294 MONTHLY REVIEW, a

The Money and Bond Markets in November

The money market last month adjusted to revisions in nant of reserve requirements.1 Federal Reserve regulations governing member bank re- The amendments to Regulation J require all banks serves and the collection of checks, which were imple- served by the Federal Reserve check-collectionsystem to mented beginning . In general, the revisions pay for checks in immediately available funds on the same lowered reserve requirements through a restructuring of day that the checks are presented to the banks. This such requirements against demand deposits; they also change resulted in a decline in reserves that was smaller speeded up the collection of checks, thereby reducing the than the reduction in requirements arising from the change Federal Reserve credit extended to member banks through in RegulationD. float. Federal funds rates fluctuated rather widely from In the statement week in which the regulation changes week to week, averaging about the same as in October. were made, it was difficult for the Federal Reserve to esti- Other short-term interest rates were generally unchanged mate accurately the resulting impact on reserve positions. or showed modest increases. In the Treasury bill market, It was realized that, for the banking system as a whole, rates declined initially against the background of the reserve positions would ease, but some banks could be relatively comfortable tone of the money market in recent adversely affected. Therefore, penalties for reserve defi- weeks. Some hesitancy developed at the lower rate levels ciencies up to a fixed amount are temporarilybeing waived in the face of increases in the supply of bills, however, and for certain banks during the transition period. These waiv- bill rates edged higher over the latter part of the month. ers amount to $450 million, and this figure has been In the capital markets, yields declined on balance de- added to reported excess reserves beginning with the week spite some increases late in the month. A generally op- ended (see Table I). timistic outlook for near-term stability of interest rates During that week, reserve positions turned out to be was encouraged by the prospects for a peace settlement easier than expected so that excess reserves (adjusted) in Vietnam as well as by indications that the Administra- increased, borrowings from the Federal Reserve fell off tion intends to impose strict restraints on Federal spend- from the high level of the previous week, and the Federal ing in the future. As the month wore on, investor demand funds rate declined, with funds trading as low as per- contracted and some participants sought to realize profits cent on the settlement day. in anticipation of substantial increases in the supplies of Despite the swings in reserve positions in the statement corporate and Federal agency securities. The resulting in- week ended November 15, most money market rates creases in yields, however, were generally modest relative moved little over the month. Even the average effective to the declines earlier in November.

BANK RESERVES AND THE MONEY MARKET

Money market conditions and the monetary and reserve I Under the new regulation, the following graduated scale of were influenced the of the reserve requirements applies: aggregates by implementation Amount of net demand deposits Reserve percentages applicable changes in Federal Reserve Regulations D and J begin- First $2 millionor less 8 percent November 9. These changes, originally Over $2 millionto $10 million 10 percent fling regulation Over $10 millionto $100 million 12 percent scheduled to go into effect on September 21 but delayed Over $100million to $400million 13 percent by court action, were described in this Review (, Over $400million 17½ percent the in makes To smooth the transition, reserve requirements on deposits be- page 154). Briefly, change Regulation D tween $100 million and $400 million were set at 16½ percent bank size rather than bank location the primary determi- during the first week of the new system. FEDERAL RESERVE BANK OF NEW YORK 295 rate on Federal funds, at 5.06 percent, was little changed Table I om the previous month's 5.04 percent rate. Rates on FACTORS TENDING TO INCREASE OR DECREASE most maturities of dealer-placed commercial paper moved MEMBER BANK RESERVES, NOVEMBER 1972 up percentage point around midmonth (see Chart I). in millions of dollars; (+) denotes increase (—) decrease In excess reserves On the other hand, rates on bankers' acceptances declined ______1/8 percentage point on and remained at the Changesin daily avcrases— lower level. Three-month Euro-dollar deposit rates drifted week ended Factors Net downward until late in the month but returned to October changes Nov. Nov. Nov. Nov. Nov. levels by the month end. Secondary market rates on large 1 8 15 22 29 certificatesof deposit edged up in the middle of the month fell off later. banks held rate "Market" factors but Most their prime at 5¾ Member bank required percent throughout the month. reserves — 94 — 71 +2.224 + 994 — 39 +3.014 The revision in Regulation J had the effect of increasing Operating transaction, (subtotai) + 193 —1,044 — 952 — 801 + 289 —2,395 demand as used the — deposits adjusted, in calculating money Federal Reserve float 234 — 539 —1.309 + 354 + 179 —1.549 — supply. However, the resulting increase has been elim- Treasury operatlonot 103 — 138 + 519 + 3 + 42 + 843 — — inated from current money supply figures in order to avoid 0014 anti foreignaccount + 37 — 3 — 2 9 14 + Currency outside hank, +150 — 270 — 412 —1.163 + 112 1,183 a discontinuity in the series. The upward adjustment of Other Federal Reserve the money supply as a result of the revision of Regulation liabilities anti capital — 87 — 94 + 232 — 47 — 49 _____— 15 J will be incorporated in the statistics at the time of the Total "market" ractoro + 99 —1,118 +1.272 + 133 + 230 ______+ 618 annual bench-mark and seasonal adjustment review. At that historical will be revised to the Direet Federal Reserve time, figures put credit transactions series on a consistent basis. Openmarket operations — — — To explain how the demand deposits in the money sup- (subtotal) +117 + 600 599 — 307 219 408 Outright holdlngn: ply were previously understated requires some examina- — — Treasury securities + 286 — 52 — 260 — 228 138 410 tion of the When one bank receives — — check-clearingprocess. Bankers' acceptances — 2 + 1 — 4 — 5 2 12 a check, drawn on a second bank, the first bank credits Federal agency obligations -'. - — 2 — 8 + 24 + 142 + 168 the account of its customer—a liability item—and also Repurchase agreements: Treasury securities — 146 + 563 — 278 — 112 — 178 — 149 increasescash items in the of collection — — process (CIPC)— Bankers' acceptances + 1 + 64 — 32 10 — 25 2 an asset item. Since the deposit is temporarily on the books Federal agency obligations ,. . — 2 + 32 — 27 + 24 — 10 + 9 — of both banks, gross demand deposits overstate the true Member bank borrowings — 210 + 404 — 463 — 3 + 151 193 stock. CIPC are deducted from Other Federal Iteserre money Therefore, gross asoetst + 9 + 30 + 4 — 399 + 50 — 202 demand in the When deposits calculating money supply. Total — 44 +1.034 —1.080 777 — 10 — 865 the check is to be cleared the Federal Reserve — through Sys- Exeeso reserves + 55 — 81 + 662 644 + 212 + 204 tem, the first bank begins the process by sending the check ______to its district Reserve which will in turn send the Bank, Moly check on to the second bank. If the actual transfer takes Daily ayerae levelo longer than is allowed for in a predetermined collection Member bank: ______schedule, the Federal Reserve credits the first bank with Total reserves, including reserves. While that bank reduces CIPC, Federal Reserve vault cash 33.704 33.894 32.132 80.494 30,743 32.1546 reserves float increases. This float is also deducted in computing Required 33,499 33,870 31.346 80.362 30,391 31,8321 Excess reoerves 205 124 786 142 354 3225 demand deposits in the money supply to avoid double Borrowings 585 959 494 421 572 8005 counting. On the day the second bank does receive the Free, or net borrowed I—), reserves — — — — — check, it will normally write down the account of the cus- 550 835 292 279 218 2781 Nonborrowed reserves 33,149 32,733 31,638 80,073 30.173 31,5546 tomer who wrote the check. Before Regulation J was re- Net carry-over, excess or vised, however, the bank could often delay its payment for deficit (—)# 75 127 86 302 58 1246 check until the day after the check was presented. This turn the reduction in if the Note: Because of rounding, figures do notnecessarily add to totals. wouldn delay CIPC, clearing - Adjusted to include $480 million of certain reserve deficiencieson which penalties car' had taken within the collection be waived for a trannitlon period in connection with bank adaptation to Regulation place predetermined period, 3 as amended, beginning November 9, 1572. or float, if it had extended beyond that period. Inasmuch as Includes changes in Treasury currency and cash. the were written down on the before the CIPC S Includes ansets denominated In foreign currencies, deposits day OAverage for five week, endedNovember 29. or float that their transfer had generated, the money sup- * Not reflected in data above. 296 MONTHLY REVIEW, DECEMBER 1972 ply was being understated by the amount of the excess months. The adjusted bank credit proxy, on the other CIPC and float being deducted. Since the November 9 hand, has continued to expand at about the revision in the regulation requiring banks to pay on the generous pace over most of the year. In the latest three-sanJ same day as the check is presented to them for collection, month period, it advanced at an annual rate of about 10 the timing discrepancy and understatement in the money percent. supply arising from this source can be eliminated. Estimates of reserves available to support private non- Because of uncertainties stemming from the regulatory bank deposits (RPD) have also been rendered more ten- changes, the measurement of the monetary aggregates in uous than usual because of the changes in regulations. November was more difficult than usual. On the whole, Allowance must be made for Regulation D changes in however, the monetary aggregates appear to have risen at order to calculate a meaningful growth rate. Accordingly, relatively moderate rates in the month. M5 grew at an esti- the reserves released by the reduction in requirementshave mated 6 percent seasonally adjusted annual rate in No- been added to the actual levels of RPD to compute growth vember and at a rate of about 5 percent in the three rates. With this adjustment, RPD advanced at an annual months ended in November (see Chart II). M2 has grown rate of about 13 percent in November and at a rate of at an annual rate of about 8 percent in the same three about 10 percent in the three months ended in November.

Cko,t I SELECTED INTEREST RATES Septeseber-Nonereb., 1972 BOND MARKETYIELDS —Percent 9.00

8.00 New Aoo.roted public rttility bonds

-Aoa.roted seasoned 7.00 corporatebonds 3-to 5year Government securities — 6.00

ortoEeuemptbonds 5.00 Long-term Government securities

4.00

3.00

I I I I i i i I i I ii, I I I... I.... 2.00 6 13 20 27 4 II 18 25 I 8 15 22 6 13 20 27 4 ii 18 25 1 8 15 22 29 September October November September October November

Note: Data are shownbr businessdays only. MONEY MARKET RATES QUOTED Bid rates tar rhree.nronthEurodollars in London;aftering standard Aea bond of et least twenty yeors' maturity; daily averages at yields rates(quoted in terms of rate af discount)an 90. to l19.day_pjjcamrnarcial p,per an seasonedAao.roted corporate bonds;daily averages of yields an lavg. quoted bythree at the four dealers that repart theirrates, or the midpoint at th, rang. term Oovetnnrentsecurities (bonds due orcallable inten year,at morel end quoted it no consensus Is available; the ettectice rate on Federalfunds (the rate molt an Governmentevorities due in thren to five years, camporedon the basis at 3 representatiaeof the transaction,eoecuted}; closing bid rates (quoted in termsof rate of closingbid prices; Thursdayaverages of yields on twenty seasonedtwgrr,ty-ygy discount)an newestoutstanding three.month Treasury hills. tao.eaemptborrdscarrying Moody's retiogsof Aaa, Aa. A, andBee). BONDMARKET YIELDS QUOTED: Yields on new Aaa.ratedpublic utility bonds are based Sources: FederalReserve Book of New York,Board at Governorsof the Fedora: on pricesasked by underwriting syndicates,adjusted to makethem equivalent to a Reserve System, Moody'sInvestors Service, Inc.. endThe BandBuyer. FEDERAL RESERVE BANK OF NEW YORK 297

Table II). A further 11 basis point increase in the average Chad II bills at the CHANGES IN MONETARYAND CREDIT AGGREGATES issuing rate of three-month Seasonallyodjust.d annual rat., auction raised rates to the level since Percent Percent highest August I 5 1971. IC The monthly auction of 52-week bills, held on Novem- ber 22, resulted in an average issuing rate of 5.226 per- ;o cent, 9 basis points below the previous month's auction. In accord with the Treasury's previously announced pol- icy of phasing out nine-month bills, this monthly auction r I I I I I I ii I I I I I ii I —5 20 did not include that maturity. On , the Treasury announced that it would auction $2 billion of tax anticipation bills (TABs) IC : on with payment on , and a further $2.5 billion of TABs on with pay- : ment on December 5. Banks were allowed to make pay- 0 liii !IIIIIIIiL1 ill iii iii I 0 ment in full for their allotments of both issues by credit to 20 ADJUSTED BANK CREDIT PROXY Treasury Tax and Loan Accounts. The first $2 billion of TABs will mature April 20, 1973, while the TABs sold at the second auction are due . IC : 22, Bidding was active in the former TAB auction, and the average issuing rate was set at 4.722 percent. By November 29, ri iilii IiIIIIii Iii iii uI ii Iii_ interest rates on outstanding bills had moved up but the 1970 1971 1972 second TAB auction still elicited strong interest, with the Note Data for Nuseutber1972 or.preliminary estimate,. rate set at 5.089 Ml Currency plus ad1asted demanddaponits bald by th, public. average issuing being percent. M2 u'Mlplus commercial bank savings and timedeposits held by ha public, The market for Treasury coupon securities was buoyed lessu.gotiabl. c.rtillcot., of depositissued irs denominations of $100000 ormore. at the beginning of the month by the active bidding for Adjustedbank credit proay Total member bankdeposits subject to reserve the $3 biffion of additional 6¼ notes requirements pIesnund.posit sources of funds,such as Rurodollar percent four-year borrowing.and the proceeds of commercial paperissued by bankholding auctioned .2 Prices increased on companies orother olfiliates. outstanding Sources Boardof Governors øfthe FadarolBaser.. System andthe issues following the auction and, by the November 15 F.d.,o Rosary,Bank of New York. payment date, the 6¼ percent notes were trading at a premium. The Treasury announcement of the TAB auctions gave further stimulation to the coupon sec- tor of the market by removing the threat of any further note issues in November. After midmonth, prices fell back THE GOVERNMENT SECURITIES MARKET a bit as profit taking set in. However, the major part of the early price increase was sustained, and intermediate- November witnessed of the curve for a flattening yield term and long-term Treasury securities yields ended the Treasury bills, perhaps reflecting a downward revision of month about 10 basis points below late-October levels. interest rate expectations. After declining early in the Several Federal agencies marketed large new issues the three-month bill rate the period, edged upward, closing in November. Most of these new securities sold very well. month 4.88 bid or 12 basis than at at percent pointshigher They benefited from the very aggressive pricing in the cor- the end of October. In the drift in the 52- contrast, upward porate sector during the month which made agency yields week bill rate in late November did not offset the early seem generous by comparison. The principal offering was and the bid of 5.22 was 12 basis declines, closing percent on November 29, when the Federal National Mortgage As- points lower than at the end of October. sociation sold three issues billion to raise In totaling $1 $400 the weekly bill auctions, results were mixed. In the million of new cash and replace $600 million of securities ovember 6 auction, the issuing rate on three-month .Treasury bills declined about 10 basis points from the week before to 4.668 percent. In the next week, however, the issuing rate moved again to about 4.78 percent up 2 For details of the November refunding announcement, see and remained there in the succeeding week's auction (see this Review (November 1972), page 285. 298 MONTHLY REVIEW, DECEMBER 1972

Table H aggressive price on a utility rated Aa and marketed No- AVERAGE ISSUING RATES* vember 14. These bonds were to 7.17 AT REGULAR TREASURY BILL AUCTIONS priced yield pe the lowest on such an issue in ten months. Th In percent cent, yield rate offered was 37 basis points below the most recent

Weekly auctiondates — November1972 comparable issue that had been placed on the market were Maturities almost a month earlier. Sales relatively slow, as mar- Nov. Nov. Nov. Nov. ket hesitated to such reduced 6 13 20 27 participants accept greatly rates. Threemonths 4.808 4.775 4.778 4.886 Even more resistance greeted a $75 million offering by Sli months 4.957 8.070 5.000 5.178 a Bell System subsidiaryon November20. The debentures, which carried an Aaa from both services, Monthlyauction dates — September.November1972 rating major were priced to yield 7.075 percent in 40 years. This yield Sept. Oct. Nov. represented the lowest return on a long-term Bell System 26 24 22 . issue since . Reflecting the slow sales of Nine months 5.346 8.223 t these securities, the parent company's huge $500 million Fifty-two weeks 5.529 5.318 5.228 issue on of notes and debentures was priced • Interest rates on hilts are quoted In termo of a 360-day year. with the discounts from less aggressively. The $350 million of 31-year debentures par as the return on the face amount of the bills payable at maturity. Bond yield equivalents, related to the amount actually Invested, would be slightly higher. was priced to yield 7.145 percent, while the eight-yearnotes f Discontinued. were priced to yield 6.43 percent. The debentures were well received, while the notes got off to a fairly slow start. A new series giving yields on new issues of Aaa-rated public utility bonds has been plotted in the second panel of Chart I. The series tracks the yield of a standard straight maturing December 11. The offerings included a 25-year debt long-term utility bond rated Aaa by Moody's Inves- bondpriced to yield 7.10 percent, an eight-year note yield- tors Service, carrying five-year call protection and under- ing 6.60 percent, and a four-year note yielding 6.25 per- written through competitive bidding. New issues that do cent. The issues were well received, and the debentures not fit these characteristics are adjusted by a formula to were selling at a premium before the day was over. derive equivalent yields.3 This series shows the relatively sharp decline in new-issue yields until the final week of OTHER SECURITIES MARKETS November. In contrast to the corporate sector, the volume of tax- Prices rose sharply in the corporate and municipal bond exempt issues was relatively large throughout the month. markets beginning in early November. Many of the same In addition, the Blue List of dealers' advertised inven- forces that fueled the rally in the Government bond tories, already swollen when the month began, climbed market were at work. In addition, expectations developed to $1,088 million on November 9, the highest level of that strong corporate cash positions would reduce the the year. Even so, prices on tax-exempt securities moved amount of corporate borrowing in the capital markets in up, reflecting the declines in long-term interest rates, gen- the months ahead. Late in the month, prices dropped off erally as well as optimism that borrowing needs of munic- as potential buyers of corporate bonds resisted the aggres- ipalities will slacken somewhat in 1973. This view was sive pricing of some new issues. stimulated by reports of increased state and local govern- Corporate bond prices benefited from a light c&endar ment tax receipts and the passage of the Federal revenue- early in the month. A Bell Telephone System issue, rated sharing program. The Bond Buyer index of twenty munic- Aaa by one rating service and AA by another, had been ipal bonds declined to 4.96 percent in the Thanksgiving poorly received at a 7.40 percent yield when it was issued week, 17 basis points below its late-October level and the on October 24, but sold out quickly in the first three days lowest it has been since . The index edged of November and moved to a premium in the resale up to 4.99 percent by the end of November. market. Prices of seasoned issues continued to advance during the week that included Election Day, as no major new corporate issues were marketed. Because of the of new utilities and the advances dearth high-grade sharp For a discussion of the derivation of this new series, see the in other issues, underwriters were encouraged to place an Federal ReserveBulletin (September1972), pages 783-84.