FIVE PER CENT. RETURN ON GOVERNMENT STOCK
A Christchurch investor purchased £2OOO of Government stock on the Christchurch Stock Exchange on Wednesday this week, paying £94 10s per £lOO for 3 per cent, stock maturing on June 15, 1964. Allowing for the £5 10s per £lOO “capital gain” which will accrue to him through his purchase at below the face value of the stock, this investor will secure a return of more than 5 per cent, on his stock. The actual return is 5.15 per cent.
Five other Government stock issues changed hands in Christchurch on Wednesday. The prices paid for these issues will return the purchasers yields ranging from 49 per cent, to 5.15 per cent. The average yield on all Government stock issues is now more than 5 per cent. Yields of 14 issues maturing within one to five years (short-term stock) averaged 5.02 per cent.; yields of nine issues maturing in five to 10 years (medium-term) averaged 5 per cent.; and yields of four issues maturing in 10 years or more (longterm) averaged 5.02 per cent. Highest Since War These yields, averaging a little more than 5 per cent , are the highest since World War 11. and are probably higher than at any time since about 1936. As yields reflect inversely, price changes, the current high yields indicate a depressed market for Government stock. The yields have been rising, almost without interruption, since the beginning of the year, as is apparent from the accompanying graph. The first factor to affect the Government stock market this year was the Government’s £lom cash loan, which was on the market in February. When the loan opened market yields were very close to the terms of the loan: 4.35 per eent. on short-term issues (compared with 4 35 per cent offered
t in the new loan); 4.65 per ; s cent, on medium-term issues . (4.65 per cent.); and 4.8 per 1 r cent, on long-term issues s o (4.85 per cent.). - By the time the loan 1 r closed, over-subscribed, at i the end of February, these ; j yields had risen to 455 per ( s cent.. 4.75 per cent., and 4 88 1 ■ per cent, respectively. They . - have continued to rise over i * the last two months. 1 Credit Squeeze ~ The over-subscription of : “ the cash loan was the first ‘ “bear” factor in the gilt- ' edged market this year: much 1 of the money subscribed to the loan might otherwise have been invested in existing issues, thus helping to a keep prices up (and yields . down). d Tax payments in March v were a further bear factor e Large taxpayers, particularly - business firms, often plan to ). sell off some of their invest- - ments in Government stock it in February to raise the cash for income tax payments n (due in the first week of • March). Record tax payg ments in March this year it probably precipitated unusug ally large sales of Government stock. :t The third, and most pro- ■- longed bear factor this year ’- has been the credit squeeze i. By making bank credit more n expensive and more difficult nto obtain, the monetary e authorities have forced many >f institutions to sell Governn ment stock. This factor is d likely to continue for some d time, to judge from official
pronouncements. In these conditions, sharebrokers and other market observers await with interest the announcement of the terms of the next Government loan. Earlier in the year it was expected that the Government would come on the market again in MayJune. Since then the surprising outcome of the Public Accounts for the year ended March 31 (which produced a small surplus) has lessened the need for borrowing from the public. To fill a loan of even £sm now. the Government would need to offer returns very close to 5 per cent.—the highest "coupon rate" since before 1933. In that year the Government took steps to convert all loans paving more than 4 per cent. Even a month’s official support for the market at this stage could scarcely reduce yields more than 0.2 per cent. —and 48 per cent. Is still a very high coupon rate for a short-term stock. In these circumstances, tt appears unlikely that the next Government loan can be placed on the market as early as intended. Without massive official intervention in the open market, the Government will also have to offer higher effective yields than for many years. Because of the political overtones of a 5 per eent. stock, most market observers expect the maximum coupon 1 rate to be slightly under S i per cent, and the stock to be offered at a discount.
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Press, Volume C, Issue 29500, 29 April 1961, Page 15
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776FIVE PER CENT. RETURN ON GOVERNMENT STOCK Press, Volume C, Issue 29500, 29 April 1961, Page 15
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