6 MONThLY REVIEW, JAMJARY 1968 The Money and Bond Markets in December On December 27, the Board of Governors of the Fed- strong investment demand from both domestic and for- eral Reserve System announced an increase of per- eign sources and relative scarcities of some issues. The centage point in reserve requirements against demand market for Treasury notes and bonds showed renewed deposits in excess of $5 million at member banks, from strength during December, although earlier price gains 16½ per cent to 17 per cent at the reserve city banks were pared on the last two trading days after the an- and from 12 per cent to 12½ per cent at other member nouncement of the increase in reserve requirements. The banks. The increase will take effect in two stages during better markettone reflected partly an increased willingness January 1968, the first at reserve city banks in the reserve of investors to commit funds on a long-term basis at computation period beginning on January 11 and the prevailing yields and partly a feeling of relief among second at other member banks in the computation period market participants that international currency markets beginning on January 18. Required reserves arc expected had stabilized after the November devaluation of the to rise by a total of $550 million—approximately $360 pound sterling. Intermediate-term issues, moreover, were in million through the first-stage increase and $190 million demand on a substantial volume of tax switching, while through the second. The increase, the first in member the longer term area benefited from the seasonal slack in bank reserve requirements since September 1966 and the new financing operations. At a somewhat higher pattern of first against demand deposits since November 1960, was yields that emerged at the start of the month, a substantial undertaken in order to further "the Federal Reserve's ob- volume of new and recent offerings of corporate and jectives of fostering financial conditions conducive to tax-exempt securities was distributed by underwriters. resistance of inflationary pressures and progress toward equilibrium in the United States balance of international BANK RESERVESAND THE MONEYMARKET payments". The money market became gradually firmer during Conditions in the money market finned very gradually December. Despite a contraction in nationwide net re- during December, although nationwide net reserve avail- serve availability of member banks after midmonth. the ability contracted sharply after midmonth. Average free reserve position of the major money market banks re- reserves of all member banks fell to about $80 million mained relatively comfortable throughout the period. Con- in the last two statement weeks (see Table I) from the sequently, the money market accommodated without di!- $200 million level that had prevailed during November ficulty the heavy seasonal flows of funds associated with and early December. At the same time, however, the corporate tax and dividend payments and year-end port- reserve positions of major money market banks were un- folio adjustments by commercial banks and corporations, usually comfortable for this period of the year (see Table as well as the substantial volume of international financial II), and the banking system accommodated large seasonal transactions that developed in the wake of the mid- demands for funds around niidmonth without strain. The November devaluation of the British pound. The effective effective rate for Federal funds rose above the discount rate for Federal funds was generally at or below the 4½ rate in the latter part of the month. per cent discount rate during the first three statement Rates on short-term money market instruments con- weeks, but rose to 4% per cent later. Rates on most other tinued to increase during December. The dealer offering money marl?et instruments also moved higher over the rate on ninety-day bankers' acceptances rose by per- month. centage point to 5% per cent, while that on prime four- to Market yields on longer term Treasury bills moved six-month commercial paper increased by percentage irregularly lower over most of December, reflecting a point to 5% per cent. Offering rates on directly placed FEDERAL RESERVEBANK OF NEW YORK 7 were raised by ¼ percentage point quently, however, the market turned decidedly more opti- financecompany paper late in the to 5½ per cent for paper maturing in one month or more. inistic, and prices rose irregularly until period exerted Offering rates posted by the major New York City banks when news of the increase in reserve requirements on negotiable time certificatesof deposit (C/D's) matur- some downward price pressures. in one to three months were raised during December A number of influences appeared to contribute to the ing the demand for to a range of 5% to 5½ per cent by the end of the month. favorable market tone, including heavy At large commercial banks throughout the country,. ap- intermediate issues generated by investor tax-switching or 28 the seasonal contraction of financing activity proximately $5.9 billion of negotiable C/D's, per transactions, cent of the total amount outstanding, matured during in the long-term capital markets, and satisfaction among December. In the statement week ended on December 20, market participants over the performance of international when the bulk of these maturities was concentrated, the currency markets after the devaluation of sterling. Long- runoff amounted to an estimated $731 million. term issues were in demand on outright buying by inves- C/D in During the two statement weeks ended on December tors who seemed reluctant to wait for further increases that had reached 20, the period during which seasonal demands for funds yields, feeling perhaps long-term yields .LL financial and a In these circumstances, prices of Treasury coupon • . from businesses, nonbank intermediaries, peak. I. securitiesdealers were ata high point, total loans (adjusted) securities were not very sensitive to developments which and investments of all weekly reporting banks expanded might otherwise have produced a greater effect. Unusually by $3.8 billion, almost entirely reflecting a rise in loans. heavy speculative buying of gold in the London market The $3.5 billion loan expansion surpassed increases in on December 14 and 15, for instance, sparked only in the a limited decline in the Government securities mar- • loans of $2.8 billion and $3.4 billion, respectively, price 7 reaction in the market to this was corresponding two weeks of 1966 and 1965. ket. The development probably tempered by a weekend statement of Treasury and Federal Reserve officials, affirming that the gold value THE GOVERNMENT SECURITIES MARKET of the dollar would be maintained and that the operation The market for Treasury notes and bonds strengthened of the London gold market would continue unchanged. unaffected in December, after having been buffeted duringNovember Similarly, the marketwas relatively by a variety ii the uncertainties of unfounded rumors about exchange rates and changes by the combined effects of surrounding :1 the domestic fiscal and credit situation and the devalua- in foreign monetary policies and by the publication at tion of the British pound in the middleof that month. At midmonth of weekly reserve statistics seeming to suggest For the the beginning of December, the market suffered fairly that a shift in monetary policy had taken place. sharp price losses in reaction to an announcement by the month as a whole, prices..increased by as much as ¾ Chairman of the House Ways and Means Committee that point in the intermediate maturity area and 1½ points no action would be taken on the Administration's income in the long-term sector of the market. tax during 1967. The heavy tone also stemmed Rates on Treasury bills moved irregularly duripg De- proposal on in part from rumors of an imminent increase in the Federal cember in a pattern generally similar to that of yields Reserve discount rate and in the maximum interest rate coupon issues. At the start of the month, rates were payable on time deposits under Regulation Q. Subse- marked up sharply as a result of aggressive professional 71 • ) Perspective '67 from Each Januarythis Bank publishes Perspective, a Perspective '67 is availabe without charge brief, informative review of the performance of the the Public Information Department, Federal Reserve New economy during the preceding year. This booklet is Bank of New York, 33 Liberty Street, York, a laymaifs guide to the economic highlights of the N. Y. 10045. (A copy is being mailed with this year. A more comprehensive treatment is presented issue of the Monthly Review.) A Spanish version is in our AnnualReport, available in March. also available upon request. .1 — 8 MONTULYREVIEW, JANUARY 1968 Table II TableIII FACJ'ORS TENDING TO INCREASE OR DECREASE RESERVE osmosOF MAJOR RESERVE crr BANKS MEMBER BANK RESERVES, DECEMBER 1967 DECEMBER 1967 In millions ofdollars; (+) denote.Increase, Inmillions ofdollars (—) decrease In excess reserves DaIly averages—weekended on Average Chan.esin dailyaverages— Factorsaftectin tourweeh week ended on basic reservepositioNs ended on Dec. Dec. Dcc. Dcc. Dec. 27 Factors — — — — chnes 6 13 20 27 Dec. Dcc. Dec. Dee. 6 13 20 27 Eight banksIn New York City Reserve excess or deficiency(—)°...... 30 10 25 + 52 29 "Market"feotori Less borrowings from Reserve Banks — 2 37 27 17 Member bank res&yes — 283 — 576 — — required + 184 298 070 Less net interbank Federal funda — Operating transactions (subtotal) —289 —10* 840 81 128 purchases or sales(—) 98 160 188 250 94 + + + Gross purchases Federal Reserve 107 — 11 1,052 905 1,147 1,172 1,069 fiqet + + + 240 ± 840 Gross sales 954 1,066 959 922 975 Treasury operations? + 267 ± 518 — 54 ± 182 + 911 Equalsnet basic reserve surplus — 122 — — 18 — or delicit(—) — 68 168 —200 —225 — Gold and (orelen account 319 + 8 449 Government — 247 — 338 — 37 — — Net loans to Currency outsidebanb 879 1,001 securities dealers 885 887 1.119 1,108 1,000 Other FederalReserve amounts InstIL.