Evening star., 1948-01-04
wall Street Startled
|By Lowering Of Pegs
For Federal Bonds
By WilIiom D. Horeon
AssoeIoted Press Finoneiol Writer.

struggle over the cost of money
reached a dramatic climax late this
year when the Federal Reserve
System startled the New York
money market by lowering its sup
port prices for United States Gov
ernment bonds.
This action was preceded by q
long decline in prices not only in
Federal bonds, but top-grade and
more speculative corporate issues
as well. AS prices went down, the
yield, or rate Of return went up.
At the close of the year, the As
sociated Press average Of 10 repre-
sentative low-yield bonds ISSUES of
companies which can, because of
their high credit standing, borrow
money at the lowest rate possible)
stood at 1863, the lowest since 1899.
This compared with a 1s47 high OF
1l6.5 and a 1916 high of 1902.
Situation Is Reversed.
Early In the year the Federal
Reserve found it necessary to sell
long-term Government issues to
keep prices from rising. But by
November the reversal in trend had
gone so far that the system stepped
in to stabilize the market.
The extent of the decline could
be measured by the change in yield
on the key Victory Loan 2hs of
1967-1972. At the top price of the
year, this issue sold high enough
to yield around 225 per cent. AT
the systems newest peg Of 1907
the yield increased to 248 per cent.
The systems revision of the No.
vember pegs carried with it various
connotations to the financial dis
trict. It was viewed as a tacit
admission by the Treasury, working
hand in glove with the Reserve
System, that the earning power Of
money-the interest rate-had been
too low. This admission, of course,
corroborated the opinions of in
vestors who turned thumbs down on
new issues of corporate securities
which carried a yield Of around 2.60
per cent and forced underwriters to
mark down prices to where the yield
was around per cent.
On the other hand the system let
it be known that there was no in
tention of varying the now tradi-
tional rate of az per cent for long
term money. In other words,
Treasury bonds would not be al
lowed to crack par. This position
was verbally strengthened by earlier
strong statements to that effect by
the chairman of the system. Mar
riner S. Eccles, and Secretary Of the
Treasury Snyder.
Assurance Inferred.
Another facet Of the revision was
the inferred assurance to the bank
ing system to stop worrying over the
possibility that they might incur
huge losses by finding Government
bonds quoted at 80 or 95.
Decisive evidence that the banks
paid any attention to this oblique
promise was lacking at the turn of
the year. The Government bond
market first learned OF. the new
Treasury policy on the day before
Christmas. Shortly thereafter the
system purchased millions Of dollars
worth of Governments to support
prices, but in dealings in the last
day of the year, buying from sources
other than the Federal made its ap-
pearance for the first time on any
appreciable scale. This buying. how
ever, was confined principally to
shorter term issues.
The strategy behind the new Fed
.eral policy was but one prong OF
q many-sided offensive planned as
q counterinhationary thrust. The
ultimate aim of the program was
to maintain continuous pressure
against the reserve position of mem
Der banks and thus operate to con-
tract the banking systems credit
base.
BY inducing banks. for instance,
to hold on to their investments of
long-term Government issues, the
banks would be less willing to ex-
tend further the record volume Of
outstanding loans to business, in
dustry and agriculture.
COrollary Method Used.
This same objective was evidently
to be sought by a corollary method.
Mr.. Eccles recently announced that
the rediscount rate would be in
creased in the not too distant future.
That would raise the charge the
Federal Reserve makes on loans to
member banks and again tend to-
or at least that is the theory
dampen further commercial lending.
1t was suggested by some Wall
Streeters that the Treasury and
Federal Reserve had maneuvered
themselves into difficult position.
If the banks refused to take the hint
and continue to sell their long-term
bonds, the effect could be directly
the opposite OF that intended. The
Federal Reserve by purchasing
these bonds as it is pledged to do,
would be adding to inf1ationary
forces by thus supplying banks with
additional funds for lending.
On the other hand, the banks
might continue to sell their long
terms but use the proceeds to
achieve a high degree of hquidity
by buying short-term Governments.
The rate on one-year paper will be