210 MONTHLY REVIEW,OCTOBER 1969

The Money and Bond Markets in September

The and bond markets continued to feel the the largest September total on record, and investor money One effects of monetary restraint during September, as new resistance was at times quite pronounced. prime-rated received fair corporate issues provided record yields and rates on most Bell System issue, for example, only a commercial paper and bankers' acceptances also moved initial reception despite a record yield of 8.25 percent. bond on the other an higher. The effective rate on Federal funds again averaged In the municipal market, hand, of new issues resulted in a decline 9 percent, but member bank borrowings declined during unusually light supply the month as a result of an unusually large voiwne of re- in yields during the month (see Chart I). Several sched- because of statu- serves provided temporarily by Treasury operations. uled municipal offerings were postponed of A large Treasury refinancing, which included the pre- tory interest ceilings and others withdrawn because refunding of a December maturity, attracted a good deal unfavorable market conditions. Growing optimism about of attention during the month. On September 17 the Trea- the tax reforms that would eventually emerge from the from securities also sury announced that holders of $6.4 billion of Treasury congress relating to income municipal notes and bonds due on and almost $2.5 billion contributed to the better tone in that market. of bonds maturing on December 15 would be offered three issues in exchange. These were a 19½-month note BANSI RESERVES AND TIlE MONEY MARKET offered at par to yield 8 percent. a 3-year 7½-month note with a 7¾ percent coupon also offered at par, and a Money market conditions continued firm during Sep- in the 7½ percent note maturing in 6 years 10½ months and tember despite a large volume of reserves provided a rundown of priced to yield about 7.59 percent. These rates were the week ended on September 10 by Treasury million of Trea- highest on comparable Treasury issues in more than a cen- balances and the sale of $1,102 special The effective rate tury, and the public gave the offering a very good recep- sury certificatesto the Federal Reserve. tion. The attrition rate on the publicly held portion of on Federal funds averaged 9.1 percent for the month, while rates on com- the maturing issues was 19.7 percent, considerably lower essentially unchanged from August, were increased than expected in the light of current market conditions. mercial paper and bankers' acceptances Of the $8.9 billion being refunded, the public held $7.6 during the month. Due primarily to the unexpectedly billion. large provision of reserves by Treasury operations, mem- With the of some short-term bill and coupon ber bank borrowings at the discount window in Septem- exception on issues, prices of United States Government securities de- ber—amounting to $1,026 million a daily average clined during September. Some brief improvement oc- basis—were down $185 million from the preceding curred from time to time in response to such factors as a month, while excess reserves averaged $88 million higher statement by Chairman Martin that interest rates might than in August. Net borrowed reserves of member banks have reached their highest level and optimistic speculation averaged $766 million for September as a whole. associated with the cease-fire in Vietnam following the The basic reserve positions of both the eight major death of Ho Chi Minh. Such rallies were short-lived, banks and the thirty-eight money center however, and the overall trend was downward. Concern banks outside New York showed a deterioration over the over the current and prospective volume of Federal month though their intramonthly patterns differed. The agency securities weighed heavily on the market toward New York City banks had a basic reserve surplus averag- the end of the month. ing $285 million at the close of August but moved to a Corporate bond prices also fell in September, and rec- deficit position in the week ended on September 3, pri- ord offering yields were set on many of the issues that marily as a result of a sizable decline in their borrowin were marketed. The volume of new corporate issues was other than from their foreign branches. The thirty-eig FEDERAL RESERVEBANK OF NEW YORK 211

ChartI SELECTEDINTEREST RATES July-Sept.mb.r1969

2 9 16 23 30 6 13 20 27 3 10 17 24 2 9 16 23 30 6 13 20 27 3 10 17 24 July August Sept.mb.r July Auguut September Not..Data or. shown for busewss days only. MONEYMARKET RATES QUOTED, Dailyrang. of ,ot.u psutedby major NewYost. City hanku immediatelyalter it has been releasedfrom syndicate restrictions); dollyavesogel styieldu on callloans (isFederal lundul secured by United Stateu Government securities (a point en seasonedAoa-rat,d corporat. bonds; dailyaverages ofyi.lds on long-termGovernment idicateithe obuence of any range), offering rate.for directly placed financecompy pgpr, e.curttteu(bands due or callable In ten y.aruor morsf andon Governmentsscuritt.u du, in the effectiv.rate an Federal fsndu (therote most representativ, of the transactions.necuted(, three to five y.oru, computedon the basisof cloning bid prices; Thursdayaverages ofyields closing bidrat.u)quoted intenet of rot,of dincoun on newestsIstanding Mr... andsu,.mond, ontwenty vn.ononedtwenty-year tas.exsmptbosds(canying Moody's ratIngsot Mo, Aa, Treasuryloll.. A, andBaa). BONDMARKET YIELDSQUOTED. Yields on newAoo- and Aa.rated publicstf Ilty bonds (arrow, point Sources.Federal ReuerveBank ofNew York. Boardof Governors of the P.d.ralReserve System. fromunderwriting syndicatescattering yield on agiven issueto marketyield on the someissue Moody'sInvestors Service, and The W.ekly land layer.

other money center banks, in contrast, showed a slight this was the week of quarterly corporate dividend pay- improvement in their position. ments as well as the sale of Alaskan oil leases, total In the week ended on September 10 the basic deficit loans and investments, other than loans to dealers, de- at the New York City banks increased by $1,085 million clined at the forty-six banks. and that at the other money center banks by $433 mil- The major money center banks managed their reserve lion. A major factor contributing to the worsening in positions aggressively in the week ended on September New York was a rise of $722 million in loans to Govern- 17, accumulating sizable reserve deficienciesover the first ment securities dealers. That increase was to a large ex- five days. As a result, the more usual pattern of tightness tent the counterpart of sizable matched sale-purchase in the Federal funds market at the start of the week and transactions by the System to offset the effects of the large some easing at the close was reversed. The effective rate volume of reserves being supplied by Treasury opera- on Federal funds was 8¾ percent on Thursday and tions. In addition, the Treasury made frequent calls on Friday but then began to rise, reaching 10 percent by its accounts at money center banks. A loss of private Tuesday as the money center banks attempted to settle also contributed to the deterioration of the basic their reserve positions. The volume of float was less than .epositsosition at both groups of banks. Despite the fact that had been expected, and the System executed repurchase 212 MONTHLY REVIEW,OCTOBER 1969

the effective rate to suit of a decline in loans to Government securities dealers. . agreements which helped to reduce market 9½ percent on the settlement date. Loans and invest- During the month of September, System open ments at the center banks increased sharply operations absorbed $735 million of reserves on a daily major money the during this corporate tax payment week, and the basic average basis (see Table I). System operations during of position of the thirty-eight banks outside New York City first and last weeks of the month supplied reserves worsened by $773 million. The deterioration in the basic $878 million on a daily average basis through repurchase million of reserves was absorbed position of the eight New York City banks was consider- agreements, but $1,613 however, as sizable gains in deposits and Euro- during the second and third statement weeks, primarily ably less, of dollar borrowings offset a large amount of the increase through the use of matched sale-purchase agreements in loans and investments. varying maturities. The tone of the money market was quite firm during There was no change in the seasonally adjusted money 1.8 the final statement week in September, and the effective supply during September following a decline of per- rate on Federal funds was above 9 percent throughout the cent (annual rate) in August. Over the third quarter as period. In a reversal of the pattern of two weeks earlier, a whole the money supply grew at a rate of only 0.2 per- Treasury operations absorbed $1,796 million of reserves cent but at a rate of 2.9 percent for the first nine months on a daily average basis in the week ended on September of 1969. Total member bank deposits subject to reserve banks' liabili- 24, primarily in relationto tax collections. The redelivery requirements (the bank credit proxy), plus to the System of securities from matched sale-purchase ties to their foreign branches, increased at a seasonally transactions executed in the previous week, and the pur- adjusted rate of 3 percent in September, compared with chase of additional securities under repurchase agree- a decline of 2 percent over the first nine months as a of means ments, helped to alleviate the pressure on the banking sys- whole. Because of the proliferation nondeposit tem. The basic reserve position of the forty-six banks of raising funds, this measure has become an increasingly improved during the week (see Chart II), largely as a re- poor indicator of trends in bank credit. The latter, on the basis of last-Wednesday-of-the-monthfigures, rose at seasonally adjusted rate of 2 percent over the first nir months of the year. After adjustment for asset sales to affiliates and foreign branches, the rate of growth in bank credit increased to 3 Chart II percent. BASICRESERVE POSITIONSOF MAJOR MONEY MARKETBANKS THE GOVERNMENT SECURITIES MARKET The market for United States Government securities was dominated inlarge part during Septemberby the Trea- sury's October refunding, which included an issue com- ing due in December as well. Terms of the refunding were announced after the close of business on September 17, and subscription books were open September 22-24. Attention in the market, particularly early in the month, was also focused on the September 10 auction of North Slope oil leases by the state of Alaska, from which some reinvestment demand was anticipated. The market also was affected by a sizable amount of Federal agency borrowing during September. The gross volume amounted to some $1,948 million, while net new money totaled $573 million. By far the largest single borrower was the Federal HomeLoan Bank System,which sold $650 million of consolidated notes due in and $250million of consolidated bonds due in . Offered at par, the issues carried coupons of 8.40 percent NairnCakalatian at ,h. bask r...rn• paittienii IIIn.trat.d tnTabi. II. and 8.375percent, respectively. Prices of most Treasury securities eroded persistentl. FEDERAL RESERVEBANK OF NEW YORK 213

Table I Table U FACTORS TENDING TO INCREASE OR DECREASE RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS MEMBER BANK RESERVES, SEPTEMBER 1969 In millions of dollars; (+) denotesincrease, Inmillions ofdollars (—) decrease Inexcess reserves

Osily aversgns—weekended on Averagesof Factors fourweeks Changesis daily averages— affectieg endedon week ended basic reserve positions on Sept Sept. Sept. Sept. Sept 24 Net 3 10 17 24 Factors changes Sept. Sept. Sept Sept 3 10 17 24 EIght banks in NewYork City

— "Market" fsetore Reserve excess or deficiency(_)e 19 151 52 27 36 Lessborrowings from Member bank requiredreserves +146 — 7 —142 — 21 — 26 Reserve Banks 57 64 129 84 84 transactions (subtotal) —256 328 — 820 847 Less net interbankFederal funds Operating +1.391 + + or 95 962 Federal Reserve float —108 195 627 purchases sales(—) 1,305 1.198 1,251 + +175 + + Gross purchases 1,803 2,203 2,089 2.124 2,055 88 880 — — Treasury operatlons + + 15 —1,125 244 Gross sales . 1.708 898 891 873 1,093 Gold and foreign account — 9 27 — 2 — 11 Equalsnet bsslc reserve surplus + +5 or deficit(—) — 133 —1,218 —1,379 —1,308 —1,010 Currency outside banks —141 35 — 72 215 16 — + + + Netloans to Government OtherFederal Reserve amounts (net)t.. 51 + 100 +248 + 104 + 425 securities dealers 505 1,054 1.083 466 777 Net carry-over, excessor deficit(—)t.. 28 7 55 — 2 22 Total "market" factors —108 +1.388 +188 — 845 +821

Direst Federal Reserveeredit Thirty-eightbanks outside New ToxicCity tsasesetless — 015 — Opal market operations (subtotal) +227 —678 + 641 —751 Reserve excess or deficiency(—)5 135 2 8 8 34 Outright holdings: Less borrowings from — ReserveBanks 289 39 329 306 241 Government securities +185 —1,278 800 -f-1,2e4 —787 — — Less net Interbank Federalfunda Banker? seeeptsnoes —1 I — —4 purchases or sales(—) 1,892 2,442 2.915 2,377 2,407 Special eertlfloatss — + 807 +154 — 681 — Gross purchases 4,025 4,599 4,447 4,320 4,348 llepurehsse agreements: Gross sales 2,133 2,157 1,532 1,943 1,941 — Equals net basic reservesurplus Government securities + 61 131 + 50 + 40 + 22 or deflcit(—) —2,046 —2,479 —3,252 —2,675 —2,613 Bankers' sereptsnoes 8—12 7 — 1 Netloans to Government + + + securities dealers — 203 — 53 48 Federal agency obligations 8 4 26 422 +14—22 + + + Net carry-over, excessor deflcit(—)t.. — 4 81 26 2 26 Member bank borrowings + 38 — 490 +277 + 89 — 91 Other iosns. discounts, and advances Note: Becauseof rounding, figures donot necessarilyadd to totals. Total +276 —1,433 —401 728 — 850 Reserves held after all adjustments applicable to the reporting period less + required reserves and carry-over reserve deficiencies. Excess reserves +188 — 45 — 215 + 83 — 0 1 Notreflected in data above.

Table III Daily average levels AVERAGE ISSUING RATES* AT REGULAR TREASURY BILL AUCTIONS

Member bank: In percent Toisl reserves, Includingvault cub 26,929 26,891 26,818 26,926 28.sPl* Required reserves 26,540 26,858 28,698 26,723 28.8321 Weekly suctiondates—September 1969 Recess reserves 580 315 120 205 280* Borrowings 1,259 740 1.017 1,106 1,0281 Maturities Free, ornet borrowed (—1, reserves —859 — 405 —697 —003 —7681 Sept Sept. Sept Sept Nonborrowed reserves 25,690 28,181 25,501 25,820 25,865* S 15 22 29 Net carry-over, excess or deficit (—)g.... 90 189 166 70 1212 Three-month 7.184 7.156 7.161 7.106 Six-month 7.408 7.329 7.362 7,340 Changesin Wednesday levels

Monthlysuction dstes—July-$epteiober 1969 System aeeount holdIngs of Government securitIes maturle Is: July Asguet Sept. Lees than one yeer —466 —1,701 + 48 +1.164 —pso 24 26 23 Morethanoneyear — — — — —

Total —468 —1,703 42 —989 Nine-month 7.407 7.387 7.357 + —1—1.164 One-year 7.313 7.340 7.350 Note: Because of rounding,figures do notnecessarily add to totals. 'Includesehangee In Treasury currencyand cash. Interest rates on bills are quotedin termsof a 360-day year, with the dis- t Ineludes assets denominated Inforeign currencies. counts from par as the return on the face amount of the bills payable at 1Average for fourweeks ended on September 24. maturity. Bond yield equivalents, related to the amount actually invested, . 9 Notreflected In data above. would be slightlyhigher. 214 MONTHLY REVIEW, OCTOBER 969

start the Demand during the month of September. The largest declines were better tone at the of period. emanating less than had ex- in longer term bonds which were of! by 3'9o 10 4'a from the refunding was participants the points, while intermediatc-tcrm issues due in three to pected, however, and rates moved irregularly during over seven years for the most part fell by to 3o points. next several days. On balance most rates increased occurred at the close Treasury bills due within two months experienced some the week, but some improvement improvement in September, but rates on all bills maturing of the month. on aver- beyond November rose from I to 27 basis points. At the regular monthly auction September 23, Thcrc was a weak tone in the market for notes and age issuing rates on the new nine- and twelve-month bills bonds during most of the first half of September. This were set at 7.357 percent and 7.350 percent, respectively, resulted from several factors. Investment demand was down 3 and up 1 basis points ftom the comparable rates At the quite light, and the growing congestion in the markets set at the auction a month earlier (see Table Ill). for Federal agency securities and corporate bonds pro- final weekly auction on September 29, average issuing set at vided further competition for available investor funds. rates for the new three- and six-month bills were 17 basis Moreover, there was some concern over the approaching 7.106 and 7.340 percent, respectively, 9 and established at the last Treasury refunding, and dealers attempted to lighten their points above the average rates positions in the intermediate maturity area. A brief im- weekly auction in August. provement occurred in response to the aforementioned speculation concerning an extension of the Vietnam cease- OTHER SECURITIES MARKETS fire and to the remarks Chairman Martin. Pollowing by dur- this, however, dealers began to mark down prices of out- Corporate bond prices moved steadily downward as the volume of new standing issues in anticipation of the terms of the Trea- ing most of the month offerings It also became gradually apparent that reached the highest total on record for September. sury's refunding. to no further investment demand was likely to stem from the The market rallied briefly on September 10 in response comments and to for an extensio Alaska oil rights sale. Chairman Martin's hope in Vietnam. Another short-lived oc- On September 18, the day following the announcement of a cease-fire rally when the first elec- of the refunding terms, prices of outstanding Government curred around midmonth, prune-rated notes and bonds moved sharply lower in adjustment to the tric utility issue ever to offer investors more than 8 percent issue of industrial yields set on the new issues. Market response to the terms was marketed and a sizable scheduled the With the was generally favorable, and the "when-issued" notes of bonds was withdrawn from calendar. excep- 1971 and 1973 % on the while those of 1976 tion of these two periods, the trend in the corporate gained day, and rose by Heavinessdeveloped as the month progressed, bond market was one of rising yields successively . on new issues. In the bond however, and the three notes were down '%2 to 1%2 at the higher records set municipal close of the market, the start of September saw a continuation of the period. on The With the exception of the shorter maturities which were previous month's deterioration, and September 4 index of on in thin supply, bill rates adjusted higher at the beginning Weekly Bond Buyer's Thursday yields twenty of and then fluctuated in a narrow range. Early municipal bonds jumped an additional 11 basis points to September of new issues sched- in the month, activity was moderate and selling by foreign a record 6.37 percent. The calendar investors as well as dealers led to an increase in bill itled for the month was light, however, and further post- rates. This was tempered somewhat by the optimistic ponements, voluntary and involuntary, were continually about a Vietnam cease-fire. occurring. In this situation of a relatively scarce supply of speculation more outlook on the In the week ended on September 19, bill rates fluc- new issues, coupled with a hopeful the future tax status of tuated narrowly in fairly active trading, and the September part of participants regarding on state and local 15 tax date presented no unusual pressures. Sizable in- municipal bonds, yields government vestment demand from foreign central banksand consider- securities moved down. By September 25 the Bond Buy- able interest in the bills sold at the regular weekly auction er's index stood at 6.08, a drop of 29 basis points from contributed to a decline in rates at the start of the week. September 4. Thereafter, yields again rose, reflecting The trend was reversed on Wednesday afternoon, how- weaknessin other markets. of investors to new bond offer- ever, in the face of professional and investor selling, and The response corporate rates moved higher over the remainder of the week. ings during the early part of the month was somewhat level of returns. An Aa-ratcd is- Foreign demand was again a factor in the bill market mixed despite the high record 8.20 in the week ended on September 26 and contributed to a sue of power company bonds yielding a per- FEDERAL RESERVE BANK OF NEW YORK 215 ccnt was a quick sellout, but an Aaa-rated $150 million successively higher record yields were required to achieve issue of Southwestern Bell Telephone Company deben- this. Moreover, investor response was not enthusiastic tures received only a fair reception on its offering date, even at these levels. despite a record return for a 13d11 System issue of 8.14 Prices of state and local bonds fell sharply at the start percent. (On August 20 a similar offering provided in- of September, and a mounting backlog of older issucs vestors with only a 7.75 percent return and was an im- prompted underwriters to release several issues from price mediate success.) The Southwestern Bell debentures did restrictions. The resulting upward yield adjustments ranged sell out on the day following their initial marketing, as as high as 45 basis points. Postponements due to mar- the market reacted favorably to optimism about a cease- ket conditions and failures to receive bids because of fire and to Chairman Martin's remarks. interest rate ceilings continued, thereby reducing the The improved tone in the corporate bond market was already light calendar even further. The "Blue List" of only temporary, however, and prices soon resumed their municipal dealers' inventories declined by $56 million downtrend. Then, on Septcmber 15, it was announced from $406 million on August 29 to $350 million on Sep- that a $150 million issue scheduled for marketing on tember 30. Although there was still concern about the September 17 was being withdrawn because of unfavor- longer term outlook for the municipal markets, the imme- able market conditions. Market participants responded diate situation of relatively few new issues provided a positively to this sizable reduction in supply and to the respite, however temporary, and municipal bond yields sale on the next day of a prime electric utility issue whose began a retreat. Despite the sharp drop in the Bond yield marked the first offering of more than 8 percent on Buyer's index of 29 basis points over the last three weeks such an issue. Again, the improvement was brief and an of the month, the level of yields remains historically high. Aa-rated offering of utility bonds which was aggressively This was underscored by the fact that on September 24 priced a few days later met with a poor reception from the Federal Housing Assistance Administration was un- investors. When the syndicate managing this issue was able to sell $142 million of a $191 million offering of .rminated, the yield on the bonds adjusted up to 8.21 tax-exempt local housing authority bonds because of a ercent from the initial offering of 8.08 percent. Those 6 percent statutory ceiling. Earlier in the month the same new issues which were auractively priced over the rc- restriction had resulted in less than half of two offerings of mainder of the month were generally well rcceived, but temporary housing and urban renewal notes being sold.