48 MONTHLY REVIEW,

The Money Market in February

A firm tone pervaded the money market in February. connected with the exchange, or for the 1980 bond men- Nation-wide reserve availability declined slightly from the tioned above. The subscription books were open for all float-inflated January level, but the market handled with- investors from through , and are out undue strain the heavy activity associated with large to remain open for individual investors through March 8. Treasury debt operations. As is usual in such a period, Settlementfor the exchange is scheduled to occur on March banks in the money centers experienced large basic re- 15. The public holds about $10.6 billion of the issues serve deficits, but they were able to balance their positions eligible for the pre-refunding and $9.7 billion of those eli- without difficulty through large purchases of Federal funds gible for the advance refunding. and some increase in their average borrowings from the Treasury bill rates, after a brief upward adjustment in Reserve Banks. Federal funds traded at a steady 3 per early February, moved downward on good demand until cent on virtually every day, and the rates posted by the late in the month when they again edged irregularly higher. major banks on call loans to Government In the market for Treasury notes and bonds, interest cen- securities dealers were generally within a 3¼ to 3V4 per tered on the exchange refunding of maturing debt early in cent range. February and the advance refunding described above. Over The final details of the Treasury's combined "pre- the month, prices tended to strengthen in the shorter cou- refunding" and "junior" advance refunding, the second pon issues and to soften in the intermediate area where step in the three-phase financing plan announced on Janu- additional issues were expected—and were offered—in the ary 30, were released after the close of business on Wed- advance refunding. In the market for corporate and tax nesday, . (The third step—a long-term bond exempt bonds, prices moved somewhat lower in the first auction—is planned, subject to market developments, for few days of February, as underwriters sought to attract the first half of April.) The Treasury said that thc issues additional investor interest in new issues. Thereafter, eligible for the pre-refunding would include the 3½ per prices edged slightly higher in the corporate sector and cent certificate and the 2½ per cent bond maturing in steadied in the tax-exempt sector until late in the month , the 3¼ per cent certificate maturing in when a somewhat easier tone spread from the Government , and the 3 per cent bond maturing in securities market. . Owners of these securities were given the option of exchanging them for a new 3¼ per cent note DANK RE5RVES maturing in , or for additional amounts of the outstanding 3 per cent bond of November 1971 or Market factors absorbedreserves on balance from the of the outstanding 4 per cent bond of February 1980. last statement period in January through the last statement Based on the prices of the potcntial pre-refunding "rights" period in February. Reserve drains primarily reflected the before the announcement, adjusted for the cash payments effectsof a routine Treasury interest payment to the Federal by the Treasury, yields on the 1967, 1971, and 1980 offer- Reserve Banks and an expansion of currency in the hands ings worked out to about 3.63 to 3.65percent, 3.96 to 3.97 of the public. These effects were only partly offset by a per cent, and 4.03 to 4.04 per cent, respectively.The issues further seasonal decline in required reserves. System open eligible for exchange in the junior advance refunding were market operations, however, counterbalanced reserves the 3½ per cent note maturing in , the drained by market factors in February. Outright System 3% per cent note maturing in , the 3 per holdings of Government securities increased on average by cent bond of , and the 3¼ per cent bond due $386 million from the last statement period in January in . Holders of these issues were offered the through the last statement week in February, while holdings opportunity to exchange them for the 3/8 per cent bond of under repurchase agreements declined by $104 million. Net November 1974, which is being reopened to yield from Systemholdings of bankers' acceptances fell by $17 million. 3.97 to 3.98 per cent after allowingfor the cash payments From Wednesday, January 30, through Wednesday, Feb- FEDERAL RESERVE BMK OF NEW YORK 49

CHANGES IN FACTORS TENDING TO INCREASE OR DECREASE of 1964 or increased amounts of the 3¾ per cent bonds MEMBER BANK RESERVES, FEBRVARY 1963 of 1968. Initial market reaction to the terms of the ex- In miWoos of dollars: (-4-) denoteslncleaae. change was very favorable. Prices of the rights, the three decteaae In ecceta reserves (—) maturing issues eligible for conversion, moved up as much Daily an,aps—*eO ended as in early trading, while prices of both of the securities Nd FedS? diecln to be issued were quoted at premium bids of from %2 to Fib. Feb. Feb. Feb. in "when-issued" The success the 6 1.3 20 27 42 trading. of refunding, for which the subscription books were open from February 0erItinStveceaatloni 2roeauzy (IL — 85 — 7 4 was reflected in the fact that attrition on the opthua + + —+ 4 through 6, Federal lleeerve Iloat — 237 — 311 + 343 — 106 13 t3lfl000y ID ,c,11Mi(m — 23 —134 — 30 4. 65 —Ill $5.5 billion publicly held portionof the maturing securities Goldsadto,cisnoccaulDt .4-14 — II +2.1 — — Ot depeelt& — + II — 13 — — lit amounted to only 4 per cent. Approximately $6.8 billion lcIaI — IU —2$ + 102 — ii — 32$ of the maturing securities was converted into the 3¼ per Direct Federal Res.ie. tiedit frmflS$CtleM cent certificates of 1964, and $2.5 billion was turned in for (2000mDLoitt5000rtiJcs: Diroti DiszkVt piarcheeci OF se1.... + 2110 + 212 — Ut + 54 ÷ the reopened 3¾ per cent bonds of 1968. hold UnIt2 rcporct,sao svnemti -•- + 157 + U —124 — U — 104 Iaeua. .1IicowtL. anti sd,socee: Once the books closed on the February refunding, mar- Moctiber bsck borrowing, — Si — 0 — 36 5) +— + Otbw — 2 — .4-SI) 4.23 ket attention shifted to the forthcoming advance Scinkor? refunding 500pItanere: — Boubt outriitit — — 1 — I — 2 expected in the latter half of February. Prior to the an- UDde? ,eSIluthaae sgreionta — S — to — — — 13 nouncement of the terms of the operation on February 20, l'otai +535 ÷ 175 —401 .4.13 + 521 prices of outstanding iSSUeS due through 1966 moved gen- Member bankmenu With Fedoral Reecryc Ranko + 321 — 33 — — .13 — 3:: erally upward, reflecting market views that some of these Cncih allowed so — 261 20 + 123 + 16 — 57 + issues would become rights in this refunding and that Tetal r*.t1vS$t .4.73 — ii! —111 +10 — SD — 47 34 111 this area (Sect of ohonga In reunited 011tivoat... + 108 + - 4B .4. supplies in maturity would accordingly be re- (coon rcwvut + + —7 +5 + IL duced. Concurrently, prices of issues due later than 1966 flatly e,er loon 06 ,utuiho7 InnS: generally edged lower, prompted by investor expectations Ucr,owlngn froctt Rneeo.e Bsnk, 223 1112 157 126 165) F.xon, recorvest 457 001 424 4131 4661 that the refunding would add to the supply of securities, roo otuerveet 214 336 211? 353 21)7: perhaps as far out as 1980. In mid-February, trading contracted as Note: Itinowseof 600ndiflO. flures do not nocecearilyadd to totai.L activity the market awaited the precise terms leciudecc2csgoo In Precatuy cunes sad canit. of the I Tboe. Sgur are estimated. offering. I Arerngo toe IOU, weeks esdad Feu.r, 11. 1503. The Treasury revealed on that it was con- sidering enlarging the scope of its forthcoming financing to include not only a junior advance refunding, as earlier niary 27, outright System holdings of Government securi- indicated, but also a pre-refunding of issues of Govern- ties maturing in less than one year rose by $252 million ment securities maturing within one year. Complete details while holdings maturing in more than one year declined by (discussed above) were released on the following day. $60 million. Subsequently, trading was heavy and prices moved frac- Over the four statement weeks ended , free tionally lower, as investors adjusted their positions in the reserves averaged $297 million., compared with $357 mil- light of the numerous alternatives made available by the lion (revised) in the five weeks ended January 30. Aver- refunding and as Government securities dealers absorbed age excess reserves fell by $116 million to $466 million, a heavy volume of rights. Over the month as awhole, prices while average borrowings from the Federal Reserve Banks of Treasury notes and bonds due through 1966 ranged declined by $56 million to $169 million. from %2 higher to %2 lower, those in the 1967-72 maturity 2 category were /32 higher to 1/32 lower, and long-term is- sues were to lower. THE QOVERNMENT SECURITIES MARKET %2 higher 1%2 Treasury bill rates moved slightly higher in the first Treasury debt operations, in process and pending, dom- few days of the month. Reinvestment demand arising from inated the market for Treasury notes and bonds in Feb- switches out of rights to the Treasury's early February ruary. At the beginning of the month, market attention exchange refunding was relatively light, and dealers' focused on the Treasury's exchange refunding in which awards in the first weekly bill auction of the month were holders of $9.5 billion of Treasury notes and certificates fairly large. At the higher yield levels, however, demand maturing on werc given the opportunity to expanded, resulting in a decline in seasonally swollen onvert these securities into new 3¼ per cent certificates dealer positions. The market was also buoyed by anticipa- 50 MONTHLY REVIEW, MARCH 1963

Lions that additional demand for bills might rcsult from to 3.02 per cent. (These indexes comprise only a limitc the February redemption of a large Government agency number of issues and do not always constitute an accurate issue and from the Treasury's advance refunding operation. guide to the tone of the market.) Against this background, bill rates edged lower from Feb- The total volume of new corporate bonds reaching the ruary 6 through 21. In the final auction of the month held market in February amounted to approximately $275 mu- on February 25, average issuing rates were 2.870 per cent lion, compared with $345 million in the preceding month for the new three-month issue and 2.922 per cent for the and $490 million in . One of the two six-month bills, in each case 5 basis points below the rates largest new corporate issues marketed during the month established in the last auction in January. Dealer awards was a $50 million Aaa-rated4% per cent utility company in the auction were large and yields subsequently moved debenture issue maturing in 2003, which reached the higher, as demand for bills from corporations selling the market early in February. When reoffered to yield 4.29 per short-term rights dried up when the prices of the short-term cent, the debentures—which arc not redeemable for five However second million rights declined. years—were well received. a $50 utility issue floated later in the month, consisting of Aa-rated 4% cent first bonds maturing in OTHER SECURITIES MARKETS per mortgage 1998 and reoffered to yield 4.27 per cent, encountered Prices of seasoned corporate and tax-exempt bonds investor resistance. New tax-exempt flotations during moved fractionally lower at the beginning of February, the month totaled approximately $735 million, as against but a better tone emerged in both sectors of the market $890 million in and $1,125 million in Feb- later in the month. The improvement was most pro- ruary 1962. The Blue List of advertised dealer offerings nounced in the corporate sector, which was strengthened of tax-exempt securities declined by $54 million during the by a relatively small supply of new issues and by a light month to $516 million on the final day in February. The calendar of scheduled flotations. In the tax-exempt sector, largest new tax-exempt offering during the period con- on the other hand, the heavy volume of new and forth- sisted of a two-part municipal bridge and tunnel authority coming issues represented a restraining influence. Against revenue bond offering. The flotation, which was not rated this background, prices of corporate bonds edged higher by Moody's, included $50 million of 3½ per cent bonds until late in the month when a more hesitant tone appeared reoffered to yield 3.45 per cent in 1985 and $50 million in the market, while tax-exempt bonds were generally of various coupon bonds reoffered to yield from 2.60 per on cent in 1970 to 3.20 cent in 1978 and was well re- • steady. For the month as a whole, the average yield per Moody's seasoned Aaa-rated corporate bonds declined ceivcd. Other new corporate and tax-exempt bond issues accorded mixed • by 2 basis pointsto 4.19 per cent, while the average yield marketed during the period were recep- similarly rated tax-exempt bonds rose by 5 basis points tions.