Evening star., 1935-01-13
Government Issues Buoyant
Despite Budget Calling
for Larger Deficits. /
new HIGHS REACHED !:
BY MUNICIPAL BONDS
Market Termed Artificial VIII
Treasury Supporting Prices. /
Outlook Confused. 1
BY CHARLES r. SPEARE.

oAAoSAh6 SVAAl1iOA bAAat SUhl1iO4Ito Otic
today in the investment market. Be-
cause it is so closely tied in with the
business and political affairs Of the
world, it is unique and puzzling in It's
outcome. 1t is not peculiar to the
United States. It has its counter
part in Canada and In most Of the
financial centers Of Europe.
Take as an illustration the reaction
Of the bond market this week to the
budget message Of President Roose-
velt. This was full of terror to those
who predicate most Of their fears f2r
the future on an unbalanced national
budget and its supposed sequel, clf-
rency imitation. It proposed more
and larger deficits and outstanding
Treasury obligations In the coming
fiscal year 100 per cent greater than
in 1891.
Apparently people did not get Is
excited over the budget as they had
the year previous, when similar r.
quests for huge expeditures were
made. Government bonds closed
higher Monday, when the budget
message was delivered, and have since
been fairly buoyant at times. New
high prices have likewise been es-
tablished in municipal issues, now
equal to those Of 1901. The State
Of New Jersey borrows at the lowest
rate Of interest in her history.
Canadian loans sell on close to . 3
per cent basis, an unheard-of event.
Corporation bonds pass the quota
tions Of last year. The lower grade
mortgages and debentures join In the
general upward movement.
Two Of the remaining Federal Re-
serve Districts on 3 per cent dis
count basis drop down to az per
cent and for one Of the few times
since the system was established there
is an almost standard rate Of interest
and an unprecedented low rate Of in-
terest over the entire country. The
minimum rate, Of course. is that of the
New York bank, which Is III per
cent.
Advance Held Unorthodox.
The strange feature Of buoyancy in
bonds is its opposition to all accepted
! theories Of how money should be en-
ployed when Government funds ap-
pear to be extravagantly disbursed
and rapid dilution Of the Govern
ment bond market is taking place.
In his message to Congress last week,
you now they public expenditures)
will be within the sound credit Of the
Government" In other words, the
volume Of Treasury loans will be held
within the limits Of ability to pay
l them at maturity and, meanwhile,
properly service them. But how can
! one determine where the point Of re-
sistance is to show itself, or when, by
the index Of market quotations, 1t
becomes evident that the banks have
had their fill of Government paper
and the public will cease to buy?
In a normal and unartiflcial situa-
tion the exposure Of weakness would
! come through the medium Of the
market. But it is not a natural con-
dition that men, supposed to sense
the trend Of markets, now have to
deal with. In the first place, the
Treasury Is known to be supporting
its issues. Some call 1t rigging" It
Is hardly that; q government work.
ing in the interest of all the people
has an obligation to maintain Sc
curity for these people, and the Con-
greSS has given the Executive author
ity to provide stability.
However. it must be admitted that
the Government bond market today
Is not q natural one, and that the
average price Of Treasury loans does
not represent the true idea of what
money should be worth on the strict
application Of the law Of supply and
demand. The Federal Reserve banks
and the various financial agencies of
the Government already own over
$4,000 100000 of Treasury paper and
are likely to have more. Eventually
notifications or amendments to the
banking act will be made. expanding
the range Of privilege Of the Fed
eral Reserve banks until they may
purchase at par an unlimited amount
Of Treasury paper.
Credit Supply Climbs.
The relation of the current invest
ment market to the business and poll
tics Of the world Is this: Owing to
deep disturbance to the economic and
social systems of this country and
Europe, business Is marking time.
Meanwhile, credit to stimulate busi-
ness Is being created on q lavish scale.
But it does not stimulate because con-
fldence is lacking. without an outlet
IN internal or international trade, this
credit seeks investment. Aside from
Government issues, new securities are
scarce. Demand is concentrated on
an abnormally small supply. Result
higher and higher prices.
This situation has been Unexpectedly
aggravated by the arguments In the
gold clause cases before the United
States Supreme Court, and from the
questioning Of the Government rep
resentatives by the court the implica.
tion has been given Wall Street that
debtors will be held to their contracts.
AL Government bonds and the gold
debenture bonds Of corporations have
been very strong this week.
There Is no present sign that this
situation will change. Consequently
prices, relatively as high for prime in
vestment securities as for common
stocks in 1929, seem bound to 60 high.
er. Gradually greater risks with cap
ital will be taken In order TO gain q
larger return on capital. From this
stage Of investment In Junior mort
cages, the now Of capital must in
evitably go into common stocks. The
change In the current will be hastened
or retarded by the degree Of business
recovery that attends the proposed
plan for increasing opportunities for
work among the unemployed.