Money-Market Thaw

The spring thaw in interest rates last week showed signs of turning into a freshet of easier money. For the third week in a row, the average yield of 91-day Treasury bills dropped sharply, hit 3.03%, lowest since the 2.87% yield last May 25, and well below the record 4.67% just before Christmas. Other short-and long-term rates were also well down from their peaks.

"The market rates are forecasting a downturn in business, but this pessimism is unwarranted," said Norris Johnson, vice president of the First National City Bank of New York. Ralph Leach, vice president and treasurer of Morgan Guaranty Trust Co., agreed. Said he: "I don't look for a downturn. If everything isn't going through the ceiling, people think business is lousy. This is nonsense. We're in gorgeous shape as far as the overall outlook for the year is concerned." Actually, the easing credit was one reason for optimism. Most economists think that the current dip is only temporary. The drop was caused chiefly by record corporate earnings and slower-than-expected inventory accumulation, which have increased the cash supply of corporations for short-term investments.

This, in turn, has affected the long-term Government and corporate bond market, where prices have risen to bring down yields (see chart). As bond yields have dropped, stock yields have risen because of the decline in the market. The reverse spread between stock and bond yields (5.39% for bonds v. 3.42% for industrials) is the closest it has been since early June last year.

The thaw will make it easier for the Government to raise money. But it has just about killed the hopes of Treasury Secretary Robert Anderson to end the 4 1/4% interest ceiling on long-term Government bonds. His stand--that interest rates were so high that the Government could not sell any long-term issues--was undercut by the slide in rates, which has dropped yields on Government bonds until many are selling at around 4%. Thus Anderson, who must raise between $2 billion and $2.5 billion in new money in the next few weeks, is expected to try to raise some of it in long-term bonds, lest the Democrats who opposed ending the ceiling criticize him for not trying.

If the issue succeeds, any chance of eliminating the 4 1/4% ceiling will be over for this session of Congress, even though the House Ways & Means Committee has already approved a compromise bill (TIME, March 7). If rates edge up again, as expected, Bob Anderson will once more be plagued by the same troubles that have made the job of selling Government issues so difficult for the past year.

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