Evening star., 1941-01-01
High Grades Strong,
Others Reflect
Stock Trends
Balance Between Low
Yields and Risks
A Difficult Task
BY AARON Nj. JONES,
Cam bridge ASsnciates Staf

In 1929 Andrew Mellon, then Sec
retary of the Treasury, observed to
the press that bonds were a good
buy" 1t was possible at that time
for financial commentators and IN
vestors to grasp this generalization
in terms of an existing reality.
But in these recent years of con-
flict and social upheaval previously
held financial conceptions have been
pretty we'll scrambled. No longer
are we permitted to observe the
bond market" in terms of a single
entity like the well-known Dow
Jones average" Ten years ago the
investor opening his newspaper to
the bond section of the financial
page found most of the daily quo
tations within 5 per cent or 10 per
cent of par. Defaulted bonds and
bonds selling under so were the ex-
ception rather than the rule. The
so-called bond ratings were punched
closely in the A to AAA classical
ton. In 1910, by contrast, bond
quotations on the financial page
have all the varied price range and
complexion of the stock market.
In any intelligent appraisal of the
bond market today, therefore, it
becomes necessary to consider the
various component groups of bonds
in the market rather than the bond
market as whole.
Government Bond ParadoXes.
First in point of Importance and
lowest in point of yield are the tax
exempt obligations of the United
States Government. A diversified
group of maturities for United
States Government bonds today
shows an average WELD of III per
cent to maturity and the price of
the bonds CORRESPONDENCE stands
at an all-time high point. Judged
by the standards of 10 years ago,
the circumstances accompanying
this price and yield position of
United States Government bonds is
wholly incomprehensible.
If any financial expert had been
told in the 1930S that by 1910 the
United States Government would
have shown a deficit of increasing
size each year throughout the To-
year period to 1941, that practically
all of the monetary gold in the
world would have been lodged in
the United States, that major
world war would be engulfing the
world, that bank deposits would
have expanded far above 1929 levels
such an expert would have con-
scientiously forecast that the rate
of interest obtainable on Govern
ment bonds would unquestionably
be at a fairly high level.
Any one who would have dared to
envision such a future and, at the
same time, a yield of less than 2
per cent on long-term Government
bonds, would have been considered
a crackpot soothSayer.
Marvels of Managed Money
This financial marvel has been ac-
complished by the new conception
of managed money" The extern
sion of Federal powers and controls
over the flow of capital and interest
rates has become so complete that
the Government today, being the
only borrower of Importance inso-
lar as new money is concerned, can
practically dictate the rate of in
1ereot it will pay. The Govern
menCs power to levy taxes, further
more, has been an instrument tend
ing to promote a low level of in
terest rate on Government bonds.
These obligations, being tax exempt,
have special attraction to wealthy
individuals whose personal incomes,
if derived from profits or from in
terest on most corporate bonds,
would be greatly reduced by taxa
ton.
Another group of credit obliga-
tions which today are fairly homo
genous are high-grade corporate
bonds-chiefy utilities and indus
trials. Although the income from
these high-grade corporate obliga-
tions is not tax exempt, the search
for safety and the pressure of idle
money has been so great that such
bonds afford the lowest yield in his
tory at the present time, an average
group yield of about 2.52 per cent
10 maturity. The difference of some
81 per cent yield between these and
Government bonds indicates roughly
the value attached to the tax
exemption privilege on the Govern
ment issues.
Risks With Small Profit.
There is another group of bonds,
again mostly in the utility and in
dustrial fields, now selling above par
and returning an average yield of
nearly Az per cent. On eXamina-
ton, however, the record of these
obligations indicates that their
quality rating would be much
closer to medium grade than high
grade. Such bonds in many cases
have in the past sold well below so
and the margin of earnings protec-
ton in the past and at present is
not very great. Although the yield
of nearly Az per cent seems quite
attractive in relation to that obtain
able on Government bonds and high