The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1935-09-04

Dearth of Bids on
u. S. Issue Seems
OveremphaSized.
by VINCENT LYONS
Times Financial Editor
attempting

WITHOUT attempting to
w deprecate the news-worthi-
ness Of the story. it does appear
that the viewers with alarm"
placed entirely too much emphasis
last week upon The fact that the
United States Treasury failed TO
receive sufficient bids TO take up
500 900 600 Of Federal Farm Mort
gage Corp. bonds which had been
offered for sale.
The episode proves that while
Federal bonds are accorded an
AAA rating by investors they also
are subject to the same influences
as obligations less highly regarded.
When conditions are prOpitiOus
bond fiOtations can be arranged at
attractive terms for the borrower.
but When things are not so good
the reception viii be less favorable.
This set of circumstances applies
in the case Of all other bonds so
there is no reason to feel alarmed
when the same rule is at work in
regard to government loans.
The government bond market
was not ripe when the FFAIC issue
was placed on sale. The entire list
Of Federal bonds had been weak
for about 10 days prior to the for
NAL Offering and some of the
lOWer-cOupon issues had fallen
below par. Secretary Of the Treas
ury Morgenthaus calmness in the
face Of the dearth of bids undOubt-
edly was due to his realization that
there was no necessity for crying
over spilled milk.
IT is automatic in financial circles
i that a new issue Of bonds should
not be offered TO the public in a
declining market. Underwriters of
private bond flotations would
rather wait a few days for a re-
Ccptive market than attempt to
sell any stable issue when values
are on the downgrade. In view of
this, some people are questioning
Secretary Morgenthau's wisdom in
putting on sale the 500 10000 of
FFMC bonds at a time when the
government bond was experiencing
a Shake-out.
Then, too. the FFNIC issue was
offered on an auction" basis; that
is, no set offering price was estab-
hshcd on the bonds. the issue 60
ing to those persons or institutions
which submitted the highest bids.
It is common knowledge that this
system of selling bonds has proven
% be decidedly unpopular with
banking institutions and other
large buyers OF government secur-
tiles
AS a matter of fact the use of
the auction" method undoubtedly
provoked the situation which de-
veloped. In the preceding flotations
arranged in this manner Mr.. Nor
genthau drew substantial prem
iums. so it is quite likely thai some
of the big buyers adopted the fol-
lowing reasoning in regard to the
FFAIC bonds: i believe the bonds,
based on the present market. are
worth about 98 But what's the use
OF submitting a bid substantially
under par when some of the little
fellows Will pay close to par
CONSEQUENTLY. if this rea-
~ soning were followed through
1t would produce Just the re-
suit which did come about. The
SIS. 592 600 of bonds taken up by
investors were on bids ranging
from par down to 90. If the en-
tire issue had been publicly Of
fered at a fiat price of % by the
Treasury, it is probable that the
tenders would have exceeded
100000 600 by quite a margin.
Thus. those persons who look
upon the entire episode as ndi-
eating the impairment of govern
ment credit are a bit preSumptiOus.
Government bond dealers refuse to
look upon the auction" system as
affOrding the best available test OF
the market when it draws large
premiums for the Treasury. By
the same token, then it should not
be thought that the best test has
been made when the same system
causes a paucity of bids on GER
tain issue; an issue, incidentally.
which was out of line with the
market at the time it was Of
fered.
True. the entire episode is an
unwhOlesome development, but in
all likelihood it will prove to be
temporary thing. 1t is far and
away less serious than the situa-
ton that prevailed in the first
month of 1884. when government
bonds were being sold short by
traders.
TINE JeremiahS who lamented
the seeming blow to the gov
ernmentS credit by the FFMC
event never had to swallow their
words quicker. For today Secre-