, but that is no rea-
son for pessimism about all outstand-
ing foreign loans. Nor must the
strong sinking fund provision by
which so many of these foreign loans
are protected be forgotten. As long
as these provisions are observed-and
SO far there has been no default in
this espect-foreign bonds have one
strong element in their favor.
Finally, whenever the indentureS
permit the nations of Northern Eu-
rope are calling in their high-rate
coupon bonds and replacing them
with moneys borrowed at home at a
much lower rate.
This brings it down to a discussion
OF conditions in France and in those
European countries where budgets
are stin to be balanced. and where
the difficulties of a return to the gold
standard are very great. The trench
Chamber finally has voted new taxes,
which are said to be sufficient to bal
ance the budget. But collection OF
these taxes still is far off, and there
is still a question whether the French
people will renew their subscriptions
TO the maturing short-term bonds.
1t is not without significance that
Il was this week for the first time that
E'rencI bonds were materially dis
turbed Ay the continued fall in the
franc.
In the domestic investment market
stock fluctuations were an influence in
the speculative and semi-speculative
section Of the list, but had very little
effect upon the strictly high grade
bonds. There is no reason to change
The view hitherto expressed in this
: correspondence that the long term
trend for gilt edge investments is up
ward Distrust Of stocks induced by
recent performances in that market
is pretty sure to turn the attention of
investors more and more to bonds.
We are not likely to hear so much
about the superiority of common
stocks to bonds as we have in the past
six months. The better grade of pre-
farred stocks will be helped, too, by
The new-found conservatism.
Common Stock Suggestion.
IT is rather curious that this change
sn investment fashion should develop
Just when the Interstate Commerce
Commission is pointing out to the rail
ways the advantages of financing on
common, stock instead of adding to
bonded Indebtedness.
The carriers have long been looking
forward to the time when they could
meet their needs for new money with
tha sale of capital stock. A few of
them have now reached that goal, but
seem to need to be reminded of the
fact by an outside authority.
1t goes without saying that the
capital structure of the railroad will
be improved by the sale of stock in
stead of bonds. That kind of financ.
ing VIII also improve the status of the
bonds already outstanding. If we ac-
cept the theory that tendency to-
ward lower commodity prices will in.
crease the demand for high grade |
bonds, the particular issues most
sought after will be those of which
the most outstanding is not likely to
be increased indefinitely or liable to
redemption.
The financial institutions are
already looking for just that type of |
band. ana are absorbing them as fast
as they come into the market. 1t will |
shortly be the turn of the individual |
investor TO go a-shopping on his own
account for this same kind of goods.