Finance: At Fever Levels

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Whenever the cost of borrowing swings to extreme highs or lows, financiers regard it as a signal of national ill-health. Last week interest rates for long-term securities climbed to a level that clearly meant economic fever.

For example, underwriters provided $25 million worth of Kansas City Power & Light bonds with a 6.67% rate, a record among top-grade electric utilities. New York City sold $45 million worth of housing bonds that offered investors up to 5.36% tax free, the juiciest return on a city issue since the early '30s. Most startling of all, the Federal Government paid its highest interest rate since the Civil War*—6.45% per year—to sell part of a $1 billion issue of securities.

That rate reflects Wall Street's disquiet over the huge federal budget deficit, which portends gigantic federal borrowing and still higher interest rates in the months just ahead. The 6.45% return applied to Federal National Mortgage Association "participation certificates"—shares in a pool of Government-owned mortgages and other loans. They were available to the public in minimum lots of $5,000. Though not a direct obligation of the U.S. Treasury, the participation certificates come close to that gilt-edged status because the Attorney General has ruled that they are backed by the full faith and credit of the Government.

Ironically, last week's sale served to stir up potential trouble in another quarter. Wall Street called it "the great money rush." Enticed by the 6.45% return on a Government-backed security with interest payments every six months, salesmen and secretaries, doctors and housewives overwhelmed traders with buying orders. One result was an unexpected drain on savings banks, one of the major sources of mortgage money. If it continues, the outflow could lead to another shortage of home loans—the very kind of shortage FNMA was created to help prevent.