154 MONTHLY REVIEW,

The Money and Bond Markets in June

The nation's financial markets coped successfully with BANKRESERVES AND THE MONEY MARKET a hcavy volume of new private securities flotations in June despite widespread concern about developments in the Rclativcly comfortable conditions prevailed in the Middle East and and new apprehensions related money market during June. Cognizant of market con- to the commercial paper market. Although most securities cerns, the Federal Reserve System was careful to provide markets had rallied stronglynear the end of May, the bond amply for the liquidity of the money market, but System markets during most of June remained under the strong actions did not lead to rapid growth in the monetary prcssurc of heavy borrowing demands which pushed yields aggregates. Lenders in the money market were able to on new corporate and municipal issues to new highs dur- accommodate smoothly the buildup of short-term bor- ing thc month. Earlier fears of a general shortage of liquid- rowing pressures around the June corporate tax date. ity faded, as the Federal Reserve continued to insure that The Federal funds rate declined slightly to about 7¾ the money markets would function smoothly with minimal percent from 8 percent in late May, and bank reserve stress during the period of seasonal tax-date pressures. positions changed little (see Table 1). Average mem- Further indications of a slowing of the economy contrib- ber bank borrowings declined to $907 million from $924 uted to strong investor and dealer demand for bonds. As million in May, while the average basic reserve deficit o the period drew toward the close, investors were appar- the forty-six large money center banks rose slightly to ently becoming more hopeful that the slowdown would level of $5.3 billion in the four weeks ended on smother the Inflationary fires and interest rates would (see Table II). decline. The daily average money supply declined in June fol- Against this background the financial markets hardly lowing a rapid expansion in April and moderate growth faltered when the Penn Central Transportation Company, in May. The level of the daily average money supply for the nation's largest railroad, filed a petition in the third the four weeks ended on June 24 contracted at a season- week of the month for reorganization under the Federal ally adjusted annual rate of 5¼ percent from the level Bankruptcy Act. Market participants recognized that this recorded in May. On a week-to-week basis, the money event could lead many investors to reexamine the quality supply changed little in Junc until the week ended on and volume of commercial paper in their investment port- June 24, when there was a marked decline (see Charts I folios, but prompt action by the Federal Reserve Board and 11). The June performancecontrasted with the revised gave reassurance that the banking system would be in a 3½ percent growth rate posted in May, and was largely position to deal with any credit strains that might emerge accounted for by a moderate decline in demand deposits. as this reassessment proceeded. Effective June 24 the The currency component, which had experienced an espe- Board suspended Regulation 0 interest rate ceilings on cially large increase in May, continued to expand in June large certificates of deposit (CD's)—.thosc in denomina- but at a less rapid pace. tions of S100,000 or more—for 30- to 89-day maturities. The volatile character of the monetary aggregates often The Board stated that it was taking the action in recogni- makes interpretation of weekly or monthly movements tion that unusual demands upon commercial banks for difficult. Because longer term movements are calculated short-term credit could arise as a consequence of current from daily average figures for the first and last months uncertainties in the financial markets. The atmosphere in of the period under consideration, these values can also be the bond markets continued to improve in the wake of this exaggerated by the choice of particularly high or low action, with yields on most debt securities tending to de- months for comparison. If, for instance, the month of cline further. February, when the money supply was at a relatively low0 FEDERAL RESERVEBANK OF NEW YORK 155

el, is used as the first month of the comparison, the 'erage rate of growth through June is about 6¼ percent. ChartII THE MONEY SUPPLY AND SEASONALEFFECTS On the other hand, the growth rate would be about 3¾ March-Jane 1970 BillicotoF dollars percent if the first month were December, when the aver- age money supply level was little affected by a sharp increase at the end of the month. During June, time deposits held at commercial banks expanded at a 7½ percent annual rate, which approximates the average rate of growth achieved on balance thus far in 1970. The change in Regulation Q should lead to further increases in this aggregate, as reintermediation occurs and banks issue a larger volume of the shorterterm CD's. The adjusted bank credit proxy moved upward in June at a 7 percent seasonally adjusted annual rate as con- trasted with a 1½ percent rate of decline experienced in May. Most of the strength in this aggregate resulted from continuing rapid time deposit growth and an upsurge of United States Government deposits held at commercial 4 11 18 25 8 15 22 29 6 banks. Over the past six months, the adjusted bank credit March April May June has at an annual rate of 31/2 percent, or *This lina is ritaavacage at tIre seasonally adjusted weeklyligccas lot FeSrcvy proxy grown nroltiplied by seasonat actorstar March, April,May.and June, bagrncingwitlr the weahof March4. Itindicates what the unadjustedmaney supply would hone been itjust rhe intluence al the sensanat Factors .— which are drawn from the behavior0t the moneysupply doting camparable weeks at preanau: years — hud been operatice.

Chart CREDIT AND MONETARYAGGREGATES Seasonally adjusted weekly averages March-June 1070 Briliont ut dollurs Billions at dollars less than the rate of of the 20o Ratio ucale 208 slightly growth money supply during the same period.

THE GOVERNMENT SECWUTIESMARKETr 200 E,±MonoonoPPlYl '00 The market for United States Government securities ato scale Jt4 stabilized in although participants remained some- 1 June, what uneasy. Market sentiment improved at midmonth, when President Nixon gave a reassuring address on the state of the economy. This improvement continued with mA the growing belief that the Federal Reserve would not 203 8 I 202 allow a liquidity crisis to develop and impair the func- tioning of the markets. Yields on Govermnent notes and bonds fluctuated in a narrow range during the early part of the month, but declined after midmonth (see Chart III). The ability of the money and capital markets to withstand heavy corporate demands for funds appears 197 j I I I I i__I__i 92 4 II 1825 1 815 22296 1320 273101724 to have had a salutary effect on this market, especially March April Mny Juan in the longer term area. During the month, most bill rates Nota Data tot Janeare preliminary. sizable as * experienced declines, heavy demand pressed Total member heels depositssubject to resercerequirements plus eandeposit a rather thin market Part the liabilities, including Eoro.dollarbnrraroiegs and rarrrmercial paper issuedhy against supply. of demand bank holding numponins or other nttiliates. for bills was apparently from investors switching from At all commercialhonks. commercialpaper. Yields on coupon securities which had declined in 156 MONTHLY REVIEW,JULY 1970

Table I TABLE H FACTORS TENDING TO INCREASE OR DECREASE RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS MEMBER BANK RESERVES, JUNE 1970 In millions of dollars; (+) denotes increase In millions of dollars (—) decrease tn excess reserves

Daily averages—weekended en Aseragenef Changesin daily averages— Factors altectieg four weeks weekceded en Net hasic reeervn positions ended en Jane Jane Jove Jane Jane 24 Factsrs changes 3 10 17 24 Jsee June Jane Jane 3 10 17 24 Eight banks In New Ynrk CIty

— 22 47 58 laster, Reserve excess or deficiency I— 54 34 "Market" Leas bsrrewl.nga from Beaerve Banks... 269 195 — 97 t41 — Less net Interbank Federal funds Member bank required reserves —151 + +210 ± 97 — — purcbaaea or oaleo I—) ..,,,.,.,,,... 847 1,770 1.984 1,300 1,447 Operating transactions (subtotal) —258 + 25 —111 66 410 — Gross purchases ,...... ,.... 2,174 2,818 2,642 2,540 2.344 Federal Reserve float 89 —192 ±371 ±290 ± 310 Gross sales ...... ,...,..,,,.. 1,227 1,048 1,078 1,012 5,09e Treassary operatlons ± 94 —189 —162 —f— 194 Equals net baale reserve surplus Gold and fsreien account — 15 — 11 — 12 — 50 — 88 or dsficlt (—I ...... —1,163 —1,988 —1,517 —1.547 —1.554 —137 —133 —447 — 79 — 799 Net loans to Government Currency oul.nlde banks securities dealers ...... ,,,,,,.,,. 429 381 311 445 394 GIber Federal Reserve liabilities Net carry-over,excess or deficit I—It.. — 3 35 3 17 19 and capital — 90 — 69 +147 ± 28 14 Talol market" factora —409 ±123 —ala ±184 — 310 Thirty-eight banks outelde Direct Federal Reserve credit tn'annattlens Reserve excess or deficiency (_ 70 97 — 13 38 247 Less borrowings rrsm Reserve Banks... - 349 237 251 396 236 Open market operations (subtotal) ±134 ±423 —678 ± Less net tolerhank Federal funds Ousrlcht holdings: purchaacs or sales (—I 1.292 3,637 3.849 3.401 3.537 Government aecucitles +235 ±143 —678 ± 259 Gross purchaaes 5.247 3,722 5.845 5,278 5.526 — 1.877 1,989 Bankers' acceptances — 7 — 2 — 3 — 12 Gross eales 1,985 2,098 1,996 agreements: Equals net basinreserve aurplue Itepurcbase — or dcficlt I—) —3,541 —1,877 —4.004 —3,720 —3.786 Government aeeuritlea 71 15 — 88 — ± ± — — Net loans to Government Bankers' anceptancea 4 —51 aecsrltlcs dealers 191 109 10 101 Ion ± ± — — 23 15 13 46 22 Federal agency obligations +22 —6 —16 Net carry-over, excess or deficIt (—It.. Member bank borrowings ±294 —369 —198 ±229 — 44 a Other Federal Reserve assetat —101 ± 36 +143 + 51 ± 139 Note: Because or rsnndlng. figures donot necessarily add to totals. Reserves bold aftcr aU adjustments applicable Is the reporting period less required Total +540 —179 +368 —398 + 133 reserves. — 20 reflected above. Eseese reserves 57 —212 ± Nat in data

. Monthly Daily average lovelo averages TABLE m ISSUING RATES Memker hack: AVERAGE AT REGULAR TREASURY BILL AUCTIONS Total reserves, Includine vault cash 27,613 27,459 27,680 27.254 27.5025 Required reserves 27,438 27,341 27.440 27,190 27,3523 ]txcess reserses 175 118 276 64 1583 1,225 816 698 887 9075 Borrowings Wenkly sactban datea—Jene1970 Free, or net borrowed I—), reserves —1,050 —738 — 382 —622 — 7483 Nonborrawed reserves 26.398 26.603 27,022 26.367 26,5953 Matarities Net tarry-over, excess or deficit (—13.... 82 122 87 173 1173 Jane Jane June Jove Juno 1 S 15 22 29

6.733 6.626 6.421 Changeain Wedoosday beds chtoo Tiires-nsostb 8.824 6.785 Six-month 6.858 6.995 6.947 6.929 6.683

System Aeonunt holdings of Geverement senuritlea maturlen in: Monthlyauction dates—Aprib-June1970 Less than one year + 501 —333 +27t —818 —379 82 187 — — ±269 Anril May June More than one year ...,...... ,..,....' + ± 23 26 23 Tulal + 583 —146 —818 —110 +27l Nine-month 6.844 7.212 7.069 7.673 Note: Recanse of rounding, figures do notnecemarily add to totals. One-year 6,814 7.277 Includes changes In Treasury currency end cash. includes assetsdenominated In foreign currencies. • Inlerest rates on hilla are quoted In terms or a 360-day yuar, with the dtscosmts from 3 Arerage fur ('car weeks ended on June 24. par as the return on thn face amsunt of the bills payable at maturity. Bond yield related to the amount Invested, wsuld ho sUghtly higher. 5 Nat reflected in data above, equivalents, actually . FEDERAL RESERVE BANK OF NEW YORK 157

ChartIll SELECTED INTEREST RATES April-June 1970 Percent MONEY MARKETRATES

April May June April May Juee

Mate Data are shametar businessdays anty. MONEY MARKET RATES QUOTED- Rid rates tar three-monthEury.ilQLj in , uttering doily eoerogesat yields on seasanedAaa-tsrtnd corporatebogds; daily acenages oh rates tardirectly pieced tinanre companypoper; the ettnctinerate ar Federaltunds the yields on hang-retm Qaaernmentsecurities Ibondsdue at callable inten years or morel rote mustrepresentation at the transacrionseoeootedl closing bid rates quated in rarms and on Oonernmentsaoonitias doe in three to fine ynans, oomputndan the basis at closing at sate of discacet an newestoutstanding three-month and ann-year Treosuryffl1. bidprices; Thursdayaoerages of yields an twenty seosaced sweaty-yeartwa -euemptloasrds EONDMARKET YIELDS QUOTED: Yields on YawAaa- andAn-rated public utility bands carrying Maody's ratingsat Aoa,An, A, and Eaal. lernawspaint trum undarernitingsyndicate reotleriag yield an a giuna issue to market Sauroes: FederalTeserse Rankoh New York,Roord of Oaoeraarsof the Federal Reserne System, yield an the some isseeimmediately alterit has been releasedtram syndicararestnistions; Moody'smacstars Sereice, and The Weekly RoadRuyer,

the late-May rally continued to move to generally lower ment of Penn Central's plans for reorganization benefited levels during the first days of June, although yields on a both notes and bonds, as investors sought and acquired number of intermediate-term securities tended to rise. Sub- higher quality issues. Yields continued to fall for the re- sequently, yields on all coupon securities moved higher, mainder of the month. partly reflecting the near-term outlook for interest rates, Rates on most Treasury bills moved sharply lower which was affected by the heavy calendar of long-term in June. Rates initially declined in a continuation of the corporate offerings and the anticipated shorter term financ- late-May rally and then fluctuated at lower levels until ing needs around the corporate tax date. By mid- after midmonth, with shorter term bills generally register- month, yields on most securities were higher than levels ing further improvements and longer term bills experienc- set at the end of May, although below the peak values ing some increases in rates. Later in the month, following posted in that month. Yields on longer term Govern- the Penn Central petition for reorganization, the shift in ment securities began to decline, however, with the mid- investor prefcrence toward higher quality issues and the month improvement in the capital markets, but yields on demand from holders of the $4.5 billion of tax anticipation intermediate-term issues were less affected. The announce- bills (TAB's) maturing on moved rates lower on 155 MONTHLY REVIEW, JULY 1970 all maturities. Rates continued to fall until the end of the coming flotations was associated with a significant deteri- month, and closed the month about 60 to 20 basis points oration in market conditions, The turnaround came on lower than those at the end of May. The average issuing the eve of President Nixon's economic address. rates set at the weekly and monthly Treasury bill auctions On , a $100 million 40-year Aaa-rated telephone also declined, as indicated in Table III. company bond issue was offered at a record yield of 9.35 On , thc Treasury announced plans to auction percent. 25 basis points higher than any previous top- $2.5 billion of TAB's maturing on March 22, 1971. The rated telephone company offering. At this high yield, the bills were to be auctioned on July 2 for payment on July 8 bonds met an excellent reception, as did most of the and qualified depositories were permitted to make full other issues marketed on the same day. Yields moved payments for subscriptionsthrough credit in their Treasury lower thereafter in a revival of demand, particularly among Tax and Loan Accounts. At the same time, the Treasury institutional investors. At the end of June, another Aaa- also announced plans for an additional cash offering in rated telephone company flotation consisting of $150 mil- the neighborhood of $2 billion to be scheduled prior to lion of 33-year debentures was successfully offered at a the refunding of the August 15 maturities. yield of 9.05 percent, 30 basis points below the slightly longer term issue marketed on June 16. OTHER SECURITIES MARKETS In the market for tax-exempt securities, yields fell nioderately early in June when new issue activity was The strong pressuresthat affected the market for light. The Weekly Bond Buyer's index of tax-exempt corporate and municipal securities in May moderated securities, which had hit a record 7.12 percent in the somewhat in June. Early in the month yields fell on week ended on Thursday, May 28, fell 20 basis points most new issues, but apprehension over the very heavy in the week ended on June 4. Subsequently, however. calendar of corporate offerings scheduled for the latter yields again moved upward and remained at higher levels half of June led to a subsequent deterioration in rates until midmonth. On June 16, the state of re- until midmonth. As it bceame evident that the large vol- entered the market after voters there approved a new 7 time of new issues would be placed successfully, market percent interest rate ceiling. California had been unable conditions improved. The announcement of the Penn Cen- to float new securities for more than a year under the tral's financial difficulties (lid not impair the performance previous 5 percent ceilinsz. After midmonth, the successful of the markets for high-grade debt issues. completion of the especially heavy flotations in the cor- Attention in the corporate market before niidmonth porate market was accompanied by a decline in tax- continued to be focused on the heavy schedule of new exempt securities yields as well. At the end of the month. corporate offerings. Alter a modest improvement early in yields on new issues were being set below levels common the month, apprehension of participants over the up- in May and earlier in June.

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