The Money and Bond Markets in August 1968

198 MONTHLY REVIEW. SEPTEMBER 1968

The Money and Bond Markets In August

A sizable volume of debt offerings produced consider- cent bid on July 31 to as low as 4.88 per cent bid on the able congestion in the capital markets during August morningof August 5. However, the large financing needs of despite continued confidcnce among market participants dealers in Government and other securities continued to that fiscal restraint would lead to lower interest rates over converge on the major money market banks, which were the months ahead. An enthusiastic reception was accorded also accumulating securities and experiencing large Trea- the Treasury's sale to the public on August 5 of a 54 sury calls on Tax and Loan Accounts. These banks were per cent six-year note (priced to yield 5.70 per cent) to consequently under heavy reserve pressure as reflected in refinance $3.6 billion of publicly held issues maturing on the Federal funds marketwherc effective rates of 6 per cent August 15 and to raise an estiniated $1.5 billion of cash. or above persisted beyond midmonth. The rates posted by Subsequently, the very size of the issue—the largest cash the New York City banks on new loans to Government offering of comparable maturity since World War H— securities dealers were as high as 6½ to 6/8 per cent in served to restrain prices of intermediate- and longer term the first half of the month, well above July levels, placing as distribution of the new on dealers to reduce their • Govcrnment coupon securities strong pressure positions note to investors proceeded. The technical reduction of the especiallyin Treasury bills. As a result, Treasury bill rates Federal Rcscrve discount rate to 5V4 per cent from 5½ rose, and the three-month bill rate fluctuatedapproximately per cent, which beganat midrnonth, aligned the rate with in a 5.10 to 5.20 per cent range in the last two thirds of changes in money market conditions which had resulted the month. Followingthe reduction in the Federal Reserve from increased fiscal restraint. This action helped sus- discount rate, the Federal funds rate eased somewhat in tain market long-term expectations of lower rates, but the second half of the month to a 5¾ to 6 per cent range prices of most Government coupon securities maturing and bank lending rates on new call loans to securities bcyond four years were lower over the month as a dealers declined late in the period to a 634 to 65/ti per whole. The new 5's's closed at 9992 bid, a premium of cent range. about over its issuingprice, after having traded as high as 1O0% immediately after the discount rate cut. BANK RESERVES AND THE MONEY MARKET Yields on new tax-exempt bonds rose during August, as approximately $1.7 billion of ncw offerings followed thc The toneof the money market was gencrally quite firm July buildup of professional inventories. The Weekly Bond during the first half of August. Thc basic reserve deficit Buyer's index of yields on twenty tax-exempt bonds rose of the major money market banks increased sharply, from the year's low of 4.07 per cent on August 8 to 4.38 primarily as a result of continued heavy borrowing by per cent on August 29. In the corporate bond market, securities dealers (partly in connection with the Treasury's investor resistance to lower yields led to mixed receptions August financing), large Treasury calls on Tax and Loan for the month's new issues. However, the moderate vol- Accounts, and an increase in bank investments.In the face ume of offerings during August, an estimated $660 mil- of substantial demands for securities loans and consider- lion, tempered the tendency of corporate yields to work able reserve pressures, the major New York City banks higher. during this period posted rates on new call loans to Gov- Most short-term interest rates moved sharply lower at ernment securities dealers generally in a high 6½ to 64 the beginning of the month, as the Treasury's refunding per Cent range. The average basic reserve deficit of of August 15 maturities into a six-year issue shifted a the New York City banks in the two statement periods large volume of debt out of the short-term area. The rate ended on August 14 was almost $1.5 billion, substantially on three-month Treasury bills plummeted from 5.17 per above the $547 million averagelevel recorded over the five FEDERAL RESERVE BANK OF NEW YORK

statementperiods in July. At the thirty-eight major reserve within two months generally remained at the 5½ per cent city banks outside New York, the basic reserve deficit Regulation 0 ceiling applicable to this maturity area. averaged $1.2 billion during the interval (see Table 11), However, most of the large New York City banks offered fittle changed from the high July average. In order to fill new C/D's of longer maturity at posted rates from ¼ their large reserve needs, the money market banks bor- percentage point to ¾ percentage point below the ceiling rowed heavily in the Federal funds market (where the rates (which are 5¾ per cent for 60- to 89-day C/D's, effective rate ranged from 6 to 6¼ per cent) and satisfied 6 per cent for 90- to 179-day C/D's, and 6¼ per cent their residual reserve needs in part through expanded for longer term C/D's). In their efforts to fill substantial borrowing from the Federal Reserve Banks. Nationwide reserve needs, the large reporting banks supplemented the net borrowed reserves during the first half of the month inflow of C/D funds with a substantial volume of borrow- averaged about $315 million (see Table 1), compared ings from overseas branches. Their liabilities to foreign with an average of approximately $190 million in the five branches rose by approximately $880 million during statement periods ended on July 31. Aggregate member August. bank borrowings from the Federal Reserve Banks averaged $657 million during the first half of August, as against a THE GOVERNMENT SECURITIES MARKET $523 million average level in July. The tone of the money market remained relatively Activity in the market for Government notes and bonds firm, following the ¼ percentage point decrease (from was dominated early in the month by the Treasury's large 5½ per cent to 5¼ per cent) in the discount rates of the August financing operation, the terms of which were dis-. Federal Reserve Banks of Minneapolis (effective August closed at the end of July. The Treasury offered a 55/s per 16) and Richmond (effectiveAugust 19)1 and the similar cent six-year note (priced at 99.62 to yield about 5.70 [ reduction on August 16 in the rate charged by the Federal per cent) to replace $8.6 billion of outstanding securities Reserve on repurchase agreements with nonbank dealers maturing on August 15 and to raise an estimated $1.5 in Government securities.The major money market banks billion of new cash. Approximately $5.1 billion of the continued to report large basic reserve deficits, reflecting note was offered to the public (which held $3.6 billion not only the persisting impact of dealer borrowing, but of the maturing securities), while an additional portion also bank acquisitions of securities. Market pressures of the offering was earmarked for Government investment diminished somewhat after znidmonth when the distribu- accounts and the Federal Reserve Banks. The announce- tion of reserves gradually became more favorable to the ment of the financing operation was received with enthu- money market banks. The effective rate on Federal funds siasm in the market. Many observers considered the 5.70 eased to a 5¾ to 6 per cent range, and bank rates on per cent offering yield generous, especially in light of their dealer call loans were quoted in a 63b to 6¼ per cent anticipations of a near-term decline in interest rates. In range for new loans. initial trading following the announcement, only a minor Several adjustments were made during August in the and brief downward adjustment in prices of outstanding rates on various money market instruments. By the end coupon issues occurred. Prices rapidly recovered, and dur- of the month, bankers' acceptance rates were generally ing the first two trading days of August rose throughout percentage point below their July 31 levels, and rates the maturity spectrum in response to broad professional on directly placed and dealer-placed commercial paper and investment demand. The underlying tone of the cou- were approximately ¼ per cent and per cent lower, pon sector was quite strong during this period, amid respectively. further discussion in the market of the prospects for a The large weekly reporting banks continued in August decline in interest rates, including the Federal Reserve to realize a net inflow of funds in the form of large- discount rate and the prime lending rate of commercial denomination negotiable certificates of deposit (CID's); banks. It was generally believed, moreover, that the the volume of outstanding C/D's rose over the month Treasury's offering would be substantially oversubscribed. by an estimated $833 million. Rates on C/D's coming due A less buoyant tone emerged in the coupon sector from August 5 through about midmonth, as diverse market influences came into play. Early in this period, activity in outstanding issues slackened and some profit taking— 1Acti by the other distriets between August 23 and August primarily from professional sources—occurred as the 30 made the new 5¼ per cent discount rate uniform throughout market awaited the outcome of the the Federal ReserveSystem. The New York Federal Reserve Bank Treasury's financing. lOWered its rate on August 30. The Treasury announced the financing results on August 200 MONTHLY REVIEW,SEPTEMBER 1968

Tabi. I Table U FACTORS TENDING TO INCREASE OR DECREASE RESERVEPOSTTIONS 01° MAJOR RESERVE CITY BANKS MEMBER BANK RE8ER'ES. AUGUST 1968 AUGUST 0968 InlWon$ of dollars: (+3 denotes increase, Iii millions of dollars (—) decrease in escess reserves Daily sintaes—estk ended on A176;t Futor$ foul teeks cbanas In daily a5du,i laded aisrars— butt tOUrS?o0itioii$ a wenkeodedns Nt Auoud Au;uul AuOust Auguit Auoint Futcri "' 14 3 25 28s Auud Auguit Au4ust Auuut 7 14 21 E}td bnok* In New Voik City

Reserve exce or dcfadency(—)1 5 24 92 30 Is fagtors Lees borrnwin5a froni u.,tsr Reaervt Banks 337 170 274 — 195 3(ember nn reoutred rot'on . — 30 305 — 153 10? 513 Lc net lntcrbank Federal funds + + + 1,110 1,313 1,006 1,152 1,160 ttaAs.ctlaaa taublolel) . — 497 — 119 4 — 51 —s54 purchases or .ale.(—) OporalJag + Gross pu.rclwjes 1,591 3824 1,509 1.600 1,631 Federal Rer'e Onal + 18 — 9 + 346 — 61 + 94 Gins, tales - 480 452 503 448 471 Ttoionry oporaUotts? 108 — 65 — 04 — 60 — U Equals net baSIc reserve ourplua + or —1,442 —0,518 —1.267 —0,122 1.331 Gatd and forligO .eoniml — 40 + 16 10 + 48 + 90 delicit(—) — — ÷ — Net loans to Government C(UTotC7 sos su + 1*0 +118 299 geCsulic$ deakfs .. 1,431 1,051 1.114 1,094 1.173 Other Federal Reaoeee soonunia Instil.. — 16 + 65 —373 + 14 -.s?o letaI 'rasekot" fietore —41 90 —104 50 —441 + + Thhrty-elgbt banks outside New York ClOy Direst FederalReaerv credit ris8utions Reserve caceal or deOclency(—)t 14 38 20 — I IS Open ina,ket Instrwzients Less boriowinp (eons . Reserve BaflkS . 44 55 90 70 65 Outright boldth$n: Less net Iniorbank Federal funds Opeeroment aeonrttlc. + 7 + 32 + " + 9 + purchases or sales(—) 1.022 1,335 0,425 1,344 0,2.82 BankcrV accepcan — S — I — 1 — — '5 Gross piirchages 2,218 2.632 2,665 2,628 2,536 B4l&Jcbane agrgelnenth: Gross sale, 1,796 7,297 1.240 1,2M 1,254 Eqw,lo net basic reserve aurplul OOrnoeflt eetutItIea +876 — IT — 112 —ill — 34 or deficil(—) —0,052 —1.353 —1,494 —1,415 —1,329 Ban? aeptsaoen — V — 8 — Is — is — 4* Net loansto Government 20CuriticS dealcrs 715 885 635 749 794 Federsl alebay ObIlg$tlOIL, + 13 — — ho — a — Mamba bank ou1ags +136 — io + 42 —146 —1*9 Other LOana. diacounis. Sold S4,anCra — — — — — Mote: Because of mundln.6gurea donot necessarilyadd to blab. I Eatlm*ied rrwrve tLuzes hare not been adjusted for so-called "as of" debits — — and credits. These Items are taken nit, account in flnal data. Total + 48? 141 I + 201 388 +180 t Rsser.ea held after all adjustments applicable to (It; repofling period Otis required reserves aod casey-overreserve deftcLciscit. + — —191 101 621 +1571 —335

Table Daily anraos ntis m AVERAGE ISSUING RATES* AT REGULAR TREASURY BILL AUCTIONS In per cent Mebwbatik: Total reeervm, IncludingVault C.&uli 26.2.46 26.585 26.2*5 25762 28.0564 B.SUIZP4 raver,e• 25.878 25.649 21.723 38.415 23.6359 Wnldy aixtiolldsts-'—A;ust 19 zNge n'eef,eol 3(13 3111 6113 167 9 Mituriliet BotrV1na 737 370 609 *14 5710 'ree at n..t betioad rarves.. —369 —200 — 116 — 007 — Autust 5uud (-4-) l— 13*8 26 30 ltonbo,rowe3 rmencs 85,509 99.309 15.606 15.402. 53,4559

Tbreo.month 5.173 5.194 Six-month 5.242 5.250 Otansti inWednesday tenet;

Monthlyauttloit dStu—Juns.AuUust 196$ 5,itw Aoeount baldiogo if Goesromiat 80eurItlea e,aturIn I,: — — Jo.6 July Augutt LIBO than one +401 717 —4.405 276 —4.930 — — — 25 24 27 Mote than one ova, .4-4.179 +49 Nine-month 5.145 5.342 5.245 Total +401 — 177 + 37* —876 + 111 One-year..... 5.731 5.309 5.151 Mao.: ltacatiau a? vtit5Ing. Igujisdo notnocaarI3y add to totals. • are Thote 6gvu. .1nesn.'1. • Intervalrates on bills are quoted inIdols of a 360-day year, with the djsC,00chI t includes aMages I,, ?Pes.uurpeazyauay sad eaah, from par as the rewrn on the face amount of be bills payable at maturity. I lCludêS?I'50 OeaoulDal.'d In 'creles ou,.dca. Bond yield equivalents. relaled to the amount actually invested, would be I Averace of foul acteta ondod on Meug 33. 1368. tli.ghtly higher. FEDERAL RESERVE BANK OF NEW YORK 201

7, reporting that the six-year note offering was heavily drifted irregularlylower. Some professional selling pressure ovcrsubscribcd. Subscriptions from the public totaled developed in reaction to President Johnson'sstatement on $23.6 billion, including $11 billion from commercial August 19 that the current policy on the prosecution of banks for their own accounts. (Banks were permitted to the Vietnam war would be continued for the balance of his pay for 50 per cent of their awards by crediting Treasury Administration. Soon thereafter, the invasion of Czecho- Tax and Loan Accounts.) The Treasury accepted ap- slovakia by the Soviet Union and several other Warsaw proximately $5.5 billion of public subscriptions (exceed- Pact nations generated a very cautious tone in the coupon ing the $5.1 billion originally offered), and an additional sector. Thus, from August 19 through August 22, prices $4.8 billion was allotted to Government investment ac- of Treasury notes and bonds generally rcceded. However, counts and the Federal Reserve Banks; thus approxi- as prices edged downward, demand emerged repeatedly, mately $1.7 billion of new cash was raised in the opera- thereby limiting the extent of the decline. Subsequently, tion. The Treasury allotted in full subscriptions for demand expanded somewhat, and during the remainder $250,000 or less and all subscriptions from local govern- of the month prices edged higher in relatively quiet trad- ments, public funds, and foreign official sources, while all ing. Over the month as a whole, prices of most issues other subscriptions from the public were subject to an 18 maturing within four years were unchanged to 1 higher per cent allotment although assured of a minimum award while issues of longer maturity wcre mostly unchanged to of $250,000. I.. lower. The 18 per cent allotment on large subscriptions, al- Treasury bill rates moved sharply lower in the opening though relatively low, nevertheless exceeded the estiinate days of August in response to strong investor demand which predominated in the market just prior to the release —particularly for 1968 maturities—augmented by pro- of the financing results. Consequently, the news precipi- fessional purchases of longer term issues. The bill market tated some selling pressures in the coupon sector, while was buoyed during this period by the absence of a short- at the same time market anticipations of a near-term maturity coupon offering in the Treasury's August financ- easing in monetary policy began to wane. Commentary in ing, as well as by expectations of considerable reinvest- the press and in market advisory letters cast doubts on ment demand for bills from holders of maturing notes the outlook for a relaxation in monetary policy in view and bonds who preferred not to convert into the six-year of the persistence of domestic inflationary pressures. Fur- note being offered by the Treasury. As a result, acute thermore, news of a deterioration in the British trade bal- scarcities developed in the bill market, especially in the ance in July diminished expectations of a cut in the British short-maturity area. Consequently, rates for bills matur- bank rate, which bond market participants had hoped ing in less than five months dropped as much as 28 basis would augur a lowering of the Federal Reserve discount points in the first two trading days of August, while rates rate. As midmouth approached, considerable uncertainty on longer bills fell by as much as 19 basis points. pervaded the market, while the relatively wide gap be- As the month progressed, a fairly good investment de- tween high dealer-financingcosts and prevailing yields on mand persisted, but firm conditions in the money market, coupon issues put an appreciable damper on market senti- highlighted by rising dealer-financing costs, made market nient. Against this background, prices of most Treasury inventories more burdcnsomc to carry and generated sell- notes and bonds dcchned steadily from August 5 through ing pressures from professional sources. In this setting. August 15, with the largest price declines occurring in the and amid mounting uncertainty over the future course of longer term maturity area where demand was modest and monetary policy, bill rates increased fairly sharply over an expansion in offerings from institutional investors de- the August 6 through August 15 interval. veloped. However, as market yields moved higher (see Subsequently, demand for bills expanded somewhat and chart on page 202), investment demand from commercial rates moved lower in reaction to the August 16 reduction banks and other sources tended to revive, particularly for in the discount rate of the Federal Reserve Bank of Min- the new 53 per cent six-year note. neapolis, followed by the ¼ percentage point decrease in Prices of Treasury notes and bonds initially advanced the rate charged by the Federal Reserve System on re- in response to the ¼ percentage point reduction on purchase agreements with nonbank dealers in Government August 16 in the discount rate of the Federal Reserve securities. A hesitant atmosphere soon reappeared in the sank of Minneapolis. However, the apparent reluctance bill sector, however, when demand contracted and offer- of some Reserve Banks to join promptly in the discount ings increased; uncertainty concerning the implications of rate reduction appeared to temper its impact upon the the invasion of Czechoslovakia also had a restraining im- market. Activity contracted, and prices subsequently pact. Against this background, bill rates fluctuated from 202 MONTHLY REVIEW.SEPTEMBER 1968

SELECTED INTEREST RATES MONUMARKflRATS Auuill65 BOHDNAAXET YltioS con'

1. ri ii

Ace -. lii ilitiil iii IIi ui iiii $ 12 19 26 3 10 17 24 31 7 14 21 28 3 I2 19 26 3 10 17 24 31 7 14 71 28 Jvn• July Avgu,P Jon. July N.t, Oslo or.,ko.. lo,bui-.n.,. doy.only. MONEYMMK1T tATE%OuOtlO 0.4, .sn. ci rot,.po.e.4 by nr.or Pb...Vs, Coybsn, ysintfrom ,,d.n.nhn9 oynth, ml.r.o4l.,n ycid ens ;re.n no...I. ocr.' old oo In. 0*c. coil1.... (I.. F.d.roI I,nd,j .swr.d byU.o.d Slol,. Gso..o....o ,oto,yin. I.. ooo ,c. oro.in.modiefly cIt.. III.e. be-., ,.1.o..dIr,. ,y.dncele ..,r.on.l doly odi.coI., ik. ob...,..ci soy .ong.IoIluinQ rot,. In. dir.clIy yilee.d 5y,ooypgpy sootog.. .0 y.Ido on ygt,oesrn.npnllot..!il.., bondi do. or tollobIn nlq.. lb..10.,ern. .e1 sot.dotq!jiflb. rub mool .pr.n.ntoIi.. .Ib.lr0000tiQl,, sootole-di; or morel sod.0 Gøro—ot,P,c.e'., 4... n Ih, ruihojj. ccmp.rr.d no In. bo,, of do.i.rqbid rot.. (q,oe.d I.br., ci rot. .0 d..co...nllon n,.,t os$,t,ndi..9 !bt,4 cio,.ng bidpric.o Thur,duy o..,o...0 ,i.ld on ,s.nty ,.oonsd 'y-y.nrto. ....pt .jy.25 - 1LtioI,,hill. ei prorrv.ngMoody. rn'ing tel *c.. A., A, codBeol. bOND MAIKU YIELDS QUOYKD Yield, c.nso A. podAe-,ot.dp,bIit ybiIsyQd! or. plotr.d See-rn..: F.d.roI I..,...lenIn of Pie-. Y..I. leo-rd .1 Gon.rnor, olIn.r.d.,.I I.....Sy.irnn crosod aline Itoe-ingd..ly ...rsg. yield, on ..p,pn.d Aoc.rab.dbOyplOobe bn..do a.,.'.. Moody.I.o..Iot, S*.ai,. and Thq.,ilyAyjyyE.

August 20 through the end of the month. a 5.70 per ccnt bond maturing in 1972 (including $70 mil- At the regular monthly auction of nine- and twelve- lion of new cash). Other new financing activity included month bills held on August 27, bidding was aggressiveand the offering on August 14 by the Federal Home Loan average issuing rates were set at 5.245 per cent and 5.151 Banks of $300 million of a 5.65per cent six-month deben- percent, respectively, 10 and 16 basis points bclow average ture at par. The issue, which partially replaced a $500 mil- rates established a month earlier (see Table Ill). At the lion maturity, was accorded an excellent investor recep- final regular weekly auction of the month held on August tion. A week later, the Federal intermediate credit banks 30, average issuing rates for the new three- and six-month offered $337 million of a 5.65 per cent nine-month deben- bills were 5.194 per cent and 5.250 per cent, respectively, ture which partly replaced $375 million of maturing obli- virtually unchanged and 4 basis points below auction rates gations. The new debenture was priced at par and was at the comparable auction held in late July. very well received, On August 28, the Federal National Prices of Government agency securities rose in early Mortgage Association offered $350 million of a 5¾ pet August and then moved irregularly over the remainder cent three-year debenture priced at par. The offering, which of the month. A very good reception was accorded an Au- replaced a maturing issue of equal amount, was fairly well gust 7 offeringby the Federal land banks of $230 million of received. FEDERAL RESERVE BANK OF NEW YORK 203

OTHER SECURITIES MARKETS to close the month at 5.96 per cent (see chart). In the tax-exempt sector, a heavy volume of new issues A fairly strong tone prevailed in the corporate bond flowed into the market and the calendar of scheduled flo- sector during the first half of August, and prices generally tations steadily expanded in August. Underwriters bid moved higher. The sector was in an excellent technical fairly aggressivelyfor new tax-exempt offerings during the position. The volume of new offerings and scheduled flota- early days of the month but, as yields edged slightly lower dons was relatively light, and unsold balances of recent and the volume of new issues grew, investor receptions jsues were small. Underwriters competed aggressively became quite restrained. The Blue List of dealers' adver- for the limited amount of new corporate bonds made tised inventories increased sharply, the technical position available by borrowers at competitive bidding during this of the market deteriorated, and yields rose steadily over period. Just before midmonth, investors accorded a good the remainder of the month. Even at the emerging higher reception to a $50 million Ma-rated utility company de- yield levels, considerable investor indifference to new and benture issue (with five years of call protection) which was recent flotations persisted. As underwriters terminated reoffered to yield 6.25 per cent, 20 basis points below the price restrictions on several recent issues, yields were ad- yicld on a comparable issue which had been marketed on justed still higher, and a very heavy atmosphere prevailed JUly 23. The midmonth news of a reduction in the Federal when the month ended. The Blue List of dealers' adver- Reserve discount rate in two districts also buoyed market tised inventories amounted to $794 million on August 30, sentiment. At the higher price levels, however, investors compared with $482 million on July 31. The Weekly bãcame more selective, new issues encountered mixed re- Bond Buyer's average yield for twenty seasoned tax- ceptions, and scattered price declines occurred. Over the exempt issues (carrying ratings ranging from Aaa to Baa) month as a whole, the average yield on Moody's Aaa- rose by 24 basis points over the month to 4.38 per cent rated seasoned corporate issues declined by 18 basis points (see chart).