Rally in Bonds

For more than two years Wall Street's bond market has been sagging like a sick puppy. But last week U.S. Government bonds snapped back for the most hopeful sign of recovery in bond prices since late 1954. Long-term Government bonds scored the largest single day's advance since June 1953, shot up as much as if points during the week, a healthy gain for gilt-edge securities. Encouraged by that sharp rise, trading picked up swiftly in both corporate and municipal bonds. New issues moved quickly into investment portfolios, and many municipal bonds sold out completely.

For Wall Street bond dealers the upturn ended, at least temporarily, one of the worst periods in bond-market history. Though bonds have never been an investment favorite because of their fixed interest rates, the big bull market had made them particularly unattractive. As stocks have upped dividend payments, the bond market has gone down.

Even when the big rise in stocks cut their yields--and the tight money policy started interest rates up--the bond market did not recover; it was swamped as corporation after corporation, cut off from long-term loans by tight money, floated bonds to pay for their enormous expansion. In 1956 a record 1,843 new bond issues worth $12.3 billion were floated. Since most of the new issues were forced to offer higher interest rates to attract investors, prices of older, less profitable bonds dropped. Thus the average price of all listed domestic bonds on the New York Stock Exchange tumbled from 97.37 in December 1955 to 92.42 at the end of November 1956, and their market value dropped sharply to more than $9 billion below face value (compared to about $3 billion below in 1955).

Tax-Free Headache. Of the 656 corporate domestic bond issues traded on the New York Stock Exchange in 1956, only 44 showed price rises for the year. Among them: Bethlehem Steel (up 30 1/8), Southern Natural Gas (up 16 1/2), Detroit Edison (up 11), General Dynamics (up 8 3/8). Tax-free municipals were even more of a headache. In 1956 alone, $5.4 billion in tax-exempt bonds were floated, bringing the total municipal debt to nearly $50 billion. This flood of issues, competing for an already restricted money supply, forced the market down further.

The Government's tight-money policy also hit Government bonds themselves. Many banks sold off low-interest, long-term Treasury obligations to get more money to lend at higher rates. In addition, the Government has had a hard time selling its low-interest savings bonds at a time when other interest rates were climbing. In 1956 the Government sold $5 billion in E and H bonds, a big $600 million drop below estimated sales. What was worse, the public has flocked to cash in its savings bonds. In the first two weeks of 1957 the value of bonds cashed in actually topped sales by more than $450 million.

Bottom & Peak. As bond prices dropped, the big mystery was: Why did investors fail to take advantage of the bargains? Yields on the Dow-Jones average of 40 bonds rose to 4.30%, close to the yield of 4.53% on the blue-chip stocks. Yet until last week the shift toward bonds was remarkably slow, apparently because many investors were waiting for bond prices to drop even further.

The market finally rallied, say bond men, because investors decided that the bond market has reached bottom and the credit pinch its peak. Many bond dealers believe that the tight-money policy, by forcing marginal borrowers out of the market, is now increasing the supply of available investment capital. Others think that the present rally is seasonal, but that credit will ease later in the year; thus nudging bond prices higher as other interest rates slip. In any case, to customers who had been waiting for the best time to buy brokers were saying: buy now.

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