Money: Creating New Strains

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More than $1.5 billion of debt securities surged onto the nation's financial markets last week, as the effort to borrow before interest rates went even higher turned into a scramble. Many of the new offerings paid interest rates higher than at any time since the 1920s. The Federal National Mortgage Association came in for a controversial $410 million. Cash-short corporations borrowed $226 million through bond issues, and municipalities tapped the market for another $112 million.

High interest sent the biggest issue of all surging back from the market the same day that it was to come on. The New Jersey Turnpike Authority withdrew a scheduled $440 million of income tax-exempt bonds because the only bid from underwriters meant a 4.23% interest rate, quite a bit more than had been expected. The bonds would have financed doubling the six-lane width of the 30 miles of turnpike nearest to New York City.

The New Jersey withdrawal was a significant sign that scarcer and costlier money-that classic tranquilizer for a souped-up economy-was finally starting to restrain spending. Another sign: the National Industrial Conference Board reported that the nation's 1,000 largest corporations, which account for 75% of business capital spending, are making plans to expand less rapidly than they did a year earlier.

Impossible Volume. It is just as well. There has never been a year when so many people wanted to borrow so much money-more, in fact, than the stock and bond markets or banks seem likely to supply. "There will have to be more disappointments and cancellations," predicts Bond Analyst Sidney Homer, a partner in Manhattan's Salomon Brothers & Hutzler. "The $68.5 billion volume of proposed financing is impossibly large."

One reason is large issues by federal agencies, such as last week's FNMA sale of participation certificates in a pool of FHA and VA loans, which it owns. That sale, the final installment of $1.6 billion of FNMA financial assests put up for private investment since last July, furthered President Johnson's goal of holding down the apparent level of federal spending. Reason: the income from the sale goes to the Treasury, which uses it, at least as a bookkeeping matter, to make the federal deficit appear smaller. The certificates bore an average interest of 5.44% a year, a rate so high that congressional critics grumbled that the Administration was using them to dodge the legal 41% ceiling on new issues of Government bonds. What irks some critics even more is that FNMA, in effect, had to sell the certificates at a loss. The pool of old, low-rate mortgages on which the participations are based brings the agency-only a 4.78% return. To attract investors at all, FNMA had to make up the difference between that and today's higher level of interest rates. That cost, $5,100,000 a year, amounts to a subsidy in support of Johnson's budget ledgerdemain.