240 MONTHLY REVIEW,.

The Money and Bond Markets in September

Short-term interest rates were little changed over the was also moderate when compared with recent historical month, although some upward pressure emerged around patterns. The bank credit proxy halted its recent decline the quarterly statement date. The continued moderate and grew modestly during the month. growth reported for the monetary aggregates reduced the concern of marketparticipants over a near-term tightening THE MONEY MARKET AND THE of money market conditions by the Federal Reserve. Nev- MONETARY AGGREGATES ertheless,. further signs of a strengthening economy and prospects of heavier credit demands weighed on market The Federal funds rate and other short-term rates were sentiment. stable over' most of the month, although increased churn- In the Government and corporate securities markets, ing in the money market put some upward pressure on opposing forced' left yields somewhat higher on balance rates toward the month end (see Chart I). Many large by the month end. Fears of renewed inflation deepened banks apparently sought to add to certificates of deposit with news of. the developing economic recovery. An an- (CDs) before the quarterly statement publishing date, and nouncement by the Treasury of enlarged borr9wing needs rates on these instruments started rising aroundthe middle with more emphasis on sellinglonger term issues to finance of the month. For September as a whole, the effective rate them also was a depressing influence. On the other hand, on Federal funds averaged 6.24 percent, compared with a the consumer price index for August showed a low rate of 6.14 percent average in August. Member bank borrowings increase, and substantial demand emerged in the auctions from the discount window continued to ,be modest on for Treasury securities. Developments in the corporate average over the month (see Table.1)., as the rate on Fed market were also greatly aided by a relatively, small eral funds remained only slightly, above the discount rate. amount of new issues.offered during the month and ex- Rates on 90- to 119-day dealer-placed commercial paper pected in the near future. This partly reflected the massive were raised during the month ¼ percentage point to 6/8 corporate debt financing earlier in the year and the can- percent, while rates on bankers' acceptances were approxi- cellations or postponements of issues due to current levels mately unchanged. In the secondary market, the rate on of interest rates. large negotiable CDs maturing in ninety days closed the Meanwhile, yields in the municipal market rose sharply month at 7.03 percent, up 8 basis points from the end of in September to record levels, as New York City's fiscal August. crisis, continued to weigh heavily on this sector. Legisla- The demand for bank loans by businesses, in decline tion, to provide additional revenues for the city was passed since last December, remained weak during. September. by the New York State legislature early in September, but Commercial and industrial loans at large commercial investors remained concerned over the financing needs of banks rose only $4 million in the first four statement weeks state and local government borrowers and their access to in September, compared with a $1,330 million average in the market. Investor concern deepened at the close of the crease over similar periods in the previous four years. month when a section of the legislation which required Nevertheless,most money center banks raised their prime the use of pension funds of state employeeswas declared lending rate 1/4 percentage point to 8 percent. unconstitutional by New York State's highest court. During the month, the Board of Governors of the 'Fed- According to preliminary data, which now reflect recent eral Reserve System released revised estimates of the bench-mark. revisions, growth in the narrow. money stock money stock measures for the period beginning January (M1) remained moderate in September for the third of this year for M1—private demand deposits. adjusted straight month. Growth 'of the more broadly defined plus currency outside commercial banks—and beginning money stock (M2), though more rapid than that of M1, October 1974 for M2—M1 plus time deposits other than FEDERAL RESERVE BANK OF NEW YORK 241

ChartI SELECTED INTEREST RATES July- BOND MARKETYIELDS -P.sc.nt 11.00

0.00 New Aaa—rat.d public u lily bonds ------Aaa-rat.d u.ason.d Irporals bond, p.00

3— to 5-y.ar —Government securities 8.00 21 -year tax-eu; mpt bond,

7.00

Governm.ntsecurities

5.00

111111111111111111111 11111111 III 111111111 11111111111111111111 A (10 2 9 16 23 30 6 (3 20 27 3 10 17 24 July August Sept.mber July August September

Note: Dataace shown forbusiness daysonly. MONEYMARKET RATES QUOTED Prime commercial loan rate at mostmajor banks; standard Aaa.rated bond of at least twenty years maturity; dailyaverage, of offeringrates (quoted interms al roteof discount) on 90. to 119.day_pnim.commercial yieldsan seasonedAaa.rat.d corporate bands; daily averages of yi.lds on paper quoted by threeof the five dialers that reporttheir rates. or the midpoint of lonp.termGovernment securities (bands due orcallable in ten years or morel th. range quoted It no cans.nsus in available; the effective rote an Federal funds and an Government securities due in thre, to five computed on the basis (the rats mostrepresentative of the transactions executed);closing bid fates (quoted of clasing bid prices; Thursdayaverag.. of yieldson twenty seasonedJ±1!i.ty_ in term, of rat. of discount)on newest outstanding three.month Treasnry)((j yeartan..uempjs lcarrying Moadys ratings of Ann,Au, A, and Baa). BOND MARKET YIELDS QUOTED: Yields an new Aoo.rated publicutility_b.!. ore based Sources, Federal ReserveBank of NewYork, Board of Governors of the F.dsret an prices asked byunderwriting syndicates, adjusted to make them equivalent to a ReserveSystem, Moody, lnvestar, Service, Inc., and The Bond Buyer.

large negotiable CDs. The revisions reflect data obtained annual rate (see Chart II). Consumer-type time and sav- from the April 16 call report for nonmember banks and ings deposits at commercial banks continued to grow from reports from foreign agencies and branches. The somewhat more slowly than their rapid pace in the first major effect of the revisions was to lower the average level half of the year, partly in lagged response to the run-up of M1 during 1975 by about $1 billion. As a result, growth in market interest rates in recent months. During the first of M1 from 1974 has been lowered slightly. All money four statement weeks of the month, these deposits aver- stock data in this article reflect these revisions. aged 6.9 percent at an annual rate above their level in the Preliminary data indicate that growth in the monetary period ended four weeks earlier. Over the same period, aggregates remained moderate in September. During the M2 increased at a 5.0 percent rate. CDs, reversing a steady four-week period ended , seasonally adjusted decline since January, grew at a 3.3 percent annual rate in M1 averaged 2.6 percent at an annual rate above its aver- September. The bank credit proxy—total member bank age during the four statement weeks in August. This deposits subject to reserve requirements plus certain non- brought the growth in M1 from its average level in the four deposit sources of funds—rose in September for the first weeks ended thirteen weeks earlier to 3.0 percent at an time in three months. 242 MONTHLY REVIEW,OCTOBER 1975

Tab6e I THE QOVERNMENT SECURITIEB MARKET WACrORSTENDING TO INCREASE OR DECREASE MEMBERBANK RESERVES,SEPTEMBER 1575 Yields on rose on Inmillions of dollars; (+) denotes Increase coupon-bearing Treasury obligations and (—) decrease In excess reserves balance during September, while rates of return on Trea- sury bills fluctuated in a narrow range. During the first Changes In daily averages— weekended Net half of September, investors became increasingly con- Factors changes cerned about inflation and the financing needs of the Sept. Sept. Sept. Sept. 3 10 17 24 Treasury. With these considerations weighing on the market, prices of longer maturity issues weakened sub- stantially. After midmonth, some good news on the price 'Mark.t" laster. front and massive retail interest in a Treasury auction Member bank requiredreserve. — 42 + 118 —188 — 293 — 405 precipitated a short rally, but most coupon issues ended Operating transactions (subtotal) — 899 +1.153 — 257 —3.381 —3.384 the month with higher yields on balance. Relatively stable Federal Reserv, float — 62 546 — 194 l5 448 + + + dealer financing costs supported the Treasury bill market Treasury operaUons — 607 + 483 +245 —3.829 —3.758 with rates — and, supply pressures potentially easing, Gold and foreignaccount 62 — 51 + 26 + 41 — 46 were over most of the month. banks — — fairly steady Currency outside + 115 72 + 208 + 29 On its overall Other Federal Reserve liabilities , the Treasury announced 177 cash needs for the remainder of the and its financing and canital — + 339 —262 + 42 — 58 year for• With to run Total ,narket" factor, —941 +1.271 — 443 —3.874 —3.789 plans September. expenditures continuing above earlier projections, with the possible suspension of oil import fees, and with a decision to maintain a DIrect Federal R.,.re. credit trais.astl.ne higher average cash balance, the Treasury raised its esti- in Open market operations (subtotal) + 748 —1.757 + +3.067 mates of needed financing. Borrowing requirements OutrIghtholdings: the second half of 1975 are now expected to total $44 — — Treasury aecuritlee + 116 55 186 +1.901 +1.182 billion to $47 billion, up from the $41 billion figure esti- Bankers' acceptances + 10 — 20 — + 32 + 15 mated in August. The Treasury also indicated that its — — — — Federal agescy obligations — 28 1 24 financing plans would place less emphasis than previously Repurchase agreements: on the bill marketin order to minimize any disinterinedia- Treasury securities + 414 —1,410 + 783 +1.173 +1.020 tion effects of the program. The September Banker.' acceptances + 86 — 166 + 51 + 123 + borrowing of the was $4 billion in Federal agmicy obligatIons + 85 — 106 + 3 + 164 + 150 component Treasury's borrowing raised auction additional $1 billion tJ.mberbsnkborrowingl —60 + 169 —68 + 68 + 123 new cash by the of an seasonal borrowinget + 11 + 3 + 7 + + 24 of two-year notes (part of a $3 billion financing) on Sep- Other Federal Reeerre asocial + 266 + 21 + 88 — + 845 tember 16, by the addition of $1 billionto the auction of Total + 963 —1.567 +707 +3.432 -1-3.635 52-week bills on , and by an auction of $2 (seas, r.e.rv.si + 22 — 296 + 262 — 242 — 234 billion of 29-month notes on September 24. The Treasury announcement had a depressing effect on the market which was still the Dailyaverage levels coupon assimilating Uonthl news of a bulge in energy and food prices in July and August. However, in the auction of two- Member bank: an amount of noncom- vault 34.631 year notes, unexpectedly large Total reserves, Including cashi 34.644 34.110 34.580 34.471 tenders resulted in about 45 of the $3 bil- Required reserves 34.923 34.105 34.293 34.586 34,302 petitive percent 25 45 lion issue being purchased by individual investors and F.xcess reserve, 321 287 170 the Total borrowings 222 885 827 896 332 smaller financial institutions. At 8.44 percent, average Seasonal borrowinget 51 54 61 84 55 yield on these notes was less than anticipated although Nonborrowed reserves 34,322 88.745 34.253 34.236 34.139 19 basis points above the average yield at the auction Net carry-over. excess or deficit (—Ill ... 177 170 4 108 115 of similar notes on August 14. The relatively small pro- portion of the issue taken by dealers left the notes in a Note: Becauseof rounding. figure. do notnecessarily add to totals. • Include, changes inTreasury currencyand cash. favorable technical position. The improved market tone tIncluded in total member bankborrowings. following the auction was reinforced on by * Includesassets denominated In foreigncurrencies. I Average fo,four weeks ended September 24. 1975. the release of the consumer price index for August which IINot reflected in data above. rose at only a 2.0 percent annual rate, the smallest FEDERAL RESERVE BANK OF NEW YORK 243 monthly increase in three years. In the auction of ment securities rose 26 basis points to 8.28 percent. The $2 billion of 29-month notes on September 24, aggressive yield on the 8½ percent Treasury bond of 1994-99 rose bidding resulted in an average yield for the notes of 8.10 to 8.64percent at the end of September, up 21 basis points percent, with a sizable portion awarded to noncompetitive from its level at the end of August. Lower coupon bonds tenders. showed a more pronounced trend. The yield on the 4¼ In the final week of the month, the market resumed percent Treasury bond of 1987-92 rose to 6.42 percent, the downward course that had been followed during the up 54 basis points from the end of August. first half of the month. Accompanying this decline was a With short-term rates remaining relatively stable over request by Treasury officials, in testimony before the Con- most of the month, inventory financing costs did not apply gress, to extend to ten years the maturity on securities that significant pressure on Government securities dealers. In can be issued without restrictions on the interest rate and addition, the outlook for supply in the bill market was im- to provide authority to sell longer term issues without proved by the Treasury's stated intention to rely to a lesser regard to the interest rate ceiling. Over the month as a extent on short-term issues to finance the deficit. As a whole, the index of yields on intermediate-term Govern- result, bills traded in a narrow range until the last two days of the month when yields on three-month bills rose 15 basis points. At the weekly auction of , the average yields on three- and six-month bills were 6.55 percent and 6.98 percent (see Table II), compared with 6.38 percent and 6.87 percent, respectively, in the last auction of Chart II August. Over the month as a whole, yields on CHANGES IN MONETARYAND CREDIT AGGREGATES most bills rose 10 to 29 basis points. Seasonally adjusted annualrate, On P.rc.nt P.rc.nt , the Treasury auctioned $1.5 billion 15 of cash-management bills, with $800 million to mature Front 52 to — weeks lather 10 on September 18 and $700 million to mature on Septem- ber 25. Like a similar issue in August, these thirteen- and 5 5 twenty-day bills were designed to dampen fluctuations in 0 ornlJ 0 the Treasury's balances at Federal Reserve Banks. In the issue of —5 II I ii Ill III II II II —5 major agency the month, the Federal IS National Mortgage Association (FNMA) issued $400 million of debentures at 8½ and to 10 four-year percent $300 million of seven-year debentures at 8.60 percent. Both 5 5 issues were well received. In August, FNMA had issued 0 0 $650 million of five-year debentures at 8¾ percent.

THE OTHER SECURITIES MARKETS

Competition from the Treasury for long-term funds and uncertainty about the outlook for inflation dominated sentiment in the corporate bond marketduring September. Few new issues were brought to market, and the calendar was lightened further by postponements due to market conditions. Prices eroded steadily in light trading over the first half of the month. However, after midmonth the Not. Growth rate. a,. computedon h, basisof fou,.w..k ovsragesof doily good in note auction and the small figurss forpsriod. .ndad indi. srat.nr.ntwonk plotted, t3 w.ohs .orli.r ond reception a Treasury ,32 w..ks •orlisr. Tb. fastest stotssneof we•h plottad is Saptanrb.r 24, 1975. increase in the consumer price index were viewed very MlcCurr.ncyplus odjust.d dewu,d dupositsheld byrho public. favorably, and a short, sharp rally ensued. Some profit M2 Ml pluscomm.rciol both savingsand here d.po.ifs h.ld byth. public. I... nagotiabl. csrtiflcotnsof dapositi,so.d indenominations of Sf00,000or man. taking occurred later in the month, but corporate prices Adjuntadbosh creditprooy Total m.mbsr bock d.posits subjsct to rosary. generally held steady as the forward calendar for new rsquir.w.urs plus eund.posir sourc.sof fund., sock us Euro.dollor borrowingsand Sb. proc..ds of commercial pap.r issuedby honkholding debt financing appeared manageable. sumponissor ash., affiliates. in the market Source: bardof Gov.rnorsof the F.dsrnl baser..System. Developments corporate in September were reflected in the bellwether financing of the month, 244 MONTHLY REVIEW,OCTOBER 1975

TableH a two-part offering of Aaa-rated telephone utility debL million: million of AVERAGE ISSUING RATES The financingtotaled $200 $75 six-year AT REGULAR TREASURY BILL AUCIONS* notes 8.70 and $125 million yielding percent offorty-year Inpercent bonds yielding 9.70 percent. Although the return on the bonds compared very favorably with a similar issue yield- Weekly auctiondates—September 1975 market in Maturity . ing 8.80 percent when brought to mid-July, Sept. Sept. Sept. Sept. the market had deteriorated significantly before the offer- • 8 12 22 29 initial in- ing date of September 17. Dealers encountered Phree.moflth 8.389 6.444 6.316 6.547 bonds. vestór resistance to the terms set for the However, Six-month 6.889 6.901 6.824 6.980 after the results of the Treasury auction became known, the bonds quickly sol4 out. With the additional impetus of Monthlyauction dates—July.September 1975 the small increase announced for the consumer price July Aug. Sept) index, the bonds traded above their issue price when 24 20 17 from restrictions 22. Dur- released syndicate on September FlIty-two weeks e.782 7.931 7.938 ing the ensuing week, the market retreated again so that, • Interest rates on bills ace quoted In terme of a 960-day year. with the discounts from at the month end, the price of the bonds was 1½ points par as the return on the face amount of the bills payable at maturity. Bond yield below their high of the previous week. equivalents, related to the amount actuallyinvested, would be eltghtly higher. The financial problems of New York City dominated the market for state and local government debt issues in September. During the first week of the month, the in- creasing difficulties in arranging a timely aid package for New York City caused price quotations on Municipal high yields through private placements. Interest charges Assistance .Corporation (MAC) issues to drop sharply. on one-year notes were reported to be 9.5 percent for the The tax-exempt market received some respite on Sep- New York State 'Housing Finance Agency and 9¾ percent tember 9 when the New York State legislature provided for the New York State Dormitory Authority. additional funds for the city and established an Emer- At the close of the month, the highest court in New gency Financial Control Board to oversee the city's fiscal York State declared unconstitutional the mandated invest- operations. Under the legislation, the state would provide ment of state employee pension funds to aid New York $750 million (to be financed by state borrowing) to the City. The decision affected the use of $125 million of city by purchasing $250 million of MAC bonds and $500 funds, which was part of the aid package passed earlier million of city and MAC notes. Another $725 million was by the state legislature. In the wake of the court decision, to have been obtained from city and state employee pen- price quotations on MAC issues plunged to new lows sion funds, with the remainder coming from tax prepay- as concern developed over whether enough funds to stave ments, net new purchases or underwritingsof $250 million off a default by the city would be forthcoming"— of MAC issues by New York banks, and other sources. The problem of dwindling investor confidence extended Shortly after the enabling legislation passed, the 9 per- to other state and local government borrowers as well. scent MAC bonds due in 1985, which had fallen to 84 at In mid-September, the Massachusetts Housing Finance the end of the preceding week, rose to 89½. Nevertheless, Agency was able to sell about $128 million of bond an- considerable uncertainty still prevailed. On the day after ticipation notes only after the full faith and credit of the the passage of the legislation, New York State, presumably state was placed behind the notes, which were priced to because of the increased burden of its financial commit- yield from 5.75 percent for maturities to ment to New York City, encountered investor hesitancy 6.75 percent for September 1976 maturities. When mar- when it offered $755 million of short-term notes in a keted at the end of the month, $50 million of Aaa-rated negotiated offering. Of those notes, $105 million due in bonds of the State of California encountered investor re- December was offered to the public at a 6 percent yield, sistance despite generous yields. The Bond,Buyer index of $400 million due in six months was offered to yield 7½ twenty bond yields on twenty-year tax-exempt bonds on percent, and $250 million of one-year notes was priced rose to a record 7.67 percent from its level of to yield 8 percent. During the following week, two other 7.18 percent on August 28. The Blue List of dealers' New York State borrowers also encountered considerable advertised inventories rose by $4.5 million and closed the reluctance from lenders and could borrow only at very month at $635 million.