102 MONTHLY REVIEW. MAY 1969
The Money and Bond Markets in April
During April the money market was subjected to pres- from the Federal Reserve Banks and a marked rise in the sure from greater monetary restraint and from unusually prevailing range of Federal funds rates. For April as a large reserve drains around midmonth. The Federal funds whole, borrowings at the discount window averaged ap- rate and other short-term interest rates advanced in the proximately Si billion, a rise of close to $80 million from wake of the April 3 announccment of increases in the March. Since excess reserves declined on balance, net Federal Reserve discount rate and reserve requirements borrowed reserves in April advanced $160 million to $860 on demand deposits at member banks. (For details, sec million. the statement of the Boardof Governors reproduced in full The Federal funds rate, after having remained mostly in on page 75 of the April issue of this Review.) Accompany- a 6¼ to 6% percent range in March, moved up to a 7 ing the firmer money market conditions that emerged dur- to 7½ percent range following the announcement of the ing the month were variations in day-to-day rates which discount rate and reserve requirement increases in early reflected some fairly abrupt shifts in the distribution of re- April (sce Chart I). About midmonth the rate rose further serves between money center and other banks. In large part, to around 7¾ percent. The distributional effects of the these fluctuations were due to wide swings in the size and Treasury operations on the major money market banks distribution of Treasury cash balances around the mid- were quite pronounced during April. Chart 11 records the month tax date. After mid-April, however, short-term pattern of basic reserve deficits during the February-April to Treasury bill rates began to reverse the upward movement period for the past three years. The early- mid-April which had occurred earlier, and by the month end rates jump was far more than seasonal in 1969 and, indeed, the were below March 31 levels. $2A billion rise during thc two-week period was one of Sentiment in the bond markets, particularly in the cor- the sharpest on record. The major money market banks, porate sector, continued to improve, and some feeling in seeking to cover their combined deficit of over $4½ funds developed that yields had already hit their peaks for the billion, were instrumental in bidding up the Federal year. New issues were aggressively sougit for a time at rate. While a subsequent reversal of the skewed distribu- declining yields, prices of outstanding bonds rose sharply, tion of reserves brought a temporary respite, Federal funds and the market resisted such potentially bearish price in- continued to trade at 7¾ percent or above for most of fluences as a rebound in the volume of new offerings, the the last half of the month. Indeed, on April 30, the final report of a strong first-quarter advance in gross national day of a statement week, some transactions at rates as product, and new trouble with North Korea. The marked high as 9½ percent were reported. to with the revival of expectations that lower interest rates lay ahead Reserve management in April had deal with re- stemmed from a growing belief that the anti-inflation pro- effects of the increase in reserve requirements and Reserve credit the Trea- grams of the Federal Reserve and the Administration, course to temporary Federal by including the proposed repeal of the investment tax credit, sury to bridge the gap between receipts and expenditures. would prove cifective. Renewed optimism over progress At the beginning of April, Treasury balances were inade- toward a settlement in Vietnam worked in the same direc- quate to cover net outlays until the inflow of tax receipts funds into tion. By the month end, however, the rally began to lose after midmonth. As a consequence, flowing were with- steam as money market rates remained high and signs of large banks for the account of the Treasury a slowing of price inflation remained sparse. drawn daily, and remaining cash shortfalls were financed by the sale of special certificates to the Federal Reserve. reserveswere redistributed from center bank DANK RESERVES AND THE MONEY MARKET Thus, money to others, and at the same time credit extended to t Increased pressure on bank reserves during April was Treasury by the System was creating new reserves which apparent in some increase in member bank borrowings had to be offset by open market operations. As corporate FEDERAL.RESERVE BA15K OF NEW YORK 103
ChartI SELECTED INTEREST RATES P.rc.nt MONEYMARKET RATES February-April 1969 BONDMARKET YIELDS Percent a.3U Yields on new publicutility bonds Reofferingyield — Market yield:
Aaa 6.00 Aa 0
0 — — 7.50
7.00 LAaa.rat.dseIonedcorporotond: — 3- to 5.yearGovernment securities I — 6.50 p—s.. —. we S,• - — —
6.00 'ecurifle\Long.tsrmGovernment - 5.50
onds eortax-exempt 5.00
II Illillil tutu Ii iii III 11111 It 11111ill 1111111 uult iii liii A fl
5 11 19 26 5 12 19 26 2 9 16 23 30 5 11 19 26 5 12 19 26 2 9 16 23 30 February March April February March April Note: Data areshown far business days only. MONEYMARKET RATES QUOTED: Dailyrange at ratesposted bymajor NewYork Citybanks immediotetyafter ithas been released from syndicate restrictions); daityaverages afyieldson on KOIIJQOSI(in Federal funds) securedby United States Government securities )a point seasonedAoa.rat.dcarparote bonds, dailyaverages of yields an 21,9-termGovernment indicatesthe absenceaJ any range); attiring rates tardirectly placed finance camp.gpypopu; iecsrities (bondsdue or callable in ten years ormore) andan Government securities due in the .ltectivsrate onFederal funds(therats mostrepresentative at the transactionsexecuted), threeto five yearn, computedon the basiuof closingbid pricenThursday dverages of yields closing bid roles(quoted in terms at roteof discount) an newestoutstanding three- andsix-month an twentyseasoned twenty.year lax-nemptbonds (carryingMoodys rasingsat Aaa, Aa, k,owviJliL A, andBaa). BONDMARKETYIELDSQUOTED; Yields an newAna. andAo.rated publicutilitygnj )orranrs paint Sources:Federal Res.rve Bank of NewYork. Board of Governors of the Federal ReserveSystem. tram rrnderwritinasyndicate reatlerino wieldan agiven issueto marketyield an thesame issue Maady'sInvistoru Service,and The We.klyJgjttygL
tax payments began to flow in at midmonth, balances in transactions absorbed reserves, and the impact tended to Tax and Loan Accounts at commercial banks were re- fall on money marketbanks, where reserve pressures were storedand indebtedness to the Federal Reserve was repaid. already great. The percentage point boost in reserves In sum, Treasury cash management operations provided required against member bank demand deposits applied about $1 billion in reserves in the week ended on April 16 to deposits in the week that began April 3. Because of the and then withdrew around $1.2 billion during the sue- two-week lag in reserve settlement, however, the full im- ceeding week as operations were reversed (see Table I). pact was delayed until the week beginningApril 17, when Confronted with the need to absorb a substantial vol- this action accounted for about $650 million of the total ume of reserves in the week ended on April 16, and to rise of $940 million in required reserves for that week. reverse direction in the following week, the System re- In spite of these reserve pressures, monetary aggregates rted extensivelyin the earlier week to matched sale and were buoyant. Total depositssubject to reserve requirements chase transactions. These operations involved sales of (the bank credit proxy) rose about 6 percent (seasonally Treasury bills by the System to dealers under agreements adjusted annual rate) in April after a 5 percent drop in to repurchase during the next week. Initially, then, these the first quarter. Adjustment to include liabilities to foreign 104 MONTHLY REVIEW,MAY 1969 branches would have more than halved the first-quarter decline, but would not have altered the April results much THE OOVERNMENT SECURITIES MARKET (although sales of assets by domestic banks to their for- eign branches introduced some distortion). Liabilities to In the market for Government securities most yields foreign branches, which had advanced about $3.9 billion declined on balance during April, although some bill rates in the first three months of 1969, registered a drop of $200 were higher during the first half of the month. The upturn million in April. This reversal coincided with a slowdownin was attributable in part to bank sales of issues acquired the rate of decline in time deposits at commercial banks. in late-March Treasury offerings and to money market While large certificates of dcposit continued the slide that pressures which increased dealer financing costs. Many has taken place throughout 1969, liquidations in April bill rates initially jumped from 5 to 9 basis points in were little more than seasonal. Indeed, total time deposits reaction to the April 3 announcement of monetary policy on a seasonally adjusted basis were about unchanged in actions, although bills due after six months soon retraced April after a drop of 6½ percent in the first quarter. Fol- most of the rise. lowing a 2 percent risc in the first quarter, the money After midmonth, upward impulses subsided and rates supply registered a surprising 13 percent annual-rate gain worked lower. The Treasury announcement that $200 in April. Part of this upsurge was related to a sharp, tem- million of the maturing April 30 bill would not be porary fall in the amount of cash items in process of col- refunded, public fund demand, and reinvestment of the lection. In turn, this drop was associated with a lull in proceeds of maturing tax anticipation bills contributed to transactions involving foreign banks, which wcrc closed the improved performance. Long bills tended to benefit for holidays both before and after the Easter weekend. somewhat from the increased confidence that monetary This kind of aberration also occurred in 1968, but on a and fiscal measures attacking inflationary pressures would somewhat smaller scale. be effective in the long run. Participants also anticipated that the Treasury's May refinancingoperation would gen- erate strong demand for bills. As a consequence, the yield curve in the bill market was flat during much of the latter half of the month, and the six-month bill sometimestraded cI,n,,II of the three-month bill. At BASICRESERVE POSITIONSOF slightly below the rate level MAJOR MONEY MARKETBANKS the regular monthly auction on April 24, average issuing rates on the nine- and twelve-month bills were set at 5.98 and 5.93 percent, respectively, 8 and 20 basis points lowerthan comparable rates at the auction a month earlier (see Table Ill). At the close of the month, the quoted rates on three- and six-month maturities were 5.87 and 5.96 percent bid, respectively, down 12 and 14 basis points from March 31. Rates for most other bills regis- tered net declines of from 2 to 17 basis points in April. Long-term markets were bolstered by the prospect of intensified monetary and fiscal attacks on inflation and by optimism about a resolution of the struggle in Vietnam. Participants focused on the positive aspects of changes in the discount rate and reserve requirements, expecting that such actions would contribute to price stability and, in time, to lower interest rates. Later in the month further improvement was generated in the capital markets by the President's recommendations for tax action. The view emerged that the elimination of the 7 percent investment tax credit might inhibit corporate capital expenditures and thereby contribute to a reduction of inflationary pressure and a contraction in the volume of corporate borrowin Net,, all 1..., ,o, •p,•iin,d.4iti petitier.,. Ct,,lolio.r.01 in the capital markets. The strong performance of the be.,,.,.r. 4..ll.;lr.t.d .n T.bl. II. potitlo.. corporate bond market during the month gave a boost FEDERAL RESERVE BANK OF NEW YORK 105
Table I Table II FACfORSTENDE4G TO INCREASE OR DECREASE RESERVE POSflONS OF MAJOR RESERVE CITY BANKS MEMBER BANK RESERVES, APRil.. 1969 APRIL 1969 Inmillions ofdollars; (+) denotes increase, Inmillions ofdollars (—) decrease Inexcess reserve. averages—weekended Ofl Daily Averagesol liveweeks Changesin daily averages— Factors affecting week ended on basic reservepositions ended on April AprIl April April AprIl April 30 Net 2 9 16 23 30 Factors — changes April April April April April 2 9 16 23 30 Eightbank. InNew YorkCity
"Market"factors Reserve excess or I dcflciency(—) 18 — 7 — 35 41 — 32 — 3 Memberbeak required Less borrowings from re.ervee — 79 + 57 — 89 —840 —139 —1.220 Reserve Bank. — 75 84 201 63 85 Operatingtranssetlone Lessnet Interbank Federal — 159 888 293 853 — — 221 —310 38 funds purchases or aales(—). 1,807 1,435 (subtotal) 289 + 39 + + Grosspurchases 1,332 1,833 2,382 2,202 1,558 1,861 FederalBeeerve floit —291 + 249 + 41 + 088 —770 — 88 Gross sales 1,491 946 575 767 1,265 1,009 Treasuryoperatlons 50 119 380 —427 —194 — 71 Equals netbasic reserve + + + surplus or deflclt(—) 177 — 970 —1,926 —1,595 — 388 — 940 Gold and foreign account.... 25 — 15 29 S + 46 Government + — + —+ + Netloans to Currency outside banks + 55 90 —189 160 + 591 + 207 securities dealers 440 948 1,010 780 645 765 Other Federal Reserve Net carry-over, excess or deflcit(—)t 38 35 11 — 24 14 15 accounts (net)t — 97 —270 + 130 + 119 + 01 — 57 Total "market" factors.... —338 + 50 4,301 —719 —479 —1,185 Thirty-eight banki outside New YorkQty Direst Federal Reserve Oreditfransactions Openmarket operations Reserve excess or — deflciency(—)t 3 23 — 149— 1— 23 — 29 (subtotal) + 126 + 185 192 + 397 + 564 + 880 Lessborrowings from Outright holdings: Reserve Banks 489 486 367 429 288 412 Gov&nmsnt .ecuritiee + 51 + 57 —559 + 819 +280 + 648 Lessnet Interbank Federal 2 — 1 — 1 funds purchases or sales(—).. 1,452 2,202 2,136 2,201 1,521 1,902 Bankers'acceptances + + 3 + + 4 Gross purchase, 3,293 3,607 3,630 3,430 3,047 3,401 Special certificates — + 06 +02? — 723 Gross sales 1,841 1,405 1,494 1,229 1,526 1,499 Repurchase agreement.: Equals netbasic reserve or —2,652 —2,631 —1,832 —2,344 Government securities 52 — 7 —211 + 222 + 4 + 61 .urplus deflcit(—) —1,939 —2,666 + — Net loansto Government ! Bankers'acceptances + 11 5 — 33 + 50 + 2 + 55 securities dealers — 95 50 218 124 — 51 64 10 — 9 — 15 20 56 61 Net carry-over, excess or Federal agency obligations. + + + + 31 29 43 14. 17 27 Member bank borrcwlngs + 232 —248 —187 + 374 — 17 + 154 deflcit(—)t Other loans, discounts. and adrancee — — — — — — Note: Because ofrounding, figuresdo not neceesarily add to totals. • Reserves held after all adjustments applicable to the reporting period less Total —116 —878 984 rcquired reserves and carry-over reserve deficiencies. +361 .4—770 + + Notreflected in data above. — — — — t Excess reserve. + 23 06 77 + 51 132 201 Table m Daily average levels AVERAGE ISSUING PATES* AT REGULAR TREASURY BILL AUCIIOI48 Member bank: In percent Total reserve.,Including vault cash 26.695 26,572 26,584 21.575 27.011 27,0088 Required reserves 26,438 25,381 26,470 27,410 27,579 26.8568 Weekly suctiondates—April 1969 reserves 257 191 114 165 33 1513 oeas Maturitiet Borrowings 1,195 947 760 1,134 1,117 1,0313 Free,or net borrowed (—I. April April Aprii April AprIl reserve. —938 —750 —648 —969 —1.084 — 8798 1 7 34 21 28 Nonborrowed reserve. ls,500 23,628 25,824 25,441 10.495 25,9751 Net carry-over, eacan or Three-month 6.065 6.167 6.195 6.175 6.053 deficit 136 130 125 41 85 1033 (—)8 Six-month 6.136 6.185 6.191 6.164 6.043
ChangesIn Wednesday levels Monthlyauction dates—February-April 1969
Syatem account holdings Government of seeurltiee February March AprIl maturing In: 20 26 24 Les. than one year + a20 + 144 —578 + 409 + 376 .44,117 More thanone year — — — — — — Nine-month 6.307 6.058 5.977 -4-144 —578 .4-409 .4-870 1.17V One-year 6.234 6.132 5.931 Note:Because of rounding, figures donot necessarily add tototals. • Includes change. InTreasury currency end cash. a Interest rates on bill. are quoted in terms of a 360-day year, with the dis- tIncludes siesta denomInthdIn foreign currencies. counts from par as the return on the face amount of the bills payable at 3 Average for five weeksended on AprIl 30. maturity. Bond yield equivalents, related to the amountactually Invested, I Not reflectedIn data above. would be slightlyhigher. 106 MONTHLY REVIEW,MAY 1969 to prices of Treasury coupon issues. Momentum tapered to yield 7.90 percent. Subsequent financings, most of off toward the end of the month, however, prompted by which carried some form of call protection, were offere some profit taking and hesitation in the face of the up- at successivelylower yields, and many traded at premiums coming announcement of the Treasury refinancing oper- after initial distribution. Some of the flotations had been ation. On April 30 the Treasury announced that it would postponed from the congested period of early March. One offer holders of issues maturing May 15 and June 15 a of the highlights in April was the excellent reception choice of a 63's percent note, due in fifteen months and of a $75 million noncallable mortgage bond issue offered priced to yield 6.42 percent, or a seven-year 6½ percent by Commonwealth Edison at 7.30 percent for three- and note, priced at par. For the month as a whole, yields five-year maturities. This response prompted other bor- on three- to five-year issues were down 14 basis points, rowers to shorten maturitics of their offerings. The short and long-term yields fell 29 basispoints. term to maturity was an innovative feature, attractive to investors and less costly to borrowers than comparable OTHER SECURITIES MARKETS financing at commercial banks. However, investor enthu- siasm ebbed at the month end, when more inflationaryevi- In the corporate bond sector new issue yields, which had dence came to light, and new bond offerings in both short begun to slide in mid-March, continued to decline through- and long maturities began to encounter resistance. out most of April. Although sporadic price corrections The tax-exempt sector also rallied, but the recovery provided temporary interruptions, the underlying condi- was generally more limited than that in the corporate sec- tion of the market was improved. After facing consider- tor. The ability of commercial banks, facing severe reserve able resistance to new offerings in March, underwritcrs pressures, to add materially to tax-exempt holdings was encountered renewed investment demand in April. As a thought questionable—particularlyin light of strong busi- consequence, inventories were considerably lightened, and, ness loan demand. Furthermore, investors expressed un- with a lower prospective supply of new offerings, aggres- certainty about the tax status of these securities in view of sive bidding for new issues developed. At the same time the tax-reform measures now under consideration by the that technical conditions unproved, investors also ap- Congress. Finally, the numerous postponements recorded peared to be heartened by the new round of anti-inflation in March were still overhanging the market, and it was measures, and once again optimism over Vietnam peace considered likely that a large volume would be offered if spread through the market. Buoyancy was somewhat de- new issue rates edged much below 5 percent. The breach flated late in the month, however, by the enlargement of of that level in the earlier upsurge had prompted changes dealer positions and by the announcement of very strong in financing plans, in many cases because borrowers were consumer price advances in March. subject to 5 percent interest-rate ceilings. At the end of The revival in the corporate bond market appears to April, The Weekly Bond Buyer's index of twenty munici- have commenced with the very strong reception of an $80 pal bond yields was 5.09 percent, a drop of 21 basis points million Consolidated Edison issue, offered on March 19 over the month.
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