296 MONTHLY REVIEW,

The Money and Bond Markets in November

Interest rate movements were mixed during November. large-denomination CDs, expanded only slightly faster The yields on three-month Treasury bills and on than in October. The seasonally adjusted volume of CDs intermediate- and long-term securities fell during the outstanding declined again as it did in October and Sep- month. The rates on Treasury bills of six months or longer tember. Partially as a result of this and partly in response and on several money marketinstruments moved higher. A to a change in the compositionof business borrowing, the combination of selling pressure resulting from the im- adjusted bank creditproxy declined from its October level. proved international position of the dollar and a growing concern among market participants that monetary policy BANK RESERVES AND THE MONEY MARKET might not loosen significantly in the coming months caused many rates to rise sharply in the first half of November. Interest rates on money market instruments edged up- However, rates declined noticeably in the second half of ward during November (see Chart I). Yields on nonbank- the month, when investors began anticipating slower busi- related, dealer-placed commercial paper registered ness activity in the months ahead as a consequence of the increases of % to /8 percentage point and closed the energy shortage. For the month as a whole, the rate on month ranging from 9'/a percent to 9½ percent. The ef- bankers' acceptances rose percentage point, while sec- fective rate on Federal funds averaged 10.03 percent, 2 ondary market rates on negotiable certificates of deposit basis points above October's average level. The volume of (CDs) increased 81 basis points. The effective rate on nonborrowed reserves declined in November; however,, Federal funds during the statement week ended Decem- total reserves fell by an even larger amount. As a result, ber 5 was 10.17 percent, 27 basis points higher than during both seasonal and nonseasonal member bank borrowings the final week of October. declined, for the third successivemonth (see Table I). Higher inventories acquired in the November financing, The market for CDs continued to show the effects of expectations that foreign central banks would be selling the higher marginal reserve requirement that was imposed securities, and an increase in dealer financing costs ex- in Septemberas well as the lighter demand for bank loans. erted steady upward pressure on yields in the Government The volume of CDs outstanding declined in November securities market early in November. In addition, Gover- for the third consecutive month. However, there was a nor Brimmer's statement that inflation would continue in modest increase during the final week of the month. In the 1974 reinforced the already cautious atmosphere in the secondary market, the interest yield on CDs increased to market, and yields on all maturities rose sharply. A much 9.34 percent. firmer tone developed toward the end of the month's The 9½ percent prime lending rate that was set by sev- second week, and rates generally receded over the eral major banks in late October spread to a few additional remainder of the period. New issue activity in the market banks during the first week of November. However, the for Federal agency securities was moderately heavy, but 9½ percent rate did not become universal, and on the interest rates on agency securities recorded only small last day of the month a few of the banks that had been changes. There was a substantial volume of new issues in quoting 9½ percent returned their rates to 9¾ percent. the corporate and municipal bondmarkets, and yields were The narrow money supply grew considerably faster in essentiallyunchanged. November than it had in recent months. Preliminary data The narrow money supply (M1)—demand deposits ad- indicate that for the three months ended in November, M1 justed plus currency outside banks—grew much more rap- expanded at a seasonally adjusted annual rate of 4 percent, idly in November thanin October. The broadmoney supply up from 0.2 percent for the three months ended in October (M2), which includes time and savings deposits other than (see Chart II). FEDERAL RESERVE BANK OF NEW YORK 297

Chad I SELECTED INTEREST RATES S.ptsmb.r - Novambar1973 BOND MARKETYIELDS P.rcant

13.0C

— 12.00

11.00

10.00

— 9.00 Now Aaa-rat.d Aoa-rated a.oson.d corporals bonds public utility bonds 8.00

I I 7.00

— 3-to5 — &00 Govsrnmnntascuritios Long-t.rm Oavarnm.ntascuriti.s

— 5.00 20-ysartox-ax.mpt bonds liii 1111111Iii 1111 11111 Iii (liii itli iii iii iii itiliii 1111(11 4.00 5 12 19 26 3 10 17 24 31 7 14 21 28 Ssptsmb.r Octobir Novsmb.r S.ptsmbnr Octobsr Novambar 1973 1973

Nato: Dataam showntar buntn.nn days only. MONEYMARKET RATESQUOTED, lid rains brthras-manth Eura.dallars in London1 attnring standard Aaa-ratnd band alas lionsIwanly yaarn maturity;daily avaragan at rains(qaalsd inlarma al rainot dincaunl(on 90-to119.day prima commnrciotpapar yialdnan naanonadAaa-ratad carporoia bondstdaily av.ragan at yialds oa (g,sg.r qaotnd bythin. atik. It,. daalnrn that raport ihairrosin, or iha midpainiat tha ranga tarmOovaramanl nacaritian (bonds don ar callobta intan yaors ormors( and qaoi.d it no connannun is availabla; th. attactiva rota an Fadarollund. (tha rota mast on Qovarnmansnacuritian dun in ibm. no tiva companodan ski basin al rapranantativaat ski transactions .ancut.d(; closing bid rains (quotad inlarma al rats at cloningbid prican;Thursday avaragan aI yialdn on Iwanly naanonadtoly_.yqr dincausl(on nawantoutstanding ihraa-month Trnaauryj5j. lgninpIbant(carsyingMoodyn ratings at Aoa, An, A• and Baa). BONDMARKET YIELDS QUOTED, Yialdnon sawAaa.roiad aublicutililyjgSjora basad Sourcan: Fadamal lanai..lash al Now York, Board alQovamnaru al tha Fadaral aspricas onkad byandnrwriting nyndicason.adjantad to mahasham aqsivolnnt Ia a Binary.Synlom, Maady'n InvonlarnSnrvica, Inc., andThn band Inyor.

In November, M2 expanded at about an 11 percent requirements plus certain nondeposit liabilities—grew in rate, approximatelythe same rate thatprevailed inOctober. November at only a 0.5 percent annual rate. The slow The three-month growth rate of M2 through November growth has been partly a reflection of the higher costs to is 8½ percent, and for the year so far it is 7¾ percent. banks of raising funds in the CD market since the reserve The interest rate ceilings that were imposed on four-or- requirement on CDs was increased. It is also caused by the more-year consumer-type time deposits last month accom- fact that, during the last week of September, the rate on panied by higher short-term interest rates caused the commercial paper fell below the prime rate and business growth of other time deposits to diminish somewhat in credit demand shifted to the commercial paper market. November. Despite this slowdown, other time deposits This reduced the banks' need for funds and tempered still expanded at a healthy 12 percent rate. their CD sales effort. Since late September, the volume of Contrary to the behavior of the other monetary aggre- commercial paper outstanding has increased noticeably gates, the adjusted bank credit proxy—which consists of while the credit proxy has shown virtually no growth. daily average member bank deposits subject to reserve The fall in the volume of CDs is, in some measure, 298 MONTHLY REVIEW, DECEMBER 1973

Table I responsiblefor the decline in reserves available to support FACTORS TENDING TO INCREASE OR DECREASE nonbank (RPD) November. After MEMBER BANK RESERVES, NOVEMBER 1973 private deposits during showingno growth during October, RPD contracted at an In millions ofdollars; (+) denotes increase (—) decrease in excess reserves 11 percent rate during November.

Changes in daily averages— THE GOVERNMENT SECURITIES MARKET week ended Net Factors changes The interest rate on three-month bills fell Non. Nov. Nov. Nov. Treasury 7 14 21 25 slightly in November, while the rates on six-month and 52-week bills advanced modestly. Throughout the month, 'Market" factor, the market's tone was affected by several competing fac- Member bank reoulred reserves +457 — — ' + 389 + 488 tors. Among these was concern over the short-run impli- Operating transactions (subtotal) + 198 + 508 .—1,72e + 378 — 849 cations of the international of the dollar relative Federal Reserve float strength — 51 + 182 + 388 + +1.019 to certain currencies. The demand for the Treasury operations' + 343 + 998 — 800 + 108 + 845 foreign strong Gold account — — and foreign 53 248 + 23 — 84 — 372 dollar created a situation in which foreign central banks Currency outside banks ._289 — 532 —1.051 — 44 —1,916 needed funds to their own currencies. To obtain the Other Federal Reserve liabilities support funds, the central banks sold some of their hold- and capital + 256 — 46 — 198 — 35 — 23 required Total "market" factors of United States securities. In the + 655 + 158 —1,737 + 74 — 181 ings Treasury addition, spreading consensus that monetary policy was unlikely Direct Federal Reservecredit to promote ease in coming months and the continued high transactions costs of financing dealers' inventories both exerted upward market — 325 — — Open operations (subtotal) 848 +2,161 827 + 181 pressure on short-term rates early in November. Against Outright holdings: these accumulating concerns, the Treasury's announce- Treasury securitles — 65 —1,140 +1.484 — + 278 Bankers' acceptances + 1 — 5 — 2 + 1 — 5 ment that it would auction a strip of bills totaling $1.1 Federal agency obligations — — + 14 + 42 + 59 billion to raise cash because of foreign central bank re- Repurchase aaraementn: of certificates contributed to Treasury securities — 232 250 893 — 727 demptions special Treasury + + + 193 climb rates month. Bankers' acceptances — 8 + 10 + 25 — 22 + the sharp in early in the The "strip" Federal agency obligations — 21 + 28 + 147 — 118 + 38 consisted of a $100 million addition to each regular weekly — Member bank borrowings 285 + 351 + 48 — 281 — 167 bill issue maturing between and January 31. Seasonal borrowlngst — 26 — 13 + 5 — 1 — 35 Other for the when was sold on November was Federal Reserve assetsl + 89 + 9 — 557 + 45 — 326 Bidding strip it 9 rate set 8.67 TotalS — 400 +2,052 —1,064 + 67 indifferent, and the average issuing was at Excess reservest ÷134 ..—244 .4.. 315 — 319 — 114 percent. At the regular weekly auction of , the issued Monthly rates on newly three- and six-month bills were 8.64 Daily averagelevels averages and 8.38 percent, respectively (see Table II), 144 and 112 basis points above the rates set at the last regular auction in October. At these yields, however, substantial Member bank: investor demand materialized. The market received addi- Total reserves, including vault casht 84.625 34.729 33,054 34,368 34.6980 Required reserves 94.360 34,707 34.718 34,349 34,5840 tional support, as information and opinion concerning the Excess reservesi 285 21 336 17 1600 energy shortage became more abundant. The marketinter- Total borrowings 1,170 1,521 1,569 1,288 1,38711 this information indicate that the of eco- Seasonal borrowlngst 93 80 85 84 8811 preted to pace Nonborroned reserves 38,455 33,207 33,483 33,078 88,80811 nomic activity in the near future would be more restrained Net carry.over, excess or deficit )—) ... 120 186 38 212 144)) than was initially expected. Consequently, bill rates re- versed field and declined Issuing rates on three- Note: Because of rounding, figures do not necessarily add to totals. abruptly. Includes changes In Treasury currency and cash. and six-month bills at the auction of were tIncluded In total member bank borrowings. down 93 and 58 basis points from the previous week. How- I Includes assets denominated In foreign currencies. I Adjusted to include $84 million of certain reserve deficiencies on svhlch penalties can ever, continued selling pressure was sufficient to prevent be waived for a transItion period In connection with bank adaptation to RegulatIon J as amended effective , 1972. The adjustment amounted to 8450 million the rates on six-month and 52-week bills from completely from November 9 through December 27. 1972. $279 million from December 28, 1972 through March 28, 1973. 8172 million from March 29 through June 27. 1973. retracing their earlier gains. For the month as a whole, rates and $112 million from June 28 through September 26, 1973. on three-month bills were 6 basis lower while rates 3 Average for four weeks ended November28, 1973. points 5 Not reflecied In data above. on six-month bills were up 35 basis points. During No- FEDERAL RESERVE'BANK OF NEW YORK 299

Table H vember, the yield on 52-week securities rose 29 basis AVERAGE ISSUING RATES points. AT REGULAR TREASURY BILL AUCTIONS On the sold $3 billion of tax Treasury In percent anticipation bills, of which $1 billion will mature next April 19 and $2 billion on June 21. The bills can be used Weekly auctiondates—November 1973 tax due in and Maturities at face value to pay Federal income April Nov. Nov. Nov. Nov. June. Both maturities were well received. The average 5 12 19 26 7.83 and on issuing rate on the April 19 bills was percent, Three-month 8.098 8.636 7.704 7.695 the June 21 issue it was 7.79 percent. Six-month 7.987 8.381 7.805 7.679 After fluctuating within a relatively narrow range, the prices of Treasury coupon securities finished November Monthlyauction dates—September.Novembtr 1973 their end-of-October levels. The of very near prices Sept. Oct. Nov. intermediate-term securities registered moderate declines 19 17 14 as noted that the Federal early in the month, participants Fifty-two week, 8.057 7.132 7.708 funds rate had stopped faffing and that further declines The market's technical was • Interest rates on bills are quoted In terms of a 360-day year. with the discounts from appeared unlikely. position par as the returnon the (ace amount of the bills payable at maturity. Bond yield somewhat weak because of large dealer inventories re- equivalents related to the amount actually invested, would be slightly higher. maining from the Treasury refunding late in October.

Governor Briinmer's statement that inflation would keep interest rates high in 1974 added another pessimistic note, and the yields on coupon securities followed bill rates CHANGES IN MONETARY AND CREDIT AGGREGATES investors Seasonally adjusted annualrates upward. In the second half of the month, began could Persnnt weighing the possibility that the energy shortage Percent IS is Ml From3 curtail economic and lead to an easier monetary orl'or activity 10 policy next year. At the same time, yields on corporate had been 5 and municipal bonds, which exerting a depressing rnonth eorlie influence on prices of coupon securities, began to move downward. As a result, the prices of Treasury coupon M2 securities reversed their earlier losses and finished the 20 20 month From 12 essentiallyunchanged. 15 - months earli Pr 15 The prices of Federal agency securities changed very declined a bit from its 10 10 little, as new issue activity pace of the preceding few months. The Federal Home Loan 5 5 ,',,months earlier Banks offered a $600 million refinancing, $300 million I II II I i II 111111 Ii I 111111111 0 III maturing in and $300 million coming due in ADJUSTED BANK CREDITk7 PROXY Prom 3 November 1977. The rate on both maturities was 7.45 earlier 15 15 were well received and soon traded at — percent. They pre- l0 mium prices. Late in the month, the Federal National Association offered a $1.3 billion of From 1 5 Mortgage package months elier debentures maturing between June 10, 1977 and Decem- IlIlIIllIllJIIIllIiiIll lIlIlillil 0 1982. rates were set between 7.20 1971 1972 1973 ber 10, The offering percent and 7.35percent, and the financingattracted a lively MaImLc Data to, November1973 an. prsliminony. Ml Curr.ncy pies odjosteddemand dspasits hsid by thu public. pre-sale interest. M2 MI plus commercial bank savingsand tims dspasitshuts byth, public. lass negoliabls certificatesof deposit issuedin denominations of 1100.000 or mare. OTHER SECURITIES MARKETS Adjustedbosh nrsdit prooy Tatol member bankdapasit. subjectto .s.w. requirements pie.nondeposit sources altnnds, such asCuro.dollar borrowingsand the praceeds aScommercial papar issued by bank holding Prices of and bonds companiesor other affiliot.s. corporate municipal changed Sours.., Boardat Governorsot the F.d.ral Reserve System andthe marginally during November. Prices were under steady FaderalRassrve Rankof Nsa Yorb. pressure during the first half of the month. Antici- 300 MONTHLY REVIEW, DECEMBER 1973 pations of a large volume of new issues, general concern tax. The issue met afair reception. over the troubled state of affairs in the Mideast, and the The new issue market in tax-exempt securities was possibility that the oil embargo could cut into utility quite active for the second consecutive month. Most of company earnings all opeEated to force prices downward. the offerings sold at yields above those on comparable However, forecasts of an economic slowdown in 1974 securitiesmarketed at the end of October. One offering of stimulated the market during the latter part of the month. Aaa-rated bonds was priced to yield from 4.20 percent in Prices regained most of their earlier losses and finished 1979 to 4.94 percent in 1991. The yield on the short the month slightly above their opening levels. maturity was 15 basis points higher than a similar bond After starting slowly, the new issue market in corporate marketed October 30. Another large issue of bonds with debt was quite active in November.One of the key new is- an A-i rating that was sold later in November was sues was a $170 million offering of Aaa-rated thirty-year priced to yield from 4.50 percent in 1975 to 5.97 percent debentures. These were sold to yield 8.07 percent, 12 in 2016. It received a good initial reception, but demand basis points higher than the yield on a similar issue sold subsequently tapered off. The Bond Buyer index of late in October. Later in the month the American Telephone twenty tax-exempt bond yields closed the month at 5.15 & Telegraph Company sold $500 million worth of preferred percent, 3 basis points above its level at the end of Octo- stock. The stock was priced to yield 7.48 percent, some ber. The Blue List of dealers' advertised inventories rose portion of which is exempt from Federal corporate income in Novemberby $47 miffion to $978 million.

DIRECT-DIALING TELEPHONE SYSTEM The Federal ReserveBank of New York will change to a direct-dialing telephone system on De- cember 17, 1973. The new main number for the Bank is 791-5000. To request publications—includingthe Monthly Review—andtours, dial 791-6131; for Research Library, dial 791-5670; for savings bond information, dial 791-5965; for information about purchasing United States Treasury obligations, dial 791-5823; for employment information, dial 791-6040. (If calling from outside New York City, be sure to dial the area code—212—first.)