r

FEDERAL RESERVE BANK OF NEW YORK 251

The Money and Bond Markets in November

The tone of the capital markets remained heavy in On a nationwide basis, excess reserves of all member November. lntcrest rates generally continued to move banks averaged $242 million during the four statement higher in the face of persistently large credit demands and weeks ended on (see Table I), little changed considerabic investor restraint. In the early days of the from October.' Member bank borrowings from the Federal month, the suspension of the bombing of Reserve Banks rose by $82 million on average in November. generated some optimism in the capital markets, but the In the first statement period of November, the basic favorable market reaction was tempered by caution on the reserve positions of the forty-six major money market eve of the national elections. Subsequently, the uncertain banks deteriorated sharply. Reserves were absorbed in status of the Vietnam peace negotiations, together with part as a result of an expansion in loans to Government evidence of continuing economic strength and rather firm securities dealers and nonbank financial institutions, while money market conditions, generated widespread caution. borrowings from foreign branches also contracted. As a Large-scale speculation in the foreign exchange markets, result, the average basic reserve deficit of the forty-six which reflected the view that the German mark might be leading reserve city banks soared by Si .2 billion in the revalued upward and that the French franc might be statement week to a $3.3 billion averagelevel devalued, was also unsettling to the domestic capital mar- (see Table II), and a substantial demand for Federal funds kets but only temporarily. produced trading in volume at 6¼ per cent. At the same Against this background, yields on corporate and tax- time, the major money market banks also increased their exempt bonds and on all but the shortest maturities of borrowings from the Federal Reserve Banks. Government securities rose progressively. Very firm con- The money market remained quite firm through most of ditions generally prevailed in the money market during the the following week. The major city banks managed first half of the month, when the reserve positions of banks their reserve positions cautiously in preparation for the in the leading money centers came under mounting pres- Veterans Day holiday weekend. The New York City sure. Subsequently, the tone of the market eased consid- banks, which were experiencing considerable reserve •erably as reserve distribution shifted in favor of banks in the pressure primarily as a result of a contraction in demand major money centers. in the closing days of the month, a deposits and a lagged increase in required reserves, bor- firm tone again predominated but no pronounced pres- rowed heavily at the Federal Reserve discount wiidow sures were evident in the money market. over the tong weekend and increased their purchases of Federal funds (then trading predominantly at 6¼ per SANK RESERVES AND THE MONEY MARKET cent) to near-record levels. A similar pauern of behavior was evident at large banks in other money centers, which The basic reservepositions of banks in the leading had to cover net reserve deficiencies carried over into the money centers were generally under substantial pressure statement week. Toward the end of the during the first half of November. As a result, these banks period, however, the reserve positions of the money mar- borrowed heavily in the Federal funds market—where ket banks improved somewhat, the large amount of re- most trading occurred in a 6 to 6¼ per cent range—and serves which these banks had accumulated earlier flowed filled a portion of their residual needs at the Federal Re- into the Federal funds market, and the tone of the money serve "discount window". Over the last two statement weeksof the month, the average basic reserve deficitof the forty-six major money market banks declined, while the effective rate on Federal funds eased to a predominant I Data cited for excess reser.es do not include the carry-over of 5½ to 6 per cent range. excess reserves or deficiencies. MONTHLY REVIEW,

TUbS. I Table U RANKS FACTORS TENDINGTO INCREASE OR DECREASE RESERVE POSITIONS OF MAJOR RESERVE CITY SIRUDER SANK RESERVES, NOVEMBER mi NOVEMBER 1961 1 million,uS dollars. (4) deflotCs lncmsae. In millionsof dollars (—) decrease Inexcess reserve, Daily awragti—wttk soded an four In daily HOlIgS$— etwi affacting Changes basic rats?,, positions Sftadam aesE saded m Nov. No,. Na, No,. Mo;. 27 Nut 27 Facbai 6 1.3 20 N. Nor. No;. Nov. 6 13 27 Eight be.ki t New Volt C1i7

or 24 78 78 — 63 29 (actors Reserve excess detlcjency(—).... 'Martat" Lees borrnwinga from — 403 — 174 936 36 129 43 II 65 Mibn? toni rOOlLlTt'd Tcserwe +104 + -3.7 Reserse Bank, . —UI lii 201 191 Less et Intetbank Federal funds (Jp,ra&ift.I t utoartilifli l,nbtut&tl + + +08 + or 1,114 312 1.102 536 — 410 4. Ml purchases eales(—) 1.171 1.809 Vedo;&l lIner.. soot - U + 4$ + Grog: purchase., 1.930 2.4)6 1.042 1.494 1.9:5 426 — 22 441 779 466 828 1.181 TreaaUYY Q0IIqS11orO 410 + 3 + + Gross ,iiIe, .. 4 — — 23 — Ci — 93 Equals its, ha5ii reserve sujplu, 43616 and forsiananmuill + II ir — 426 — — — or dctlcit(—) —l,182 —1.860 —1,079 —1,137 tin outside beets 11.0 357 584 TO —2.216 Net loansto Government — —. 475 OUter Federal Iteao'e account. (r,attt.. 6? 150 + 01* + securities dealers 886 765 379 489 680 +2 Nctcarry-ovcr,excmorde6clt(—)t 9 18 44 57 32 — 2? —364 4.121 .+- Total 'Uub1' CtO3 +426 IaO__ Dirsot F.der.l 80Mm credIt llslrIy-eIgbi bsnka outdeNew Toil CIty Danu.ClIOftI in*rtnt Instnhiaeata Opm Reserve excess or deftclcncy(—).... — 68 127 — 79 19 — holdings: Outright — Lets borrowings from Oo.seflm! nacuilclee — 51 4. 201 —. 53 — 55? 400 Reserve Bank' 119 242 168 154 171 BarkorV smeptanoeS —1 + 5 LesS net Lnte,bank Fcdcral runds 43+ purchases or slet(—) 1.944 2.029 1.877 1.595 1.861 lIrpurchi.. agro;o;o;1a: Gross pisr,'ha,.j .. 1,1!) 3.369 3.122 2.867 3.102 — — 51 Goonmoerl (realitIeS + + II —172 Gross suIgs —. 1.167 1.2110 1.246 1,272 1.241 I — — DankorV aooe,t.anco; Equals net basic reserve surplus 2l—r—13 — — or dcficit(—) ... —l132 —2,144 —2,124 —1,730 —2,032 Fed..i1 .lrn(P othgitlOltI + 7 + 6 Nd loans to Government Member bank borrectage —105 —164 + 71 + 85 accuritt detkra 857 412 515 318 541 Net excessor deflcit(—)t.. 10 83 — 1 32 Other loan,. diemuni.. and edvafl0M.... carry-over, i— — — 430 — 48? — 368 11? + 64 Note: Becauie of do not add In tolall. roundtng, 8guzea the — — Reserve, held after ctrtaln adjustments applicable to report1n peilod (ios. r.swvea — 164 + 200 — 301 53 20$ lei.s requited rcvesvor. t Not reflected in data above.

Table 132 Daily norsat samOa AVERAGE ISSUING RATE8 AT REGULAR TREASURY SILL AUCTIONS Mw,b,t bank: In per cent Total rcwrcoo. Irciudlot vault Cub 20.118 27.061 26.934 26.023 30,712* 26,400 26,470* Riutuireti men 28,165 26.560 26.142 Weekly auctiondatn—N,nmber 1968 ltzons rmr,,,s 1*0 453 190 819 2422 801 073 511 511 1001 MattwItIs floorusitlegn — — Fr,., i or net borrowed I—I roe.. -— 100 182 —220 403 290* t+ 26,378 26.410 23.943 28.1121 Nonbijrrow,dnoun??,., 5,9241 60 121 Nit en?r7-uco. cars or deficit (—)I ... 142 220 l3$ Thenon SIs.m_oolb .- ChangesIn Wodnndjy boils

Monthlyauction dates—Septanbsr.Noistsbtr 1968

3gs50M Asomint baIdillis 01 Costs ovint o;ounitll$ inatrl'tq I.: Sept. Oct. I Na,. 24 24 22 IriS than one roar + 88 + 19 —4.631 + 628 —ecu Mo, Ua.n on. sear — — 4-42*4 IC 84 ( Nine-month - 5,202 3.444 5.693 rotaj + 88 + 72 1.337 +823 — *41 One-year 5.108 5.401 5.568 to totals. Not.: tenureot rounding. figurer etc not notesesrily add with the dlsCOUflta laetudi'i ebanOenin Tvr,aeury curreres sad rub. • Interest rates on bills are quotedIn terms of a 360.day year, dortmnLnntoil U. InrifignonfreItCira. frompar asthe return on the face amount of the bilIt payable at rnaIiztIW I Ineluitea ereets the amount actually invcaicd, would be Aserateor rour weeks caded on Noeernber 27, 1948. Bond yield equiva1cte, related to I fllCCts free rcen?ven. higher. I Not IOOht lcd Is,accrue 1l& ot or slightly FEDERAL RESERVE BAIK OF NEW 253

market cased sharply. Thus, the effective rate on Federal that new obstacles might impede the Vietnam peace talks. funds declined to 5¼ per ccnt on November 13, and funds In this atmosphere, prices of Treasury notes and bonds traded at rates as low as ¼ per cent latc that day. generally fluctuated narrowly in quiet trading during the The tone of the money market was comfortable during first statement period of November. the statement period, in part because mem- A weaker tone subsequently predominated in the ber banks had carried a substantial volume of excess re- coupon sector. Market sentiment was adversely affected by serves into the period (see Table 1). The average basic increasing uncertainty over the Vietnam negotiations, by reserve position of the eight major New York City banks the heavy tone in the markets for corporate and tax- linproved markedly (see Table LI) as a result of an in- exempt bonds, and by some investment switching out of crease in demand deposits and a contraction in loans to longer term Treasury issues into higher yielding corporate Government securities dealers, while their liabilities to bonds. Furthermore, the persistent finnncss in the money foreign branches also expanded. Against this background, market during the first half of November made the posi- these banks sharply reduced their borrowingsin the Federal tions of Government securities dealers relatively costly to hinds market and from the Federal Reserve Banks. The finance and stimulated professional efforts to reduce in- effective rate on Federal funds was 6 per cent early in the ventories. The decision of a leading New York City bank week but fell to 2½ per cent on November 20, when some to raise its prime lending rate on November 13 from 6 funds traded at rates as low as ¼ per cent. In the final per cent to 6¼ per cent (thus bringing its rate into line statement period of the month, a firmer tone reappeared with the prime rate then quoted by most other banks') and in the money market but no real stress developed. Federal the increase in the French bank rate to 6 per cent also had funds traded primarily in a 5½ to 5½ per cent range, a minor bearish impact on the market for intermediate- although some trading occurred at higher rates late in the and long-termGovernment securities. period. Member bank borrowings from the Reserve Banks The coupon sector reacted only moderately around mid- increased somewhat, although the reserve positions of the month to news of the resurgence of speculative pressures money market banks improved further. in the foreign exchange markets and to reportsof possible Rates on bankers' acceptances and some maturities of imminent changes in the parities of some European commercial paper rose by per cent over the month as a currencies. Investment activity diminished, and dealers whole. Offering rates posted by the major New York City cautiously marked prices of coupon issues lower. Subse- banks on negotiable time certificatesof deposit (C/D's) of quently, the tone of the market improved somewhat as two- through five-month maturity were increased in several participants grew confident that international consultations steps during the month to the ceiling levels of 5¾ per being held by financial officials would produce constructive cent for 60- to 89-day maturities and 6 per cent for 90- measures to cope with the situation. As the month drew to to 179-day C/D's, while C/D's of longer maturity were a close, prices edged irregularly lower in light trading. reportedly sold at times at their 6V4 per cent ceiling rate. Over the month as a whole, prices of Treasury issues The volume of C/D's outstanding at the weekly reporting maturing in two to ten years were %2 to %2 point lower. banks in New York City rose by $523 million in Novem- Prices of longer term obligations were 1 ¼ to 2¾ points ber, as against a $513 million rise in October. Liabilities lower, partly in reaction to pressures evidcnt in the corpo- of United States banks to their foreign branches rose by rate and tax-exempt bond markets. (Associatcd yield in- $168 million in November, compared with a decline of creases are illustrated in the right-hand panel of the chart.) $51 million in October. Mixed trendswere apparent in the Treasury bill market in the first half of November. During this period, there THE GOVERNMENT SECURITIES MARKET was good investment demand for bills of short maturity, which were in relatively scarce market supply, and rates Prices of intermediate- and long-term Treasury notes on such issues declined. At the same time, however, rates and bonds moved irregularly lower in November. At the on longer term bills were under persistent upward pressure very beginning of the month, market sentiment was buoyed (see the left-hand panel of the chart). Commercial bank by hopes that the cessation of United States bombing op- sales of tax anticipation bills accelerated. In addition, the erations in North Vietnam and expanded peace negotia- 1 tions would prove fruitful. However, a less optimistic tone quickly emerged in the coupon sector, first as a reflection of domestic uncertainties to the political prior 2 Beginningon December 2, most major banks throughout the Presidential election, and then in response to indications country raised their prime rates to 6½ per ccnt. 254 MONTHLY REVIEW,DECEMBER 1968

SELECTEDINTEREST RATES 196S Pu tint MONtYMAKU ftATU S,pombuNoyotob,, eONDMAxrTVlttDS

*Y.Idoon now pubik utG$y bond, R.oIIun y.eld MarkoysW Aoo . Ao iliii ilii 111111 ill iii 4 1 10 25 2 9 16 23 30 6 IS 20 V 4 ii IS 25 2 9 16 23 30 6 13 20 27 Soptstnb.r Ortober Nevimb.r S.pluob.r October Novetuib.,

Not., Dat..,..l..wn for b..lo.i, doy. oofy. MONUMAftKtT SAIlS QUOTI.D-. Doilytong. of talonpontnd by.nju H YuA City book. poiot f.otnwodsntiog $yodiitn,.o(foting y.sldon 5a.n to o.l.tyi.ld ott,n on osoc!]loe 5n .d...I f,..d,l a.n..tsdby Unit,d Slot., Oon.,n..oni,.cni'i., a powl I0.. imn• ltno.dioI.tyoft.,, Ito, b.s. ,,l,.,,d I,... tyndiont.r•ut,ition;J daily ;ndioot., It. .b..nc. of otty .oog. ofl.'ing oto,far dirtuly placidfita.tQ"pyy gpp•t o...e.tof yisldion bond.dal at toltobloit P.nport A. .If.cl,o. rOti00 f3SfDhth lb.lOIS nQil spr.pintaPi.e .1 It.Iq.,,.,aoon .,oa1.A. g, mo,• nodof Go. n..potsd no k.bo,..f tioning bid at..fa.oP.d a burntof rot. ofdi.tooof on nsott oot.t.ndiog olo.l.g bid p'ic.t Thtr,,doy 000togIIof yi.ld.an 'o.nry ..o,n.dSPF,y-!2y. • ILlOfl!Li). 93d)too.ryinQ$.ondy. .atlog.of Aoo. 00. A..and leaf. eCuOMARKETTISIDS QUOTSO, Yi.ld. Oog dAgjop.jPOCT4iIi1VT!I 0,. pfa't.d So.uc,, P.d..ol I,..,..Swul of N.a To,k. Reordof G0.,00t.of tit,f,detol RoI.'.oty.t.a. aroond • Irni ahoning doilyo.o,g• yfdn no gio4 LIy1y5 y00jgi1.3otto., Moody,Inoo,t.,. 5n..co. and T..kIy5dloig.

firm tone of the money markct as well as expectations that permitted to pay for their allotments through credits to additional tax bills would be offered by the Treasury in Treasury Tax and Loan Accounts. The size of the offer- late Novenibcr led Government securities dealers to raise ing, which only moderately exceeded the $1.8 billion rates on longer term bills in order to reduce their inven- of attrition in the Treasury's recent refunding operation,3 tories. Over the midmonth period, bill rates generally rose was smaller than many market observers had anticipated. throughout the maturityrange, partly in reaction to the new This factor contributed to the emergence of a somewhat problems which were besetting the international financial better tone in the bill sector. In addition, market partici- markets. At the same time, market participants cautiously pants became more hopeful that the international financial awaited the Treasury's late-November bill auctions — difficulties would soon subside. Subsequently, investment including an expected offering of tax anticipationbills. demand for outstanding bills was augmented by expanded On , the Treasury announcedthat it would auction on November26 (for payment on December 2) $2 billion of additional tax anticipation bills which will be at face value in in- acceptable payment of For details of the refunding, see this Review (November 1968), come taxes due next June 15. Commercial banks were pages 232-33. FEDERAL RESERVEBANK OF NEW YORK 255

demand from professional sources, and bill rates declined New corporate and tax-exempt bonds were marketed at irregularly for a time. In the last few days of the month, progressively higher yields and were accorded mixed re- however, market supplies were swelled by bank selling of ceptions by investors. At the same time, underwriters the reopened June tax bills and bill rates generally edged removed price restrictions on several slow-moving recent higher. corporate and tax-exempt issues and prices were adjusted At the regular monthly auction of nine- and twelve- sharply lower. Over the midmonth period, disturbances month bills held on , average issuing rates in the international financial markets adversely aflected were set at 5.693 per cent and 5.568 per cent, respectively, the domestic bond market. During this period, an $85 mil- 25 and 17 basis points above average rates established a lion Aaa-rated telephone company issue with five years of month earlier (see Table III). At the final regular weekly call protection was priced to yield 6.85 per cent, 10 basis auction of the month held on , average issu- points above the earlier record high yield on a comparable ing rates for the new three- and six-month bills were set at offering in early June. Later, as yields on new and recent 5.448 per cent and 5.573 per cent, respectively, 2 basis issues rose, investment demand occasionally improved points lower and 10 basis points higher than average issu- somewhat and a slightly better tone emerged at times in ing rates at the comparable auction held in late October. At the corporate and tax-exempt sectors. Prices generally con- the auction of June tax anticipation bills, an tinued to edge lower through the end of the period, how- average issuing rate of 5.489 per cent was set. ever. At the close of November, The Weekly Bond Buyer's OTHER SECURITIES MARKETS yield index of twenty seasoned tax-exempt issues was quoted at 4.64 per cent, 8 basis points higher than a month Prices of corporate and tax-exempt bonds declined earlier, while Moody's index for seasoned Aaa-rated cor- steadilythrough most of November, and yields approached porate bonds, at 6.29 per cent, was 13 basis points higher or in some instances exceeded the previous record levels. than a month earlier. The Blue List of advertised dealer in- Investor demand was sporadic, while the sizable calendar ventories of tax-exempt securities totaled $858 million at of scheduled flotations and heavy dealer invcntories of the end of the month, as against its October 31 level of bonds triggered widespread price cutting in both sectors. $876 million.