6 MONThLY REVIEW, JAMJARY 1968

The Money and Bond Markets in December

On , the Board of Governors of the Fed- strong investment demand from both domestic and for- eral Reserve System announced an increase of per- eign sources and relative scarcities of some issues. The centage point in reserve requirements against demand market for Treasury notes and bonds showed renewed deposits in excess of $5 million at member banks, from strength during December, although earlier price gains 16½ per cent to 17 per cent at the reserve city banks were pared on the last two trading days after the an- and from 12 per cent to 12½ per cent at other member nouncement of the increase in reserve requirements. The banks. The increase will take effect in two stages during better markettone reflected partly an increased willingness , the first at reserve city banks in the reserve of investors to commit funds on a long-term basis at computation period beginning on January 11 and the prevailing yields and partly a feeling of relief among second at other member banks in the computation period market participants that international currency markets beginning on January 18. Required reserves arc expected had stabilized after the November devaluation of the to rise by a total of $550 million—approximately $360 pound sterling. Intermediate-term issues, moreover, were in million through the first-stage increase and $190 million demand on a substantial volume of tax switching, while through the second. The increase, the first in member the longer term area benefited from the seasonal slack in bank reserve requirements since and the new financing operations. At a somewhat higher pattern of first against demand deposits since November 1960, was yields that emerged at the start of the month, a substantial undertaken in order to further "the Federal Reserve's ob- volume of new and recent offerings of corporate and jectives of fostering financial conditions conducive to tax-exempt securities was distributed by underwriters. resistance of inflationary pressures and progress toward equilibrium in the United States balance of international BANK RESERVESAND THE MONEYMARKET payments". The money market became gradually firmer during Conditions in the money market finned very gradually December. Despite a contraction in nationwide net re- during December, although nationwide net reserve avail- serve availability of member banks after midmonth. the ability contracted sharply after midmonth. Average free reserve position of the major money market banks re- reserves of all member banks fell to about $80 million mained relatively comfortable throughout the period. Con- in the last two statement weeks (see Table I) from the sequently, the money market accommodated without di!- $200 million level that had prevailed during November ficulty the heavy seasonal flows of funds associated with and early December. At the same time, however, the corporate tax and dividend payments and year-end port- reserve positions of major money market banks were un- folio adjustments by commercial banks and corporations, usually comfortable for this period of the year (see Table as well as the substantial volume of international financial II), and the banking system accommodated large seasonal transactions that developed in the wake of the mid- demands for funds around niidmonth without strain. The November devaluation of the British pound. The effective effective rate for Federal funds rose above the discount rate for Federal funds was generally at or below the 4½ rate in the latter part of the month. per cent discount rate during the first three statement Rates on short-term money market instruments con- weeks, but rose to 4% per cent later. Rates on most other tinued to increase during December. The dealer offering money marl?et instruments also moved higher over the rate on ninety-day bankers' acceptances rose by per- month. centage point to 5% per cent, while that on prime four- to Market yields on longer term Treasury bills moved six-month commercial paper increased by percentage irregularly lower over most of December, reflecting a point to 5% per cent. Offering rates on directly placed FEDERAL RESERVEBANK OF 7

were raised by ¼ percentage point quently, however, the market turned decidedly more opti- financecompany paper late in the to 5½ per cent for paper maturing in one month or more. inistic, and prices rose irregularly until period exerted Offering rates posted by the major banks when news of the increase in reserve requirements on negotiable time certificatesof deposit (C/D's) matur- some downward price pressures. in one to three months were raised during December A number of influences appeared to contribute to the ing the demand for to a range of 5% to 5½ per cent by the end of the month. favorable market tone, including heavy At large commercial banks throughout the country,. ap- intermediate issues generated by investor tax-switching or 28 the seasonal contraction of financing activity proximately $5.9 billion of negotiable C/D's, per transactions, cent of the total amount outstanding, matured during in the long-term capital markets, and satisfaction among December. In the statement week ended on , market participants over the performance of international when the bulk of these maturities was concentrated, the currency markets after the devaluation of sterling. Long- runoff amounted to an estimated $731 million. term issues were in demand on outright buying by inves- C/D in During the two statement weeks ended on December tors who seemed reluctant to wait for further increases that had reached 20, the period during which seasonal demands for funds yields, feeling perhaps long-term yields .LL financial and a In these circumstances, prices of Treasury coupon • . from businesses, nonbank intermediaries, peak. I. securitiesdealers were ata high point, total loans (adjusted) securities were not very sensitive to developments which and investments of all weekly reporting banks expanded might otherwise have produced a greater effect. Unusually by $3.8 billion, almost entirely reflecting a rise in loans. heavy speculative buying of gold in the market The $3.5 billion loan expansion surpassed increases in on and 15, for instance, sparked only in the a limited decline in the Government securities mar- • loans of $2.8 billion and $3.4 billion, respectively, price 7 reaction in the market to this was corresponding two weeks of 1966 and 1965. ket. The development probably tempered by a weekend statement of Treasury and Federal Reserve officials, affirming that the gold value THE GOVERNMENT SECURITIES MARKET of the dollar would be maintained and that the operation The market for Treasury notes and bonds strengthened of the London gold market would continue unchanged. unaffected in December, after having been buffeted duringNovember Similarly, the marketwas relatively by a variety ii the uncertainties of unfounded rumors about exchange rates and changes by the combined effects of surrounding :1 the domestic fiscal and credit situation and the devalua- in foreign monetary policies and by the publication at tion of the British pound in the middleof that month. At midmonth of weekly reserve statistics seeming to suggest For the the beginning of December, the market suffered fairly that a shift in monetary policy had taken place. sharp price losses in reaction to an announcement by the month as a whole, prices..increased by as much as ¾ Chairman of the House Ways and Means Committee that point in the intermediate maturity area and 1½ points no action would be taken on the Administration's income in the long-term sector of the market. tax during 1967. The heavy tone also stemmed Rates on Treasury bills moved irregularly duripg De- proposal on in part from rumors of an imminent increase in the Federal cember in a pattern generally similar to that of yields Reserve discount rate and in the maximum interest rate coupon issues. At the start of the month, rates were payable on time deposits under Regulation Q. Subse- marked up sharply as a result of aggressive professional

71 • )

Perspective '67 from Each Januarythis Bank publishes Perspective, a Perspective '67 is availabe without charge brief, informative review of the performance of the the Public Information Department, Federal Reserve New economy during the preceding year. This booklet is Bank of New York, 33 Liberty Street, York, a laymaifs guide to the economic highlights of the N. Y. 10045. (A copy is being mailed with this year. A more comprehensive treatment is presented issue of the Monthly Review.) A Spanish version is in our AnnualReport, available in March. also available upon request.

.1 — 8 MONTULYREVIEW, JANUARY 1968

Table II TableIII FACJ'ORS TENDING TO INCREASE OR DECREASE RESERVE osmosOF MAJOR RESERVE crr BANKS MEMBER BANK RESERVES, DECEMBER 1967 In millions ofdollars; (+) denote.Increase, Inmillions ofdollars (—) decrease In excess reserves DaIly averages—weekended on Average Chan.esin dailyaverages— Factorsaftectin tourweeh week ended on basic reservepositioNs ended on Dec. Dec. Dcc. Dcc. Dec. 27 Factors — — — — chnes 6 13 20 27 Dec. Dcc. Dec. Dee. 6 13 20 27 Eight banksIn New York City

Reserve excess or deficiency(—)°...... 30 10 25 + 52 29 "Market"feotori Less borrowings from Reserve Banks — 2 37 27 17 Member bank res&yes — 283 — 576 — — required + 184 298 070 Less net interbank Federal funda — Operating transactions (subtotal) —289 —10* 840 81 128 purchases or sales(—) 98 160 188 250 94 + + + Gross purchases Federal Reserve 107 — 11 1,052 905 1,147 1,172 1,069 fiqet + + + 240 ± 840 Gross sales 954 1,066 959 922 975 Treasury operations? + 267 ± 518 — 54 ± 182 + 911 Equalsnet basic reserve surplus — 122 — — 18 — or delicit(—) — 68 168 —200 —225 — Gold and (orelen account 319 + 8 449 Government — 247 — 338 — 37 — — Net loans to Currency outsidebanb 879 1,001 securities dealers 885 887 1.119 1,108 1,000 Other FederalReserve amounts InstIL. — 292 — 54 + 244 + 28 — 74

Total "market" factori — 574 — 22 64 —212 — 744 + Thirty-eight banksoutside New YorkCity Direct FedraI Reserve credit tronsaetlonc Reserve excess or deficlency(—)° 14 16 14 34 20 Open marketInetrumenta Less borrowings from Reserve Banks ... 21 54 43 104 56 Outright holdings: Less net InterbanicFederal fundi Government securities 872 154 —145 141 502 purchases or salcs(—) 408 651 512 421 498 + + ± + Gross Baaker' acceptances + V + + 2 + 3 + 21 purchases 1,727 1,805 1,883 1,814 1,807 Repurchase agreements: Gross sales 1,319 1,154 1,370 1,394 1,309 Equals net basicreserve surplus Government securities + 125 — 172 — + 81 + 84 or deficit(—) —416 —688 —541 —491 —534 Bankers' acceptances 14 61 — 75 39 U Net loans to Government + ± + ± securities dealers 648 491 379 Federal agency obllgattons + 9 — 11 — + 7 + 5 435 493 Member bank borrowings — 32 + 5 + 64 + 160 + 226 Other loans, discounts, and advances — — — Note: Because ofrounding, figuresdo not necessarily add to totals. Reserves held after all adjustments applicable to the reporting period less reserves and reservedeftcieocies. Total + 497 + —184 + 433 ± 823 required carry-over Excess reserves' — 77 + $0 — 90 + 221 ± 84

Table 1111 Daily avere3e levels AVERAGE ISSUING RATESO AT REGULAR TREASURY BILL AUCI'IONS Inper cent Member bank: Total reserves, Including vault caeli..... 24,863 24,701 25.187 25.701 23,1110 Required reserves' 24,338 24,874 24,950 35,243 24,7813 Weeklyauction dates—December 1967 Excess reserves' 297 327 237 458 3803 Maturities Borrowings 87 121 185 345 1833 Dec. Dec. Dcc. Dec. Free resarve,' 210 20* 52 113 1453 4 U 15 22 Nonborrowsd reserves' 24.768 34.380 35,003 25.356 24,928* Three-month 4.989 4.941 5.127 4.989 Six-month 5.580 5.493 5.659 5.515 Changesin Wednesday levels

MonthlyauctIon dates—October-Docember1967 S,atem Aceaunt holdings of Governomest securIties maturIng in: October November Deeer.iher Less then one yeas + 308 + 66 + 463 + 829 24 22 26 More than one year — — —169 — — 189 Nine-month 5.313 5.422 5.555 Total + 808 — —113 + 463 + 660 One-year 5.3(72 5.430 5.544 Note:Because of rounding, figures do not necesserllyadd to totals. •These figure, are estlmnte& °Interest rates on bills are quoted In termsof a 360'day year, with the discounti tIncludes changes In Treasury currency and cash. from par asthe return on the face amount of the bills payable at maturity. 7 Includes assets denominated In foreigncurrencies, Bond yieldequivalents, related to the amount actually invested, would be * Average of fourweeks endedon December 27. slightly higher. FE_DERAL RE1tVE BANK OF NEW YORL 9

SELECTED INTEREST RATES Oct.b.r-D.l.mbs,1967 BONDMARKEI YIELDS

4 ii 16 25 I 0 13 22 79 6 13 20 27 Oclobs, Nov.',b.r Dac.mbe,

N,Is- DoluOh ib,.. lo bu.inesidsp only. MOIYMARUT RATES QUOTRO Dodyron9. ci alsopootod by No.V.4 City ba,&. pOinIIto., inds.-o.ili ,pd,ot. s.oil.r.n yieldn a9sen ulone S. .uubsf yield ott tba • on newEQ41JR . Pad.,oIFsinds3 ..n.ssd by Unlssd Stole, Oo.en,mo.t sSCWiIieO Is pOisI a... is,..Iaos.dlot*4y .il,r.tha, be.*,si.a.,d I,.. ,yodk,l. snitqIclia,slu dady Indle.,., Ii,.abs..,, *4 assyse'.OsGl ofIs,in9top., Ensdl,slI1, plocid fin.Lc3l!l5fl' an.scØeoof yields a. f*4 Os.sniiltl,i bonds di,. .,caIl.bl. l loss i.e., • - lb. sat. ji .ft.dl*. oilft*4.jondy f,h.sot. esents.ps...nMth. of Mo kostlooli,,; .oawl.dJ, a, .avsf end*1 Oni.* !.i,,d3l,d,sim1iaIE yu.coos,ot.d on he boiis.l dosin.gbid taPes lqs.tndIn los., ofjot. of dlscosinil on nswenh eslllendi.5this.- nod'LI- °'II. silo.In bid ptlsisou Thsissdoy o.ss..n of i.ld,ot, w..Pyron,oo.d '—"yyw ta...555p1 1LVfL'Yk1lls. 2!!d1(co.yi,5 Moody.,etiu',o of Aoe. AO.A. .nd Roof. BONDMARKBT YIELDS OUOThD,Yields on s. AIsysdp Inybsthas. planed 5onno... Fedesolmi.,.. Bonk of N.. Vo4 Ba.,dof Oa,,,no,, *4 Ike,.d.,.I B.o.... Sub.. • oroondoIi.. oh,wing daily.n.sag. yieldseu Intro., Moodys tnn.s',rsBattle.. endThe W5l, !opdJt',.j

selling of bills prompted by disappointment over the fate OTHER SECURITIES MARKETS of the tax increase proposal in the Congress and by wide- spread rumors of a discount rate increase. The rise in A firmer tone emerged in the corporate and municipal rates generated increased investment demand, however, bond markets during December, after an initial sharp and bidding in the first regular weekly bill auction of the upward adjustment of yields (see chart). One Aa-rated month was very strong, resulting in average issuing rates offering of public utility bonds, priced just before the Con- for the three- and six-month issues, respectively, of 4.989 gressional announcement that the proposed surtax would percent and 5.580per cent (see Table 1W, only slightly not be enacted by the end of the year, was poorly received higher than in the prcvious-4eekly auction. Investment at a reoffering yield of 6.65 per cent. In contrast, two other buying of bills, much of it from foreign sources, held at similarly rated public utility offerings also carrying five- significant levels over the remainder of the month, and year call protection, priced shortly after the announcement, Scarcities of certain maturities developed frequently. For were quickly taken by investors at a reoffering yield of December as a whole, market yields on the nearest three- 6.80 per cent, a near-record high for this type of offering. and six-month bill maturities rose by 9 and 1 basispoints, At the higher yield lçvels, new offerings of tax-exempt respectively, to 5.04 per cent and 5.54 per cent. bonds were also marketed quite successfully. Among the 10 MONTHLY REVIEW,JANUARY 1968 largest offerings of the month was a $97 million issue of market, and at the close of the month the Blue List of industrial revenue bonds, of which $74 million represented dealers' advertised inventories of municipal bonds stood term bonds due in 1990. These bonds, rated Baa by at $506 million, up from $478 million at the end of Moody's, were well received at a reoffering yield of 6 per November. cent. Unsold balances of a number of municipal offerings, The average yield on Moody's Aaa-ratedseasoned cor- which had been overhanging the market since their initial porate bonds rose to 6.24 per cent at the end of December reoffering inNovember, were released from syndicate price from 6.13 per cent a month earlier. The Weekly Bond restrictions during December, with resultant upward yield Buyer's series for twenty seasoned tax-exempt issues, also rose over adjustments of as much as 15 basis points. Nevertheless, carrying ratings ranging from Aaa to Baa, a certain amount of congestionremained in the tax-exempt the month to 4.44 per cent from 4.42 per cent.

Special Drawing Rights: A Major Step in the Evolution of the World's Monetary System

A major benchmark in the evolution of the international limits their obligation to accept them. But, because in monetary system was reached last September when the general SDR's could be used automatically for the settle- members of •the International Monetary Fund (IMP) ment of international payments, they fulfill the essential agreed on a proposal for establishinga new reservefacility function of anyreserve asset. to meet the possible need for a supplement to existing This new facility to some extent represents a logical international reserve assets. This supplement is designed extension of the Fund's current operations, but it departs to assure an adequate supply of international liquidity from the Fund's ordinary procedures in several important for a growing world economyif, as is expected, the growth respects. First, SDR's will be more readily available than of more traditional reserve assets—gold and foreign ex- the credit that the IMF now provides through drawings change—should prove inadequate. The plan provides a in the credit tranches.' Any participating country will be means for regularly creating special drawing rights (SDR's) able to use SDR's whenever it has a balance-of-payments in the Fund, which the participating countries would or reserve need to do so. Its exercise of this right will nor con- accept as reserves and could use in international settle- not be subject to consultation or prior challenge ments. Although the plan contains certain provisions to ensure the attractiveness of SDR's, their value as a reserve asset rests fundamentally on the obligation of participants for a convertible to accept them in exchange currency. 'At present, a member of the Fund may purchase (or "draw") To be sure, the proposal places some restraints on the the currencies of other members by depositing with the IMF an equivalent amount of its own currency. The normal quantitative ability of participating countries to use these assets and limitations on the use of the Fund's resources depend on the size of the member's quota (which equals the member's subscription in gold and in its own currency to the Fund's resources). Draw- ings are virtually automatic in the "gold tranche"—i.e.,as long as the total amount drawn does not exceed the 25 per cent of the borrowing country's quota normally subscribed in gold. But a * Martin Barrett and MargaretL. Greene, Economists, Foreign country can make additional drawings, in the "credit tranches", Research Division, had primary responsibility for the preparation only after it has agreed to take measures to correct its balance of this article. of payments.