Evening star., 1939-01-01
Doubtful Profit Seen
For Bond Investors
In Last Year
Low Yields and Slump
In Rails Destroy
Investment Sofety
BY AARON NJ. JONES,
Camhridpe ASsnciafeS 9toH


In the good old days before 1929
1t used to be possible for financial
commentators to analyze the trend
of senior security prices by refer
ence to some such well-knoWn "av-
erage" of bond prices as the Dow
Jones 40 bonds. Today, however,
and indeed for the last eight years,
the bond market can only be con-
sidered as a marekt for bonds-good,
bad or indifferent.
Thus In 1898, although the closing
months of the year saw all-time
new high prices for Government,
municipal and high-grade utility
and industrial bonds, the average in
vestor would probably have to admit
at the end of 1888 that he would
be considerably better off right now
If every bond in his portfolio had
been sold out year ago and placed
in a savings institution at 21a per
cent. Particularly was this true
of railroad bonds in practically every
quality classification.
In the spring of 1887 many in
vestors, even those of the profess
sional and institutional type, were
buying junior railroad bonds in the
90s. Although they were aware of
the fact that these bonds were Sec
ond grade and had f1uctuated widely
in the past, it nevertheless appeared
to them in 1886 and 1887 that the
intermediate outlook for the rail-
roads was favorable and the bonds
could be disposed of at a profit
before the next downturn in the
cycle developed.
"Gilt-Edged Insecurity"
Early in 1888. and indeed even in
the latter part, any of these same in
vestors were wondering whether they
should sell railroad bonds in the
30s. 40s and sos. Again it has
been brought home only too clearly
that the supposed security of bond
is often nothing but "gilt-edged in
security Only by buying the high
est-grade Government or corporate
bond in 1887 and 1888 could the
investor in senior securities have
enjoyed the security which he nat
urally seeks in holding fixed-income-
bearing issues in his portfolio.
Sadly disillusioned by the per-
formance of second-grade bonds
particularly in the railroad field
during 1887 and early 1893, in
vestorS consistently SHE'D away from
cheap or bargain bonds and
competed continuously with one an
other for the privilege of paying
near alltime high prices for Gov
ernment and corporate obligations
which to them seemed safe. 1t was a
case Of high-priced bonds pushing
up and priced bonds going
nowhere on the upside, even during
periods of substantial advances in
equity security prices.
Convertibles Score Gains.
Probably the best experience OF
1888 in the bond market, outside
of very high-grade bonds, came to
the holder or buyer of convertible
industrial bonds. which in line with
substantial advances in their COM
panies' common stocks scored very
satisfactory gains in 1885, The holder
of senior utility bonds, too. had a
far better relative experience than
did the holder of railroad senior
securities, due not so much to basic
solution of the political aspect of
the utilities problem as to the re-
markable improvement in kilowatt
hour outlook and the relatively
steady earning power of subsidiary
operating properties.
Perhaps year from now it will
be necessary to record again that
high-grade bonds of long maturities
continue to advance because of the
competition for any kind of a re-
turn on the part of institutions
banks and other seekers after sound
credit risks. Perhaps 1899 will be
another year of disappointment to
the holder of railroad bonds. Never
theless it would not be at all sur
prising, assuming a reasonable ex-
tension of the business recovery in
that year, to find that carefully
selected second-grade railroad, util-
ity and industrial bonds would show
a fair performance from present rel
atively low levels. Neither would 1t
be surprising if the fears of those
who have long wondered at the ease
with which prices for prime bonds
are maintained at all-time high
levels may be realized in the be-
ginning of the downtrend in long
term bonds.