194 MONTHLY REVIEW, models late in the month. While the strike against Ford prices may moderate. The overall wholesale price index may create new shortages, apparently it did not have declined in August, as lowerfood prices offset a rather siz- much directeffect on sales in Scptcmber. able increase in the index of industrial commodities. Pre- Price increases were widespread in August. The con- liminary figures for September, on the other hand, indi- sumer price index rose by 0.3 per cent, making August cate that further rises in industrial prices outweighed the the fifth straight month of substantial advance. Gains were reduced food prices, resulting in a small rise in the over- recorded in virtually all major components—most notably all wholesale index. In addition, there has recently been a in the services, housing, and food categories. Consumer wave of price increases which are not yet incorporated in food prices, which had declined last winter, rose strongly in the indexes; these included higher prices for automobiles, the May-August period. However, a recent easing in the color television sets, a variety of steel products, nickel wholesale food index suggests that the rise in retail food alloys, sulfur, and other chemical products.

The Money and Bond Markets in September

The money market was generally comfortable during long automobile strike might create additional difficulty September, with no significant pressures evident around for the Administration's tax proposals. Treasury bill rates the midmonth tax and dividend payment dates. Free re- declined briefly early in the month, but then rose almost serves fluctuated in a range slightly higher than in August, steadily until , after which rates again de- and Federal funds traded at about 4 per cent throughout clined. During the month, rates on some bills climbed to the month. The basic reserve positions of banks in leading new 1967peaks, while yields on long-term Treasury bonds money centers deteriorated sharply during the first half exceeded last year's highs. of the month. These banks, however, had little difficulty The market for corporate securities also began the covering their reserve needs through the Federal funds month with an improved tone. The calendarof new offer- market, and borrowings from thc Federal Reserve System ings scheduled for September was lighter than in August, were relatively light. A large volume of negotiable cer- and there was good investmentdemand. Early in the month tificates of deposit (C/D's) matured during September. In prices increased from their lows for the year, although re- order to limit attrition of these funds, a number of banks ceptions were mixed when dealers attempted to price new increased offering rates for C/D's. offerings more than slightly above previously accepted lev- Continuing the pattern of recent months, the comfort- els. During the last half of the month, corporate bond able tone of the money marketduring September coincided prices declined moderately as dealer inventories and the with further increases in yields on capital market instru- calendarof prospective new offeringsmounted. Tax-exempt ments. The month opened with prices of Treasury coupon securities were under pressure throughout September, and issues buoyed by prospects of possible new peace feelers underwriters generally had difficulty reducing inventories following the election in . However, the without deep price concessions.The prevailing caution was price situation quickly deteriorated after the Labor Day enhanced by a growing calendar of future issues. holiday (), as apprehension grew that Treasury financingneeds in the months ahead would be considerably BANKRESERVES AND THE MONEY MARKET larger than previouslyanticipated even with passage of the Administration's proposed surtax. Also, hopes faded for a The money market remainedgenerally comfortable in near-term solution in Vietnam, and it appeared likely that a September: average nationwide free reserves were $274 FEDERAL RESERVEBANK OF NEW YORK l9

Table I Table H FACTORSTENDING TO INCREASE OR DECREASE RESERVEPOSITIONS OF MAJOR RESERVE CITY BANKS MEMBER DANK RESERVES SEPTEMBER 1967 SEPTEMBER 1967 Inmillions of dollars; (-4-) denotes increase, In millions of douars (—) decrease in excess reserves

Daily aiera;es.—cerk ended on Aneraes of Chasota In daily assuages— FactorsatIectia9 fourmock, seek ended en basis 'sterns positions I ended on lIst Sept. I Sept. I Soul Sept. 27° Faders charges 6 20 27° Sept. Sept. Sept. Sept. 6 1.3 20 27 EIgIa5 banks In New York City "Martat" Outset — 563 — — 253 — Reserve excess or dcflclency(—fl 23 16 18 2 15 Member hank rnutrrd renreut -55 136 Less horrowinpfrom — Orwrattns teanssettoas teutitatal) +339 + 400 — 583 ÷433 ReserveBanks 21 . 21 — It Less net tnterhank Federal funds Itesene toss 129 134 210 s'estrral + + + -235 +206 purchases or sales(—) 2W2 876, 671 70 475 Gross Treanary apeeelten.t 590 525 — 131 -660 purchases ija 1J6O 1.355 1.005 1,717 + + +206 Gross sales 862 485 684 938 742 Geld and (orelen account — 45 +0 —4 — 46 Equal.s net basic reserve surplus , : or deflcit(—) —280 —860 —674 — 6.8 — 471 Currency ous..Ide bsnki• — 524 — Cs ÷ 243 -4. 272 — Vt Net loansto Government . securities dealers 1.069 Other Federal itoarrco aernttnta saet)t.. + 4 + 97 •1- +135 1,163' 1,020 776. 1,01W 'meat "market" (actors —370 +521 +147 —051 banks outside New Direct Federal Reeena eredit Thldy.elgIsI York City traaoutlona Gyint market tasrnunrote Reserve excess or detlclency(—fl 36 27 7 —21 12 Less Outright hotdtng&: borrowings from ReserveBanks 12 7 35 13 17 Goveontnet oerturttte$ +331 —419 — 4 +257 +203 Lets net interbankFederal funds purchases or aales(—) 397 905' 5,095 555 — 5 — l.019 hankers' anreptanoun — 2 — a I — is G,os.s purchases 1,792 2,214 2.24! 2.257 2.126 — — — Cross sales 1.395 1.306 , 1,146 1338 1,271 ltpeelst emtlttntn 55 55 . Equals net basic reserve surplus I snementa: or defldi(—) ' —375 —388 — Iteuurebaaa Net loans —1,l23'—t,053. + — to Government Gorernjat securities +87 —87 —— — securities dealers -. 571 794 893 803 765 — — — Bsnkrs asorgetennea +56 +85 Federal asrItry ohltesrhone +0 —e — — — Note: Becauseof rounding, flauntdo not necessarily addto totals. Estimated reserve figures have nnt been adjusted for so-tallest "as or' debIts Member talk benawtea + 25 — + 36 — U ± and credits, These items are taken into account In final data. Other loans, dtarounta, and eflvsnen... - Reserves held after all adjustments apptlcabte to the reporting period less required reserves and carry-over reserve deficiencies. TOtal +47 —iOl —ItS +4(0 +302 teens reserves' + l ÷ 20 + —133 —1 Table HI Osily 545I5 testis AVERAGE ISSUING RATES AT REGULAR TREASURY BILL AI!CHONS Member bank: In per cent — Tatat rnwno, tnetu,uIr'e ysult enh 03.544 25.025 54.307 25.210 14.1256 RequIred rmenea' 23,574 23.640 23.803 21.551 13.7641 Wetkly suetisttdates—Soptember 1967 lxrma ruusnas° 346 386 414 250 slot Matueliles Benowtass 79 70 106 74 an Seat. Sept. Sept. Sept Free r,.,rne.' 147 Ito 505 tan nit 1 11 15 25 Noaborroured rnervn 21.865 23,928 31,201 24,526 240501 ______Three-month 4.324 4.360 4.490 4.629

Six-month 4.765 4.931 4.998 5.143 chsnges in Wsdnesday lash

Monthlyauction dates—Juty.September 1967 Restate *acauet seedless at Oassraasst seeuerltlasunatartee In: July Aequct Swteunbsr 25 24 26 lena than one year +840 ..—.1,1D8 +170 +501 + 425 Marethanoae yeas + 52 — + +555 Nine-month - 5.IM 5.098 5.145 Total + —1.175 —5-647 + ±1701 One-year 5.150 5.100 5.124 Note: tteeause orrounettno. fleures do antoeoenuartty add to totals. These ttsure, sea ,mtlrnsted. ° Interest rates on hiltj are quoted in wrote of a 360-day year, with the dis- Includeschatters to Treasuryesrrenep and cash. cuunts from par as the return on the face amount of the bills payable at I tnrtuustru aai.eto'leutontiusteut to foreIgn cunenetru. maturtly. Bond yield equivalents, relatedto the amount actually invested, I Ayeraee at tour weekseaded en Seutounbor27. would be slightly higher. 196 MONTHLY REVIEW, OCTOBER 196? million, and average member bank borrowing from the tton in South Vietnam, and the prospect that a strike in Federal Rcscrvc Banks were S82 million (sec Table 1). the automobile industry might temporarily dampen eco- Federal funds continued to trade predominantly at 4 per nomic activity. Reports of lagging loan demand also ap- cent, the level of the Federal Reserve discount rate. No peared to have a favorable impact on the market. significant pressures developed around the Market sentiment deteriorated after the holiday, how- payment date for the quarterly instalment of corporate ever, and price declines during the second week wiped income taxes. Although loans extended by commercial out almost all the increases of the preceding two weeks. banks rose substantially in the week ended on September The underlying tone became cautious and indecisive, as 20, the advance was apparently no greater Ihan expected, opinions differed concerning the probable length and eco- and investmentsalso increased moderately during the week. nomic impact of the automobile strike and its possible The basic reserve positions of the major money market effect on passage of the Administration's tax proposals by banks deteriorated sharply duringthe first half of the month. the Congress. In addition, hopes faded for near-term peace The shift of reserves away from banks in the leading money in Vietnam and there was some discussion of the likeli- centers reflected attrition of C/D's and Euro-dollar hold- hood of a shift from ease in monetary policy, although ings, as well as sizable calls on Treasury Tax and Loan Ac- most participants felt that no such change was imminent. counts, at a time when loans to securities dealers were in- In this environment, professional traders began to lighten creasing. The reserve positions of the major banks in New inventories accumulated ovcr the preceding two weeks, York City improved after the September 15 corporate tax thereby further depressing prices. Prices of Treasury notes date, due largely to an inflow of Euro-dollars, an increase and bonds continued to drift lower as market participants in Government deposits as corporate tax payments were considered the possibility that, even with the passage of credited to Treasury Tax and Loan Accounts, and a decline the Administration's tax proposals, Treasury financing in lending to Government securities dealers. On the other needs stemming from the expected large deficit would hand, the basic reserve deficit of the major banks outside probably be appreciably greater than previously antic- New York City continued to deepen through ipated. By the end of the month, prices of many long-term and, although there was some improvement toward the Government bonds were below their lowest levels of last close of the month, the average deficit remained substantial year, although prices of intermediate-term issues remained (see Table II). well above their 1966 lows. Approximately $5.1 billion, or one fourth, of the C/I)'s The Treasury bill market began the month on a com- outstanding at weekly reporting banks matured in Sep.. paratively steady note, with dealers making fairly good tember. Of that total, more than $1.1 billion fell due on sales at slightly lower rates. The Federal Reserve System September 15 alone. In view of the heavy volume of matur- entered the market to meet the reserve needs associated ing C/D's,several banks raised their offering rates and gen- with the long holiday weekend, and there was good demand erally succeeded in replacing a substantial portion of their from the public and commercial banks. The market bid maturities. At the end of the month, the most often posted rate for three-month bills fell to 4.29 per cent at the end of rates ranged from 4V4 per cent for the shortest maturities to the first week, about 10 basis points below the level in the 53 per cent for certificatesmaturing in one year or longer. final week of August (see chart). In subsequent days, how- The corresponding rates a month earlier were 4½ per cent ever, the demand for bills abated, especially for shorter and 5¼ per cent, respectively. Rates on bankers' accept- maturities, as dealers focused their attention on the possi- ances rose by '/s percentage point to 5 per cent during bility of an increased supply of bills to the market during September. the dividend and tax payment period. Treasury bill rates then continued to rise under investor selling and dealers' for the that the THE GOVERNMENT SECURITIES MARKET desire to prepare possibility Treasury might soon be entering the market to sell up to $5 billion of new A cautious atmosphere continued to pervade the Gov- tax anticipation bills. At the last regular weekly auction of ernment securities market during September, and prices the month on September25, the average issuing rate for the generally declined. Prior to the Labor Day holiday, how- new three-month bills was 4.629 per cent (see Table Ill), ever, prices of fixed income securities increased slightly as about 14 basis points higher than the average rate of the professional traders covered short positions and rebuilt in- last regular auction in August and the highest auction rate ventories. Moreover, underlying investment sentiment was since January 23, 1967. The average rate on the six-month buoyed by an improved tone in the corporate bond mar- issue was 5.143 per cent, about 15 basis points higher than ket, the possibility of new peace efforts following the elec- that of the last auction in August and the highest since De- FEDERALRESERVE BANK OF NEW YORK 197

SELECTEDINTEREST RATES

P52 saM Suly.Snptembo. 1967 MONEY MARKET RATES &OND MARKETYIELDS Per cesu

vialdson new pvbI.r utility bonds — Rsollnrit.gyin(d— Ma,beryinld Ace. —. Ac. —630 . - I: — Aoo-,oled seasoned iniporoinbonds 550

4 '———C— n.e_a ce_n.. eta '°—S ..d • 3.5 ysot Cjonornmanl ssCunilios CtnrmGnrnmnnIsocuzT%rT —

- 5 —t____.___ 14.00 20.yaos tou.ooosnplbond, - -330

--too

1111111111 I iii Ii LI huh I II' I uJilL U II I I UJJJJJi iLl I HI ill LII III. 111111 U S 12 19 26 2 9 16 22 30 6 I) 20 27 5 12 19 26 2 9 16 23 30 6 13 70 2/ July August September July August September Note Dote eqs shown Ia, businessdays only. MONEYMARRRT BAITSQUQTED Doilyrange citotes postedby major Non.York Citybanks point fromondstai.ting stndisore rasllaringyield sac gina issue so mother yield on rhn Federal en newg))jiy ha lund,)secured by IJnlted S,ssns Oose-snms,rssssritini a point some isso. soondiotely alter'the, been elsosed Item syndisors resrsirnnns),dnily indisoles shaabsents cinay songnl, slitting 'o'enlot dirnotTy placed l,iboy.co sampory pupnri snnrognsci yields on itj,g-ioc,n.Oovnrnmnnrs.sstiIiia bandsdo. at relIable intee yno's shsefiennle. tote on Fenle,alfunds Irks rote nestrnprnsentatros ci the rronsorsions esecoledI; at maralnnd af Connnany(ycsjrjjinsdoe nrk,as refine years nampuredass sknbarns of closing kid rains4qsoted in tunas cisate ci distountan newestouturnisding th'se.oydsin-rnoeth (tasteg bid sstir.s; Thnirsdnyannrngnsolyields onraeory seasonedtaaaiy y.nt tan.s.mpv iTsatYnirh- bands(carrying Masdys rotings ofAno. Ac. A. andBaa). BONDMARKET YIELDS QUOTED Tisldson is ore Sosirsas: F.darnl newp..gg.ond Ac-toted pub1 issflinybonds pisrtad Rssesnn Boshol flee York.Boosd sI Ow.ernnrs alIke Federal1nss.vn System, Moodys lrispstorsSetuge. end lJya.ntLJyBand Buy.t.

cember 5, 1966. Strongdemand developed for Treasury The shorter maturities were sold at an average yield of 4.93 bills at the higherrates, partly as commercial banks bought per cent, and the longer maturities yielded 5.11 per cent. before the statement publishing date. As a Commercial banks were allowed to pay for 75 per cent of consequence, bill rates fell sharply and the rates on three- the bills allotted to themselvesand their customersthrough and six-month bills closed the month at 4.39 per cent and credits to Treasury Tax and Loan Accounts. The 'trea- 5.02 per cent, respectively. sury also announced that it would continue adding $100 On September22, the Treasury announcedplans to raise million each week to the weekly offerings of three-month $4.5 billion of cash through the sale of tax anticipation bills bills through another full thirteen-week cycle. The pre- maturing in April and June 196K. The bills were auctioned vious cycle of $100 million weekly additions was com- on Tuesday, October 3, for payment on Monday, October pleted with the bills paid for on October 5. Subsequent 9. Of the $4.5 billion total, $1.5 billion represented an weekly offerings will consist of $1.5 billion of three-month additional offering of tax anticipation bills maturing on bills and $1 .0 billion of six-month bills. April 22, 1968, of which $2.0 billion was already out- Several new (iovemment agency obligations were mar- standing. The remaining $3.0 billion comprised a new is- keted during Septemhcr. Among the larger issues, the Fed- sue of tax anticipation bills maturing on June 24, 1968. eral Home Loan Banks offered two $300 million issues on 198 MONTHLY REVIEW,OCTOBER 1967

in view of the Tuesday, , to replace a $650 million ma- ances of recently marketed bonds; and, turned tUrity on . The two issues were offered at growing calendar of scheduled offerings, bidding yields of 5.45 per cent and 5.50 per cent for ten- and cautious. An offering of $100 million Au-ratedtelephone sixteen-month maturities, and both were trading at small debentures with five years of special call protection was 11 basis than premiums by the end of the week. Shortly after midmonth, priced to yield 6.06 per cent, points higher the announcement by the Federal National Mortgage Asso- had been offered on the earlier telephone issue and the in over ciation of a $400 million three-year debenture issue to be highest interest cost incurred by the company offered September22 tended to depress the market, as it was forty-five years. Nevertheless, the issue was accorded a a larger amount than the outstanding issue being refunded. poor reception, with lagging sales in part due to competi- However, at a yield of 5.82 per cent it was generally well tion from sizable dealers' inventories of the earlier tele- received, a]though there were slight price declines in subse- phone issue. Other large corporate offerings toward the and were quent trading. end of the month were mostly convertible issues generally accorded excellent receptions. The average yield on Moody's Aaa-ratedseasoned corporate bonds was 5.68 cent the end of from OTHER SECURSTIES MARSIETS per at September, virtually unchanged August. Many of the factors influencingthe Government securi- The market for tax-exempt securities labored under ties market early in the month also affected the corporate pressure throughout most of the month, although some un- market, but perhaps of most inunediate influence was the short-lived relief appeared during the second week as decline in the calendar of new issues scheduled for Sep- derwriters experienced a good distribution from their temberto $860 million, still large but weil below the aver- heaviest weekly schedule of new offerings since early in age monthly volume floated publicly during the summer the year. To attract buyers, however, yields on new issues months. In this environment, Aa-rated utility issues with moved almost to the high levels reached in July, prior to five years of special call protection, which had reached the President's request for a tax surcharge. For most of unsold yields of 6.20 per cent or more during the last week of the month, underwriters had difficulty reducing August, posted price advances during early September balances of older issues without deep price concessions, large enough to bring yields down to around 6.10 per and investor interest in new issues was only fair despite cent. However, underwriters who bid aggressively for higher reoffering yields. The prevailing caution was fur- a sizable Au-rated telephone issue at the start of the ther influenced by growing concern over the fate of the month encountered considerable investor resistance at proposed tax surcharge. The Weekly Bond Buyer's aver- a reoffering yield of 5.95 per cent. This was roughly 12 age yield series for twenty seasoned tax-exempt bonds, basispoints under the yield on a similar issue marketed the carrying ratings from Aaa to Baa, rose to 4.19 per cent previous week and the lowest rate on this type of security at the month end, from 4.06 per cent at the dose of since June. Only offerings which came out at yields August (see chart). By the end of the month, the volume around the levels of the preceding month tended to be of tax-exempt issues advertised on the Blue List stood at well received. After midmonth, underwriters became in- $469 million, compared with $433 million at the end of creasingly concerned with their rather large unsold bal- August.