Finance
The 'L30b,00p,000 Loan UNDOUBTEDLY, the outstanding feature of the past week has been the announcement of a Government Loan for £300,000,000. I am aware that before this article appears in print, the Subscription Lists for the Loan will have closed, so, needless to say, what follows is not offered in any sense of guidance to those who may, or may not; have dedided to invest in the new Loans. Nevertheless, I con- sider that whether viewed from the standpoint Of the national finances or from that of the ordinary investor, the' operation is both an important and a significant one. Before, however, commenting upon the special points of significance with regard to the national .finances and the position of the investor, let us look at the actual details of the Loans themselves.
LoW INTEREST RECORD.
It will be seen that I have used the word in the plural, for, there arc really two distinct Loans. The larger one is for, £200,000,000 in 21 per cents: issued at the price of 061 per cent. and described as a 2i per cent. Funding Loan of 195-1961, the two dates meaning, of :'course, that redemption is compulsory in 1961, while the Government has the option to repay on or at any time after April 15th, 1956. Assuming, for a moment, that the Loan was not redeemed until 1961, the final yield to the investor would be £2 13s. 10d. per cent. The other Loan for £100,000,000 is in the form of 1 per cent. Treasury Bonds offered at the price of 98 per cent., redeemable at latest in February, 1941, with the option to the Government to repay at any time after February 1st, 1989. Thus, it will be seen that the minimum life of the 2f per cent. Loan is 21 years and the maximum, 26 years, while the Treasury Bonds run either for 3 or 4 to 5 years. Incidentally, this is probably the first time in which the British Government has been able to issue a loan other than in Treasury Bills carrying as low a rate of interest as 1 per cent,
LARGELY CONVERSION.
A further point, and an important one to note, is that although the-Government is about to raise loans amounting; to £300,006,900; no such large addition will be made to the National Debt.' In the first place, it must be remembered that the Government has already repaid this year £44,000,000 in 8 per cent. Treasury Bonds, ;while in April next, the outstanding balance Of E44,00d;d00 Of these bonds, is to be repaid. Not only so, but the -Treasury has an nOunced that it will redeem next March outstanding 2 per, cent. Treasury Bonds amounting to £150;000;000. There-' fore, while allowance has to be made for the Government having partly effected the redemption • this year of £44,000,000 in 3 per cent. Treasury Bonds by an increase' in Treasury Bills, the fact remains that of the present issue of £309,000,000 probably less than £100,000,000 represents' " new" money which may be required' either for special, outlays or for the redemption a little later on of the out- standing volume of Treasury Bills.
NATIONAL CREDIT SOUND.
Now let is see What significance this latest Government operation has when viewed from the standpoint of the National Finances and that of the ordinary investor. I consider • that from the point of View Of -the National Finances the . operation is one which should further strengthen • confidence in . the • conduct of the , National Accounts. 'tumours have been current for some time past of a huge Government Loan, but while as regards the size of the operation these reports now receive confirma- tion, the Loan, it will be noted, is not of a kind indicating that outlays for Defence are necessarily to be met out of capital, or even that the operation involves some sudden extravagant outlays of an unproductive character. On the contrary, the first impression created by the present large. Loan is that the. Government desires to reduce as far as possible its short-dated or floating debt. The 1 per cent. Bonds for £100,000,000 will appeal almost entirely to the Lcindon Money Market, which is the holder of the 2 per cent. Treasu6r Bonds for £150,000,000 to be redeemed next March. It will be noted, however; that the present issue of new short-term Bonds for £100,000,000 falls short by £50,000,000 -of the amount required- to deal with the .March maturities, so that the short term debt of the .• Ooyernment will haVe been,. inaterially_reduced and funded into longer dated stock—stock, raised mere- dyer, riPciii terms which show hew Strong at tine Present moment is British credit. Moreover, the present Loan will,suflice to meet all the Government's requirements for dealing with short-term debt before next. year'S _Budget, thus to that extent Simplifying the task of the Chancellor of the Exchequer when Budget ,Day arrives.
,THE INVESTOR'S: STANDPOINT.
When, .however, the present Government • operation is viewed from the standpoint of the investor, it is rather more difficult to express a very' definite opinion. 'Most of the newspapers on Tuesday morning, when referring to the operation, deScribed it as constituting, a veritable tonie•to the market for gilt-edged 'securities, and their remarks were so far justified that British Government Stocks rose sharply on the announcement of the details of the 'new Loans, It is always rather difficult, however, to determine on such an occasion whether the firmness is due to what is sometimes described as " official " support or how far it really reflects the views of the investing public. ThoSe who described the new loans as likely to prove a tonic to Governfrient securities, had, no doubt; in mind such considerations as the following :—(1) that "the terms of the Loans were so- favourable to the. Government as to -impress the market with the feeling that the authorities look for a continuance of cheap money for a long time to come ; (,2) that-the terms of .the Loan indicate a pro- spective reduction in the supply of short-term securities for the money market, and (3)' that the mere fact of this long anticipated Loan for £300,000,000 being out of the way, would constitute a factor tending to stimulate a further rise in Government securities and other gilt-edged stocks.
. On the other hand, some of the newspapers described the Loan as indicating a belief on the part of the Govern- ment that dearer money was probable in a not very distant future ; the argument, of course, is that on such a view, the Government deemed it wise to make this Issue at once and to make it for as large an amount. as £300,000,000. Whether this argument is to be regarded as a sound one, and one to be carefully noted by the investor, will, to some extent, be determined by the extent of the response to the new Loans. . If it is quickly taken up by the genuine investor, then I do not think there is very much in the argument, but if there were not to lie a full and quick response from the investor, and sonic part of the 2f per cent. Loan had to be taken up by the Government Departments,. then it might follow that the prospect of resales 'later on would net as 'a drag upen the. market for gilt-edged securities, the more so, in view of the expected continuation of large issues by English Coiporations, to say nothing of an anticipated further Conversion Loan by the Coinmonwealth Goverri- ment of Australia. My own opinion, for what it is worth, 'is that the loan, will 'be readily 'absorbed and that later. on it will constitute a factor making for firmness rather than weakness in gilt-edged securities. -Nor do. I think that the end of cheap Money is in sight. On the other hand, I feel, as I have ,done for some time past, that while neither a rise in nioney,rates nor a fall in Trustee Securities may be at hand, it seems reasonable to believe that the maximum of monetary ease has been reached and that firmness rather than any further great advance is probable in the case of Government and kindred securities.
ARTHUR W. KIDDY.
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