The Money and Bond Markets in July 1970
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FEDERAL RESERVE BANK OF NEW YORK 187 The Money and Bond Markets in July The nation's financial system demonstrated great resil- when many borrowers were unable to obtain adequate iency during July by withstanding its most strenuous trial financing in the commercial paper market. The value of in years. Confidence in the commercial paper market was outstanding commercial paper (not seasonally adjusted) severely tested in the wake of the filing on June 21 of a issued by institutions other than banks dropped by $2¾ petition for reorganization by the Penn Central Company billion in the four weeks ended on July 22, reflecting the covering its railroad subsidiary. The prompt response of new emphasis placed by investors on higher quality assets. the Board of Governors of the Federal Reserve System in This shift in investor preference forced borrowers of suspending Regulation Q ceilings on large short-term time lesser standing to approach commercial banks for loans deposits, effectiveJune 24, helped to prevent the emergency or, in some instances, to sell receivables. Banks were able from snowballing into a cumulative spiral of business to meet the higher credit demand through additional de- failures. The Board's action promoted a rechanneling of posits made possible by the partial suspension on June 24 credit through the banking system. Banks were able to ob- of Regulation Q ceilings and through increased reserves tain funds through sales of negotiable certificatesof deposit supplied by the System. CD's at weekly reporting banks (CD's), thereby facilitating lending to firms having diffi- increased by $3.9 billion during the four weeks ended on culty rolling over maturing commercial paper. Banks also July 22. In the same four-week period, member bank obtained liberal accommodation at the Reserve Banks' discount window. The Federal Reserve System thus ful- filled its historic role as lender of last resort. The severe pressures affecting the commercial paper market did not spread to other securities markets. Al- Chost I some uneasiness was rates de- COMMERCIAL PAPER AND BUSINESSLOANS though evident, generally Jono-Joly I97O not soosonoiiyodj0sted clined. The Federal funds rate moved slightly lower in July, Billions of dollots Billionsof dollors 33 94 as did Treasury bill rates despite the Treasury's auction of $4¾ billion of tax anticipation bills (TAB's). The capital markets were buoyant and yields on United States Government, municipal, and high-grade corporate bonds declined substantially over the month. Yields on lower rated corporate issues remained at record levels, however, reflecting a shift in investor preference toward minimiza- tion of credit risk. Market sentiment was encouraged by an apparent improvement in the prospects for peace in the Middle and Far East and by indications that the slowdown in the economywas bottoming out. There was also a grow- ing belief that securities yields had seen their peaks for the current — cycle. weekly reporting banks* 28 BANK RESERVESAND THE MONEY MARKET 3 10 17 24 1 8 15 22 29 Jane Jaly * The commercialbanking systemmet a rapidly expand- Including business loon. solsi to affiliates. •ing demand for short-term credit in July (see Chart I), 188 MONTHLY REVIEW,AUGUST 1970 Table I Table II . FACtORS TENDING TO INCREASE OR DECREASE RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS MEMBER BANE RESERVES, JULY 1970 JULY 1970 In millions of dollars; (4-) denotesincrease In millions of dollars (—) decrease in excess reserves Daily averages—weekcoded ee Aooragessi Factors affectisg teeweeks Ckueges in daily averages— basic reserve positisno ended 00 week ended vs July July July July July July29 Net 1 8 15 22 29 ac oru chueieu July July July JuOy July 1 8 15 22 29 Eight banke in New York City "Morket" fugtern Reserve excess or Memberbank required deficIency (—1' 46 — 44 39 38 3 tfl — — — reserves —360 —222 229 164 + 134 871 Less borrowings from Reserve Banks 93 360 469 139 29 219 Oporatinc transactions Leas tnterbank Federal — 352 not (subtotali — 93 — 64 — 600 4.328 157 funds purchases or sales (—I.. 1,012 1.921 1,709 .1.087 931 1,292 + — Federal Resorre float — + — + 480 —601 695 Gross purchases 2.339 2,699 2.699 2.221 2,135 2.417 Treasury opcratisns' + 89 — 179 100 + 145 — 25 + 149 Gross sales 1,327 878 980 1.134 1.304 1.125 + Equals baste reserve Gold and foreign accsunt.... 44 — 23 — 39 44 8 + 54 net + + + surplus or deficit I—) —1.019 —2,223 ——2,130 —1,181 — 957 Currency outside bunks + 360 —565 — 315 —448 +910 + 142 Net leans to Government Other Fevierai Reserve securities dealers 473 661 345 563 984 605 liabilities and capital — 03 — 70 88 100 — 55 36 Not carry-over, excess or + + + deficit (—It 6 32 — 9 11 44 21 Total ''market" factors 453 —286 — 839 + 164 + 291 —1.223 Direct Federal Reserve 'Thirty-eightbanks outside New York City credittraessctioes Open market eperotinns Reserve excess or 440 — 72 754 118 —385 567 (subtotal) ± + + + deficiency (—I' — 131 — 47 15 39 — 76 — 40 Outright holdings: Less borrowings from Reserve Banks 260 412 571 531 928 460 Government securities . .. +445 — 72 — 638 — 42 568 — + + Less net tnterbank Federal Bankera'acceptances ,_5 + 1 —1 + 4 — 1 funds purchases or sales 1—).. 2,745 2,874 3,827 3,701 3,479 3,325 Repurchaseagreements: Gross purchases 4.901 5.760 — 5,299 5,583 6,138 8.349 Governmentsgctsrlties ,. — + 022 — 444 —188 Gross sales 2,110 2,425 1,533 1.882 1,659 2.023 Bankers' acceptances — — + 03 — 22 — 41 Equals net basic reserve — — 99 — ei — 28 . surpies or deficit (—I —3,136 —3,333 —4.383 —4,193 —4,093 —3,826 Federal agency obligations. + Net loans to Government Member bank borrowings + 108 + 303 + 384 — 293 —150 + 344 securities dealers 126 245 151 304 852 336 Other Federal Reserve Net carry-over, excess or deficit 16 30 4 assetat 4.97 —143—128 — + 7 —167 (—it 21 25 20 Total 642 08 — 183 — 456 + + +1,050 4.1,142 Note: Because of rounding, figures do not necessarily add to totals. Excess renerseu 180 — 150 tin — 19 — 107 — 82 Reserves held after all adjustments applicable to the reporting period less required + + reserves. Not reflected In data above. - Montkly Daily average levels userages Member bask: Table III Total reserves,including AVERAGE ISSUING RATES° vault cash 27,823 27.847 28,217 20,305 28,063 28,0GM AT REGULAR TREASURY BILL AUCTIONS Itequired reserves 27,550 57.772 25.031 28,155 28,081 27,9225 Excess reserves ...,........... 273 75 :186 168 1 1415 In percent Borrswings 951 1.254 1.080 1,387 1.231 1.3170 Free, or net borrowed I—), Weekly auction dutee—July 1970 reserves — 718 —1.210 —1.454 —1.219 .1,220 —1,1705 Maturities Nonbnrrowed reserves ......,. 20,832 20,553 26.557 26.575 20.832 26.7461 Net carry-Over, excess ov July July July July deficit (—II 70 158 55 115 130 l08 6 13 20 27 Three-month 6.642 6.547 6.982 6.345 Changes Wedeesday levels Six-month 6.654 4.044 6.442 0.429 in changes Soalem Amount holdiegn of Government oeoeritleo Mastkly auction dates—May-July 1970 moturlee 1v Less than one year...... +709 — 43 41,168 —701 + 200 -3,1,333 Msrethanoneyear .....,.,.. — — — — — May June July 26 2,3 23 — — total +709 43 -4.1,108 701 + 200 —f-L333 Nine-month 7.352 7,009 6.467 Note: Because of rounding. figures donut necessarily add to totals. One-year 7.277 7.079 0.379 'Includes changes In Treasury currency and cash. Includes assets denominated In foreign cuecencios. • tnterest rates an bills are in of Areraco for five weeks ended on July 29. Quoted terms a 360-day year, ss-ith the discounts front I par as the return on the face amount of the bills payable at maturity, Bond yield I Not reflected In data above. equivalents, related to the amount actually invested, wouid be slightly higker, FEDERAL RESERVE BANK OF NEW YORK 189 borrowings from the System rose almost $½ billion (see Daily average time deposits at all commercial banks ex- Table I) over the average of the previous four weeks in panded at a 40½ percent seasonally adjusted annual rate June. The basic reserve position of the forty-six major during the four weeks ended on July 22, compared reserve city banks averaged $5.3 billion in the five weeks with the average of the previous month. The July advance ended on July29 (see TableII). followed a 7¾ percent annual rate of increase in June. The Federal funds rate hovered around 7½ percent Similarly, the adjusted bank credit proxy, which includes for most of July before moving somewhat lower at the end time deposits as well as all other member bank deposits of the month (see Chart II). Euro-dollar rates remained and nondeposit liabilities, showed substantial growth in at the lower levels established in late June, as United States July, rising at a 17½ percent annual rate during the four- banks further reduced their Euro-dollar borrowings. week period ended on July 22. In June, the bank credit The impact of recent financial developments is clearly proxy had increased at a 7 percent rate. The seasonally evident in the growth of time deposits in July. The up- adjusted average money supply rose during the same four surge in CD's after the partial suspension of Regula- weeks in July at an annual rate of 5¾ percent after de- •tion 0 led to a jump in time deposits (see Chart III). clining at a 1¾ percent annual rate in June.