98 MONTHLY REVIEW.

The Money and Bond Markets in April

Prices drifted lower in most sectors of thc bond market gates was slow to reverse, however, when these special during the first part of April and then dropped sharply factors disappeared. in consequence, the System allowed after midinonth, in part because indications of economic modestly firmer money market conditions to develop dur- strength led market participants to revise their expccta- ing the last half of the month. For the three months ended (ions of the interest rate outlook. The confidence in lower in April the money supply grew at a seasonally adjusted rates that had developed in late March when the banks' annual rate of 5 percent, while the adjusted bank credit prime lending rate was cut was tested by a record out- proxy advanced at a rate of 7 percent and time deposits pouring of new corporate issues. The previously an- at I 1 percent. nounced $1.6 billion bond offering by the American Tele- The effective rate on Federal funds averaged 8.1 per- phone and Telegraph Company led to upward rate ad- cent in April. compared with 7.7 percent in March. The justments on other new and outstanding securities when rates on three- and six-month Treasury bills closed the and specific terms of the issue were made known on . month at 6.93 and 7.18 pcrccnt, up 55 70 basispoints Concern also mounted among many market participants from a month earlier. The bid rate on ninety-day bankers' that the economy might resume its expansion before inlia- acceptances climbed sharply in several steps to 8¼ per- tionary tendencies were contained, especially since fiscal cent by from 7½ percent at the end of maturities of Marc policy seemed to be tilting again toward the expansionary Rates also moved up on the short directly side. A somewhat firmer money market suggested that placed commercial paper but were unchanged on longer the monetary authorities were alert to the dangers of mawritics and on dealer-placed paper over the month. overly rapid monetary expansion. While this augured well for the long-run health of the bond markets, dealers had BANKRESERVES AND THE MONEY MARKET to work oil heavy inventories of Treasury bills built up in in in- anticipation of greater investor demands than materialized. The behaviorof the monetary aggregates April the Accordingly, short-term rates moved rapidly higher in volved a number of uncertainties. Typically, both late April, contributing to the adjustment under way in the money supply and the bank credit proxy tend at times to bond market in advance of the Treasury's May financing. deviate from average seasonal patterns or longer run on or even month-to-month With prices of Government securities falling sharply growth trends a week-to-week after midnionth. there was growing apprehension concern- basis. Because of special factors at work in late March. turned out to be month of unusual ing the terms and the effect of the Treasury's May refund- April a uncertainty. The rise in the in the week ended on ing in that market as the announcement date money supply 1 in relation to seasonal approached. Initial reaction was generally favorable to April was extraordinary past the terms on which the Treasury's new offerings were behavior (see Chart 1)) A major factor responsible for made. this was a very sharp drop during that week in cash items The monetary and bank credit aggregates expanded in the process of collection, which represent a deduction from demand in the demand strongly in April, and the Federal Reserve interposed gross deposits arriving at some resistance to the acceleration that developed. A deposit component of the money supply. In part, this number of unusual developments appear to have con- tributed to unexpected deposit strength. Normal financial clearings were disrupted early in the period by the effects of bank and the aftermath of 'Sin-c there is no growthfactor incorporatedin the seasonal European holidays by between the two would result the which line, some difference usually if labor disputes and unseasonable snowstorms, actual Nenesexhibited a fairlyregular growth. ihc chart show5 th most of delayed mail delivery. The early April rise in the aggre- type ofdivergence during March. FEDERAL RESERVE BANK OF NEW YORK 99

also increased by about $70 million over the period. Cher, I The average basic reserve position of the forty-six ma- AND SEASONALEFFECTS THE MONEY SUPPLY jor money center banks showed virtually no change at Bit..5..4 d.lInrs lillian..fdolf.rs 201 I 201 the start of the month but then began to deteriorate, with the deficits rising to a record $7.5 billion and $8.0 billion, 206 — — 206 Uiiodju.I.d monflsupply respectively, in the statement weeks ended on and 22. An of the deficit occurred 204 — — 204 April easing during the final statement week (see Table U) in a pattern which tonal Iii,.* 202 — — 202 has recurred in the past several years. Substantial declines in United States Government balances and private demand — 200 200 deposits and a sharp rise in lagged reserve requirements

— accounted for the of the average reserve 191 — "I largely deepening \ deficit of the money centerbanks during the week of April I I I I 15. A sizable inflow of took place in the l 4 II II 25 B Is 22 29 Treasury deposits March April following week as tax collections were made, but this was 1970 continuation loans • ThisIi,. is rh a.. .11k Ily ndj.is.d ,w..kly Ii I..F.hruory more than offset by a of a buildup in mulliplind b I I.clor, farMarch ..dApril, b.ai,,in• rid.ik. ....b investments which toward the close of the •f March 4. IIi.di..st. .1soI 1k.,n.djs.Md .sarn Ispply ..s,ldI.... bnna and began pre- hfl.ri.r if .11 1k, i—cl of sh. ..a,.,.ll.ct.ru—.hlch •r. d.n.a free 1k. ceding week. .11k. ,..,y supply during cnnparable uneta aI p,•ninc. y.ar.— h.d boa .p.r.llfl. System open market operations provided $209 million in reserves during April primarily through repurchase agreements involving Government securities. Reserves amounting to $128 million were also supplied by operat- ing transactions, as a large increase in float was only par- p was attributable to the closing of European money tially offset by other transactions which drained reserves. kets on the Friday and Monday surrounding Easter Required reserves increased by $650 million over the unday.1 This temporary phenomenon was quickly re- month. versed after the Easter weekend so that cash items in the Preliminary data for the monetary aggregates in April process of collection rose. However, the money supply show a seasonally adjusted annual rate of growth in the did not fall back as promptly as one would have expected money supply of 13.7 percent following a 13.2 percent after this and other factors affecting the collection system rise during March. Over the three months ended in April fadcd in importance. the seasonally adjusted annual rate is estimated at 5.4 The average effective rate on Federal funds moved to percent, compared with an increase of 4.0 percent in the a higher plateau in the last half of April (see Chart II), as three months ended in January. The adjusted bank credit System open market operations offered some resistance to proxy grew at a seasonally adjusted annual rate of 7.0 per- the rapid growth in the money supply and bank credit. cent in the quarter ended in April,compared with a rate of Contributing to the firming of the Federal funds rate 3.3 percent in the three months ended in January. were the heavy financing needs of Government securities dealers, who held unusually large inventories during muâh THE GOVERNMENT SECURITIES MARKET of the period. In addition, the money center banks experi- enced substantial reserve drains when a large rise in re- Activity in the market for Treasury coupon issues was quired reserves coincided with deposit outflows and siz- rather subdued in April. Based in part on the expectation able loan demand associated with the mid-April individual that the Treasury's May refunding would be a rights and corporate income tax date. Average borrowings by offering, some demand developed for shorter dated securi- member banks at the discount window totaled some $870 ties during the first half of the month and prices on issues million in April (see TableI), down slightly from the $896 due within two years improved over that interval. During million average in March, while net borrowed reserves de- this same period, prices on longer maturities drifted irreg- clined by an average of $98 million since excess reserves ularly lower and at midmonth began to fall sbarply in conjunction with the rate adjustments in the corporate bond market following the announcement of the AT&T offering terms. Also around midmonth, dealers began to further details,see pages 104-5. readjust their positions in preparation for the May re- 100 MONTHLY REVIEW,MAY 1970 funding, and thereby exerted further downward pres- the market became increasingly cautious in light of the sure on the market. This was felt particularly in the pronounced deterioration which the market had under- intermediate-term area, where dealers attempted to re- gone in recent weeks. The terms of the May refunding duce their holdings in anticipation of a new supply from were as follows: holders of the $16.6 billion of 5¾ per- the refunding in this maturity range. cent and 6¾ percent notes maturing May 15, 1970 were As the month progressed and additional information on offered the right to exchange them for additional amounts the state of the economy became available, many market of two outstanding issues. These were the 7¾ percent note participants became apprehensive that the economy might due May 15, 1973, priced to yield 7.98 percent, and the begin to expand without the needed check on inflation 8 percent note of February 15, 1977, priced at par. The and that some tightening of monetary policy might be re. public held about $4.9 billion of the notes eligible for quired. In this atmosphere, rates on all coupon issues rose, exchange. Subscription books for the exchange were open with the sharpest increases occurring on intermediate- and from May 4 through May 6. In addition, the Treasury of- long-term notes and bonds. As the April 29 announcement fered for cash or exchange $3.5 billion of a 734 percent of the Treasury's refunding terms drew closer, the tone of eighteen-monthnote in order to meet the attrition on the

Chon II SELECTED INTEREST RATES F.b,gary.April 1970 P..t.nt MONEY MAIKET RATES IOND MARKET VIEWS P.,c.nt 10.00 9

A ii II 25 4 II II 25 I I 45 22 29 4 II II 25 II II 25 I I IS 22 29 Fabnuory March April hbnuory Morch April

Not.. Dab ar• thawshr b Soy.osly. MONEY MARKET RAmSQUOTED, lid rain bar .hr..,.ofl b.ra.dalla,, I, London. album1 dailyon..,.. a! yi.ld. a,..a..,.d A.o.rasd carpa..tab.,d. dalyan..... of rat., bardiracily placad liwc copa,y frg,; S..II.cli.. rat..,FSrS Ia.t Ma yI.Id. o, ln94.r G..ar,..a,t..w.iSn Ibo,d. dii.ar callabI. I,I., a, rat.me.t r.pr....bati..at ha bro,.ocbia,. .aac,tadf;da.i.a bidrat.. quotaSI. b.rms asS a. Ge..r.wJ..curlli.. 5,. 1, hr..— H..y..i. comp.l.d a, th. flu, of cla.ii11 ci..t. of di.co,nhf on toulstaitdi,g Sr.a..ashatS o,a.y.acig.auvbilI bid p.ia.; Th,r.doy onrog..of yi.ld. 0,Iw..fy .ao.o,.d twast.yaer of 10410 MARKET YIELDS QUOTED, VialS. 0'aw An. asSA..rabad p.Wk .iSlity.gj (carryis. M..dy. r.fl.g, Ao..A., A, a'S laa. tram be .,ark.b of far.... pain' .ndarwriting sysdhal.raafhnisa ylaldas a at.., i..,. S. . Fadarallawn 5.4 N.. Van.SeaS of 0 of S.Fadarol b..r,aSyulam. yiald a Ma uollwib•,a im.adi.aalyobtar it has baa, r.laa..dfrom sysdicot. ra.tnictio,.J, Masdys lit.a.tor. S.rwtca. oSma WesklyJ54Jy,.g, FEDERAL RESERVEBMX OF NEW YORK 101

TabS. I case a FACThRI TENDING TO INCREASEOR DECREASE RESERVEvoSmoNs OF MAIORRESERVE CUYRANKS MEMBER BANK RESERVESJ APRIL 1970 APRIL1910 In millions of dollar,; (4.) denot Increase In millions of dollar, (—) decrene in ace.I tarn. Daily amps—week indS In Awniqaot !Sn aff.ctlnp ORWeekS Chins.. iii dolly aRnie,— bseuc morn pouts.., tedS iii On . week .ndtd Nit AprIl April April April AprIl AprIl 29 Faita, — dwi..N 1 8 15 fl 29 AprII hull Sip11 hurl! April I 1 0 15 V n Elgit banks I. "Nnt.V' faMan Memb,bank Bar. ar or re'jufrid deftal.n c—r 71 16 — 51 10 — 14 14 reiena — SI TI 615 — ST + '' —150 La borTowin. non tran..ations lZ.ern It.afl 131 — 514 617 II 11? fl.du Lsinet InterbankFidcral Iaibtatal) — — + III + 506 407 + IS' 414 +ill Fund. punehaacaor sale. (—I.. 1.101 1.640 1.041 0.470 1.353 1.754 Federal Ilcient Scat III 5" — 554 171 — 410 411 Gra puIthase. 2.101 1.510 2.715 3.073 1.311 2.673 + + + + Gras Tn—un opeatlonr — 51 +1N + Il —154 — Ill —110 sale. 390 030 707 594 633 109 Gold and roSa ar,nt... —51 —V — 15 + 29 Iouals netbailer..,. 4.Il +" — arplea or da3dt C—) —'.465 —1.545 —1.417 —2.911 —1.416 —1.917 Cisrr.nty olgalda ban SI — 11 — 101 —NI Ill Net loan, to Othor + + Oonnnr.nt Federal ' teounitlai 1.031 915 075 51? 1ti a_tn III 033 IlabIlitis and capital —n — In ft — II Net ean7-o.ur.anna Or + T dodalt(—)t 15 33 56— I 13 23 Total niarlo,t" ftotoni + 17 +514 —1.000 +ta —110 — Dlr..t F.l.ai Oar.. Thjny.slbt heW ouodd. New York 017 creditfr.su.ptl.n. Opat martot opanedjans Dan. - or (.ubtotal) ill —leT 418 —174 209 + + + + deddana ()e IT — 51 19 — 35 — 17 — 5 Oiflhsht hoidin.: Lsa borrowin Train Gotaitnet —111 —14 154 — 71 —65 ItarreBanD 144 069 610 155 331 III arid. + +1 L.a net Inlorbank Fodni flanb,a amwtan —1 I —2 + + 4.0 +6 Piad. pmsrabessor .aS I—).. 3.013 4112 4.075 4.704 3.401 1.001 enoS.aaananeib: Urns niinoha 4.021 5.770 3.07? 1.147 5.493 5.653 S (lonmmeat .eturltia + "I — 151 + 214 —154 + 106 +131 Ott. asia 1.033 1.553 1.501 1,443 1011 tin BInkie, aptaaol-s + 19 — 11 + 11 — II + 15 +14 Oquat,net basic nat. Federal aaenfl obluatlana. 'I — 17 + 24 — 14 II airplne or debIt I—) —4.110 —4.541 —4.016 —4.951 —3.05' .....4337 + — +1 + Netloans to Oomnnt..t Mentor bank bonrewlnn +14 454 + 524 —4, —TI —u neurItis dealera III 1.117 353 014 417 313 Other lfl,frraI itsetia Netcarry-over. at I — assIst + +10 +10 + 19 +12 + Ifl dalsit (—)t II I 17 3 13 Total +216 —163 I" + 554 I + + ' Not.: lt.oau.e orroundin,. flgurs do notn..arily add tototals. naita —III — N 64 —170 — III Barr, bold aft. an adMimaiua applicabI. to iba irpertlas period required txui +145 + muir.. IS Not inflected In data font Daily ar.ge 1mb !J1 loLl. flint Sat: m Total tt.enee. InoludIna AVERAGE ISSUING RATE5• vanlt cask 17.101 11700 13.113 15.319 11594 15.021* AT REGULAR ThEASVRY BILL AUCTIONS 15.014 lkaulr.d r.s rh? 17.539 aug 20.111 run In pliant Xar.a.s 039 170 74 230 —31 135* Dorrawinp 949 416 1.010 971 395 leSt Fr,. oroat borrowed C—). Weekly iittiua data—April 1970 —315 —131 —915 tans —iio —946 —TINt Matwitie, Nanb,nowed rans 25.037 17.013 21.110 17.39! r.lol IT.1551 Ndtti!T.n. April April AprIl AprIl 6 13 20 27 debelt (—Il 04 196 115 74 II 110*

Tins-mouth 6.409 6.110 6.476 0.171 Six-month Change. In WSiieud.y ansI. 6.454 0.14? 6.494 tlfl Ipift. Asnat b.ldInia .1 Ouveniei.ntasurltis Monthlyauttlea datu.—Febiiary-Aprll 1970 ..tiirlit. lie: Iaban me year 4.414 —471 +111 —302 + 4.454 — — — — — F.briniy North AprIl nthsnon.pear 24 24 23 Total —471 4.010 —302 7 +4141 + +464 Nini-owath 6.094 6.100 2644 Note: Itaneso of roundins. Spire. do act nuccarilyadd to total.. 6.903 6.111 6.014 ads than,. III Trea.uty ourrefl and cash. in uris aupita a_ontlnat.d roreige ounaclee. • lateral reasonwit. are qsted In terms of a lID-day pear, with the diaount.Ira • rnaa for Are weefi ed.S on Arlt 15. par a. tie return on the (a.. mount at th, bills payableat matrity. Bond yield ,I Not reflected In data aba'. ucutval,te. related to tb mount actually In,atad, would to .llgbtJy hioher. 102 MONTHLY REVIEW, MAY 1970 S refunded issues and to raise additional funds. Subscription OTHER SECURITIES MARKETS books were open on May 5 for this part of the offering. market Although market participants were somewhat surprised by The highlight of the corporate bond during the inclusion of a cash offering, prices on the "when- April was the huge AT&T debenture-warrants offer- issued" securities held at a premium during thcir first ing to those owning its shares as of . Until May day of trading. 18 of this year, holders of thirty-five rights can purchase Rates on Treasury bills moved somewhat higher during for $100 a thirty-year Aaa-rated debenture paying 8¾ the early days of the month, partly as a result of investor pereent—lO basis points more than the previous Bell to selling following the establishment of positions for quar- System offering on March 31—and receive warrants terly statement purposes. When the volume of such selling purchase two additional shares of stock at $52 each be- proved less than had been feared and some investment tween November 15, 1970 and May 15, 1975. The com- demand emerged, rates turned down for about a week. pany plans to raise almost $1.6 billion through its sale Dealers carried unusually heavy inventories during much of debentures and an additional $1.6 billion over the 4½ of the month but exerted little selling pressure during the years in which the warrants are exercisable. Initial market when-issued first half of the period despite relatively high financing reaction to the terms was quite favorable: the costs. Substantial demand was expected from state and debentures traded at a premium, and the prices established local government investing of tax receipts and from the on the when-issued rights and warrants also indicated a reinvestment of funds by holders of outstanding tax good deal of investor interest. Four lower rated utility anticipation bills (TAll's) maturing on . syndicates were disbanded on the day after the AT&T After midmonth, dealers became somewhat concerned offering,and sizable upward rate adjustmentsresulted when when the demand from state and local governments failed the bonds were traded without price restrictions. Appre- to materialize to the extent that had been expected, and ciative of the higher rate levels that were developing, new issue on that some paring of positions began. Nonetheless, the resulting underwriters marketed a Aa-rated utility 27 basis more ti pressure on bill rates was not too great, since reinvest- sante day to yield investors points ment demand from the TAB's was still anticipated. The a similar security in the preceding week. costs of financing these inventories was increasing, how- Corporate bond prices drifted somewhat lower over ever, and when holders of the maturing TAB's also did the remainder of the week of the AT&T announcement not bills in the volume expected, rates rose and then dropped sharply at the start of the following purchase on new sharply as dealers marked down prices in an attempt to week, prompting underwriters to raise the return a reduce their stocks. Over the three-day period from April A-rated utility issue to 9.20 percent. Despite the fact that 20 basis below the record for com- 22 to , rates on some outstanding issues increased this was only points a by as much as 50 basispoints. The rise in yields continued parable issue set last December, early sales were dis- unsold balance was reduced in during the remainder of the month but at a more moderate appointing; however, the pace. On balance for April as a whole, rates on bills due the wake of the successful marketing of two more attrac- within three months were mostly 30 to 55 basis points tive offerings that followed. Under the weight of a record while term bills generally increased by from four months' supply, additional announcements of forth- higher longer of 63 to 81 basis points. coming new offerings, and concern about indications as the Reflecting the increased concern over costly inventories an economic upturn, prices continued their decline in the face of disappointing demand, the average issuing month progressed, with the AT&T debentures beginning rates on three- and six-month bills jumped by some 57 to trade at a discount. and 101 basis points, respectively, between the auctions On balance the tax-exempt bond market deteriorated some held on April 13 and . In the monthly auction during April. though the reception given particular held on the day following the TAB's maturation, rates on new issues was quite good. Reflecting the fairly steady the new nine- and twelve-month bills were set at 6.844 overall decline, The Weekly Bond Buyer's index rose each and 6.8 14 percent. up 74 and 68 basis points from the week by from 6 to 23 basis points and reached a high of month earlier (see TableIll). 6.79 percent on April 30, only 11 basis points below its Some $1.7 billion of securities was marketed by five peak of 6.90 percent set on December 18. Starting the Federally sponsored agencies in April, and initial recep- month with substantial inventories from the preceding tions to several of the offerings appeared good. However, period (the Blue List of advertised dealer inventories sto a number of the issues later traded below par as a result at $557 million on March 31), the marketwas confro of the overall worsening in the capital markets. with a record thirty-day calendar which had materialized FEDERAL RESERVE BANK OF NEW YORK 103 as a result of generally rising prices sincc the start of the commercial banks, which might be associated with the year. purchase of tax-exempt securities. Although prices declined on most tax-exempt issues Despite the generally depressed tenor of the tax-exempt during the month, investor interest was for the most part market, two of the month's largest issues nict with favor- restrained and dealer inventories remained large through- able investor receptions. These were a $165 million issue out the period. At the close of April the Blue List totaled of New York City bonds, which arc attractive to local $521 million, a decline of only $36 million over the month. residents because they arc also exempt from state and Adding to the poorer tone in the municipal market was city taxes, and a $100 million issue of Aa-rated Pennsyl- an element of uncertainty which arose at midmonth con- vania bonds which were priced to yield as much as 7 cerning the tax status of borrowing costs incurred by percent on a 28-year maturity.

Banking and Monetary Developments in the First Quarter

The Federal Open Market Committee, at its meeting result of their more favorable deposit position, commercial of January 15, 1970, concluded that "in the conduct banks began to reduce their dependence on nondeposit of open market operations increased stress should be sources of funds. Bank credit expansion was characterized placed on the objective of achieving modest growth in by a shift in the composition of newly acquired earning the monetary aggregates, with about equal weight being assets. The pace of lending slowed, and banks reversed the given to bank credit and the money stock. It was agreed liquidation of securities holdin that occurred over most that operations should be directed at maintaining firm of 1969 and early 1970. Interest rates, spurred by wide- conditions in the money market, but that they should be spread expectations of a more relaxed monetary environ- modified if it appeared that the objective with respect ment and signs of a slowdown in business activity, were to the aggregates was not being achieved".1 In fact, the marked by a broad-based decline. Rates leveled off, how- growth of the money supply accelerated somewhat in the ever, at the end of the quarter and rose sharply again in first quarter from the rates of expansion recorded in the April. tinal quarter of 1969. Bank credit increased slowly in the first quarter, but credit growth tended to accelerate as the MONEY SUPPLY AND TIME DEPOSITS quarter progressed. In the case of the money supply, growth rates within the quarter fluctuated widely, owing The growth of the narrowly defined money supply— in part to technical factors. Time deposit flows also privately held demand dcposiLs plus currency held by the strengthened in this period as the higher Regulation 0 nonbank public—quickened during the first quarter. The interest rate ceilings, made effective by the Board of Gov- seasonallyadjusted daily averagemoney supply grew at ernors of the Federal Reserve System on January 21, a 3.8 percent annual rate from December through March, and the lower money market rates in February and March up from the 1.2 percent risc in the fourth quarter of 1969. enhanced the banks' ability to attract these funds. As a The stronger growth of the money supply in the first

I "Record of Policy Actions of the Federal Open Market Corn- Sec this Reii"t. pigc-s 9R-103 for money and bond market de- mittcc". Federal Rtseri'e Bulletin (April 1970), pages 338-39. velopments in April.