STATE OF BUSINESS: The New Bonds

The Eisenhower Administration this week took its first major step to reverse the New Deal-Fair Deal “cheap money” policies and put the national debt on a sounder, long-term basis. On sale went a new issue of government bonds, with the highest interest rate (3¼%) since 1933, and the longest-term maturity (30 years) since the beginning of World War II. It was also the first long-term issue in 20 years to be floated in an “unpegged” market, i.e., the Federal Reserve is not committed to support the bonds at any fixed price. With the new $2 billion issue, Treasury Secretary George M. Humphrey hopes to raise $1 billion in cash — his first venture into the new-money market—and refund a like amount of shorter-term savings bonds due in the next few months.

On news of the issue, the U.S. bond market, which has been sagging for weeks, sagged some more. Many a bond issued in the past with an interest rate of 2½% or less looked less attractive when stacked up against the new 3¼% rate. Thus, the lower price of old bonds brought their interest yield more in line with the higher rates of the new bonds. Last week victory-loan bonds, issued at a 2½% interest rate in 1941, dipped half a point to 93 9/10, v. their issue price of 100, giving them a yield of about 3%.

The Treasury’s new long-term issue was designed to 1) help relieve the U.S. of its constant sorties into the money market to refund short-term issues, and 2) provide a safeguard against more inflation by boosting loan rates all around and by tapping savings as they accumulate in life-insurance companies, pension funds and savings banks. The new bonds would also probably tap some money that would normally go into the stock market.

In any case, the business of “stretching out” the $264 billion national debt, now 75% concentrated in issues maturing in five years or less, will be a long and difficult job. Nine weeks ago, Secretary Humphrey offered investors a choice of fiveyear, ten-month, 2½% bonds or short-term notes in exchange for $3.8 billion of maturing certificates (TIME, Feb. 9). The certificate holders took only $619 million worth of the longer-term issue. But as the bonds went on sale this week, it looked like a quick sellout.