Free Riders Derailed

In Wall Street jargon, a "free rider'' in Government bonds is a speculator who buys into a new issue of Governments--often on margins as low as 5%--and hopes they will rise a point so that he can get out with a quick killing. The big advantage is that he can put up only $5,000 to get $100,000 worth of bonds; if the bonds advance a point--as they often do shortly after issue--the free rider can sell at a profit of $1,000. The danger is that the bonds also can go down. Last week the Government bond market suffered its worst beating of the year, and many of the joyriders were derailed with heavy losses.

The biggest break came in the new 2 5/8% interest bonds which came out fortnight ago (TIME, June 23). Many Wall Streeters touted the bonds as sure to rise, as other recent Government issues have risen. Demand was so great that New York City banks' loans to brokers against Government obligations (which helped the brokers to carry the thinly margined speculators) hit a twelve-year high of $1,357,000,000. Just after the bonds came out, they hit 100 1/2. But by last week the bonds had skidded a full point to 99 1/2, due largely to rumors that the Federal Reserve Board was ready to reimpose a tight-money policy, which would boost other interest rates and make the 2 5/8% Governments unattractive. In a panic, the free riders unloaded.

After the shake-out of the speculators, the bonds hardened a bit. Reason for the rise was the announcement that the Federal Reserve Board had just bought the year's high of $269 million worth of Government securities, which pumped more lending power into the banking system. That assured Wall Streeters that the Fed had no intention--at least for the time--of reversing its easy-money policy.

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