Evening star., 1936-12-31
HOLDERS PLAGUED
BY Low YIELDS
Threat of Higher Interest
Rates Fails to Curb
Strong Demand.
BY AARON M. JONES,
Cambridge Associates STAFF.

Cambridge Associates STAN.
It is hardly possible to characterize
1887 in the market as anything but a
boom" year. High-grade corporate,
municipal and Government obliga-
tions which seemed at dizzy heights
at the end of 1885 have proved in their
persistent upward movement through
1886 that supply and demand alone,
and not the precedent Of history, are
the determining factors in fixing min
imum price levels.
Today individual and institutional
buyers, loaded with funds, though
worried about the high level of bond
prices, are nevertheless competing
with each other for allotmentS of
bonds affording only nominal yields
on short-term issues, and hardly 3 per
cent on prime long-term obligations.
OF course, all borrowers, with even
q fair credit standing, have in 1886
had their field day Bonds have been
called and refunded at savings up to
SO per cent to the borrower. Bond
holders are suffering from income NAL
nutrition though their portfolio mar
ket values are the fattest in history.
Opportunities Remain.
In the lower grades of bond listings,
on the other hand, there were in 1896,
and there still appear to remain for
the future, opportunities for reason
ably secure commitments at good re-
turns with some promise Of principal
enhancement. In the railroad, indus
trial and utility groups of medium
grade issues, careful buying is likely
to continue to be rewarded, providing
the general trend toward business i'm
provement persists in 1887, as is now
anticipated.
But the purchaser Of high-grade,
iong-term, low-coupon bonds at pres
ent levels is hardly in an enviable po-
sition, even though there is no nearby
prospect that his position will be i'm
paired materially.
Looking beyond the immediate fu-
ture, and ignoring the expressed de-
termination OF the national admins
tration to maintain cheap money and
low interest rates. one can safely as
sert that the present yields on long
term bonds are far lower than those
formerly prevailing over long periods
Of our business and national history,
and that therefore We may expect
interest rates in the longer future to
more normal levels prevailing in the
past.
Illustration Given.
To illustrate: If a high-grade bond
now selling at 101, to yield 81 per
cent, bearing a 3A per cent coupon
and maturing 80 years hence, were 70
afford a return of about AZ per cent,
as it did In 1929, it would have to
decline into the low 80s in price. All
this without any change in the rating
or security of the issue in question.
Indeed, assuming prosperity ahead, it
is possible to envisage a paradox
whereby the intrinsic values-earn-
ings, assets, etc.-behind high-grade,
long-term bonds greatly increase, yet
those bonds decline materially in mar
ket value.
Nor Is this threat Of higher interest
rates over q term of years the only
threat to holders Of premium high
grade, long-term bonds today. Even
If present dollar prices for high-grade
bonds are maintained, rising price
level, whether the results of normal
prosperity forces or deliberate infla-
tionary tinkering, will effectively re-
duce the real value of high-grade
bonds under these future conditions.
There is small consolation in having
the same number Of high-grade bond
dollars five years from now if in the
interim those dollars have lost a con-
siderable portion of their present buy
ing power in terms of the essentials
of life-ood, clothing and shelter. AS
Thomas F. Woodlock summed up the
situation recently: Either we shall
have q continuation of recovery in
business, which means rising commod-
ity prices and higher interest rates
Oower bond prices), or we shall not
have recovery, in which case low in
terest rates (high bond prices) will
continue"