Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-10-18
BANK RATE RAISE
DEPRESSES BONDS
Government Issues Bear
Brunt of Selling During
the Last Week.
Dispatch to The Star.

Special DlSpdlCu 10 Inc StdT.
NEW YORK, October IA second
successive increase in the New York
Federal Reserve Banks rediScount rate
this week started a series Of bond mar
ket session unparalleled in modern in
vestment history.
United States Government bonds,
long the acme Of security to the Amer
lean investor, had the swiftest decline
in the memory of traders. Declines o:
2 to points, which are usually asso-
cited with speculative stocks or junior
bones, took place in the long-term Lib
critics and Treasures. and on one day
Friday. there were losses ranging from
l to over points. Treasury bills and
certificates. which as recently as six
weeks ago were selling at price yield
ing less than one-half of l per cent per
annum, sold at prices yielding $50 per
cent
Even though the advance of per
cent in the rediscount rate. only a
week after it had been increased the
same amount, represented drastic
revision of money market conditions,
one must look farther than that to ex-
plain the sharp slump in Government
bonds.
Bank Liquidation.
For months banks have been closing
in many sections of the country and
the aggregate amount Of liquidation tc
be effected in settling their affairs is
enormous. One bond trader estimates
that approximately S1,500,000,000 in
United States Government bonds Fed
eral Land Bank bonds and other Fed
eral securities had to be liquidated for
the account of closed banks, not to
mention other securities.
So long as money rates were low and
the market for Government bonds was
steady. this selling proceeded at a Sc
date pace. those handling it not wish
ing to cause undue unsettlement of the
market. But when the era of cheap
money passed suddenly, as the redis-
count rate rose, time money quotations
firmed and call money deserted the l 2
per cent level to which it had chung
since early in the year, the bank
liquidatorS became anxious lest they
might have to write off substantial
losses on Government bonds in addi-
ton to the heavy depreciation in the
general bond portfolios.
Liberty fourth 4l2s started the move
ment by dropping suddenly from the
195 per cent yield basis, to which the
probability of an early refunding opera
ton had driven them, down close
to par. The first 414s and Treasury
issues were aided in their slide by the
selling of large banks, which, con-
WINGED that the cheap money market
was at an end and that Secretary
Mellon would not be able after all to
refund advantageously any part of the
Liberty loans in 1882. decided that the
Treasury issues would all eventually
drop to approximately "A per cent
yield basis And it was at this level
that the Government list ended the
week.
Other Groups.
In the meantime. however, truer
gauge of how much the advance in rates
had affected the bond market was to
be found in prime municipal, rail equip
ments and high-grade railroad and
public utility bonds. While these de-
clined with Governments. their losses
were narrower. 1t was significant, too,
that the stock market and the specula-
tive bond list rallied strongly.
1t developed that switching move
ment had begun. Some of the most
astute traders in Wall Street were selling
their Government bonds to buy second
grade railroad and industrial bonds and
common stocks where dividends were
still being paid. Hence. Government
issues were suffering from three types
OF selling-forced liquidation by banks
selling by banks which saw the end OF
cheap money and a lower price range
for Governments and selling by specu-
lators either for the purpose of raising
cash to invest in speculative securities
or merely on short sales.
l,t