Bond prices continued their precipitous decline today, falling as much as $35 or more (off a face value of $1,000), close to a record one-day decline.
Analysts said investors were demanding higher yields on long-term debt securities because of a continued bleak outlook for inflation and rapidly rising short-term interest rates, triggered by a renewed tighening of Federal Reserve Board monetary policy.
Most major banks raised their prime interest rates from 15 1/4 to 15 3/4 percent today.
Bond prices fell so much today that the State of Oregon rejected all bids for its proposed sale of $31.6 million of tax-exempt housing bonds, calling the financing charge "unworkable."
For the third day in a row, stock prices tumbled. The Dow Jones average of 30 inndustrial stocks closed down 8.96 at 876.02. Unlike bond prices, which have been declining almost without let up since the first of the year, stock prices are still well above their January levels.
Nonetheless, Commonwealth Edison Co., the big Chicago utility, said it has posponed plans for an offering of 8 million shares of common stock because of unsatisfactory market conditions.
While interest rates on long-term borrowings like bonds have been rising steadily since the first of the year (when prices decline, interest yields rise), short-term rates had remained exceptionally steady.
But that stability was shattered last Friday, when rates jumped sharply after the Federal Reserve boosted its discount rate from 12 to 13 percent and tightened other levers in its conduct of monetary policy. Short-term rates jumped again today.
The key short-term interest rate, the so-called federal funds rate, traded in the range of 16 1/2 to 17 percent today, up a full percentage point from Friday, according to Patrick Savin of Drexel Burnham Lambert Inc.
Larry Wachtel of Bache Halsey Stuart Shields Inc. said the decline in stock prices is a "correction" that was due "after six weeks of steady increases and record volume." Wachtel said stock prices should begin to climb again soon.
"You can always say it's due to the Federal Reserve or inflation or something like that," Wachtel said. "But the fact is that after you double, triple or quadruple your money some sort of correction is in order." No such correction was in order in the long-term debt, or bond, market, however. Bond prices, on average, are $150 or more lower today than they were at the beginning of the year.
"The market is in disarray," said John Gutfreund, managing partner of the major investment banking house, Salomon Brothers.
He said it is no longer possible to "give rational advice" to clients -- corporate, state or municipal -- about whether to hold off on long-term financing or to proceed on the assumption that rates will continue to rise (as bonds prices continue to fall).
But both corporations and governments clearly are becoming edgy about locking themselves into paying record interest rates for the next 30 to 40 years.
When the State of Oregon opened up the two bids it received for a $31.6 million offering of housing bonds today, it threw them both out.
The best bid was submitted by a group headed by Continental Illinois National Bank of Chicago. It called for a yearly interest charge of 9.166 percent (because purchasers of such bonds do not have to pay federal income tax, rates are somewhat lower than on so-called taxable bonds).
Not all potential borrowers, however, can afford to reject bids if they need the money now. "The high rates will become just another cost to taxpayers," Gutfreund said.
In the short term market, Citicorp's regular weekly offering of 91-day paper sold at an average yield of 15.221 percent, compared with 13.727 percent last Tuesday Citicorp, which owns New York's largest bank, sold about $150 million of the short-term paper.
Trading on the New York Stock Exchange was moderate in volume, compared with the record levels of the first six weeks of the year. About 39.7 million shares changed hands today, compared with an average of more than 50 million a day since Jan. 1.
Most of the decline occurred among energy and defense-related stocks, equities that were the beneficiaries of most the price advances since Jan. 1.
The Dow average, which closed down 8.96, had been down more than 13 points early in the afternoon. The New York Stock Exchange composite index closed down 0.52 to 65.62.
The number of issues which declined in price totaled 1,230, while 47 stocks rose in price.
Over on the American Exchange, the index was up 4.67 to 286.02. Nevertheless, only 195 Amex issues rose in price, while 436 fell.