296 MONTHLY REVIEW, DECEMBER 1973 The Money and Bond Markets in November Interest rate movements were mixed during November. large-denomination CDs, expanded only slightly faster The yields on three-month Treasury bills and on than in October. The seasonally adjusted volume of CDs intermediate- and long-term securities fell during the outstanding declined again as it did in October and Sep- month. The rates on Treasury bills of six months or longer tember. Partially as a result of this and partly in response and on several money marketinstruments moved higher. A to a change in the compositionof business borrowing, the combination of selling pressure resulting from the im- adjusted bank creditproxy declined from its October level. proved international position of the dollar and a growing concern among market participants that monetary policy BANK RESERVES AND THE MONEY MARKET might not loosen significantly in the coming months caused many rates to rise sharply in the first half of November. Interest rates on money market instruments edged up- However, rates declined noticeably in the second half of ward during November (see Chart I). Yields on nonbank- the month, when investors began anticipating slower busi- related, dealer-placed commercial paper registered ness activity in the months ahead as a consequence of the increases of % to /8 percentage point and closed the energy shortage. For the month as a whole, the rate on month ranging from 9'/a percent to 9½ percent. The ef- bankers' acceptances rose percentage point, while sec- fective rate on Federal funds averaged 10.03 percent, 2 ondary market rates on negotiable certificates of deposit basis points above October's average level. The volume of (CDs) increased 81 basis points. The effective rate on nonborrowed reserves declined in November; however,, Federal funds during the statement week ended Decem- total reserves fell by an even larger amount. As a result, ber 5 was 10.17 percent, 27 basis points higher than during both seasonal and nonseasonal member bank borrowings the final week of October. declined, for the third successivemonth (see Table I). Higher inventories acquired in the November financing, The market for CDs continued to show the effects of expectations that foreign central banks would be selling the higher marginal reserve requirement that was imposed securities, and an increase in dealer financing costs ex- in Septemberas well as the lighter demand for bank loans. erted steady upward pressure on yields in the Government The volume of CDs outstanding declined in November securities market early in November. In addition, Gover- for the third consecutive month. However, there was a nor Brimmer's statement that inflation would continue in modest increase during the final week of the month. In the 1974 reinforced the already cautious atmosphere in the secondary market, the interest yield on CDs increased to market, and yields on all maturities rose sharply. A much 9.34 percent. firmer tone developed toward the end of the month's The 9½ percent prime lending rate that was set by sev- second week, and rates generally receded over the eral major banks in late October spread to a few additional remainder of the period. New issue activity in the market banks during the first week of November. However, the for Federal agency securities was moderately heavy, but 9½ percent rate did not become universal, and on the interest rates on agency securities recorded only small last day of the month a few of the banks that had been changes. There was a substantial volume of new issues in quoting 9½ percent returned their rates to 9¾ percent. the corporate and municipal bondmarkets, and yields were The narrow money supply grew considerably faster in essentiallyunchanged. November than it had in recent months. Preliminary data The narrow money supply (M1)—demand deposits ad- indicate that for the three months ended in November, M1 justed plus currency outside banks—grew much more rap- expanded at a seasonally adjusted annual rate of 4 percent, idly in November thanin October. The broadmoney supply up from 0.2 percent for the three months ended in October (M2), which includes time and savings deposits other than (see Chart II). FEDERAL RESERVE BANK OF NEW YORK 297 Chad I SELECTED INTEREST RATES S.ptsmb.r - Novambar1973 BOND MARKETYIELDS P.rcant 13.0C — 12.00 11.00 10.00 — 9.00 Now Aaa-rat.d Aoa-rated a.oson.d corporals bonds public utility bonds 8.00 I I 7.00 — 3-to5 — &00 Govsrnmnntascuritios Long-t.rm Oavarnm.ntascuriti.s — 5.00 20-ysartox-ax.mpt bonds liii 1111111Iii 1111 11111 Iii (liii itli iii iii iii itiliii 1111(11 4.00 5 12 19 26 3 10 17 24 31 7 14 21 28 Ssptsmb.r Octobir Novsmb.r S.ptsmbnr Octobsr Novambar 1973 1973 Nato: Dataam showntar buntn.nn days only. MONEYMARKET RATESQUOTED, lid rains br thras-manthEura.dallars in London1 attnring standard Aaa-ratnd band alas lionsIwanly yaarn maturity;daily avaragan at rains(qaalsd inlarma al rainot dincaunl(on 90-to119.day prima commnrciotpapar yialdnan naanonadAaa-ratad carporoia bondstdaily av.ragan at yialds oa (g,sg.r qaotnd bythin. atik. It,. daalnrn that raport ihairrosin, or iha midpainiat tha ranga tarmOovaramanl nacaritian (bonds don ar callobta intan yaors ormors( and qaoi.d it no connannun is availabla; th. attactiva rota an Fadarollund. (tha rota mast on Qovarnmansnacuritian dun in ibm. no tiva companodan ski basin al rapranantativaat ski transactions .ancut.d(; closing bid rains (quotad inlarma al rats at cloningbid prican;Thursday avaragan aI yialdn on Iwanly naanonadtoly_.yqr dincausl(on nawantoutstanding ihraa-month Trnaauryj5j. lgninpIbant(carsyingMoodyn ratings at Aoa, An, A• and Baa). BONDMARKET YIELDS QUOTED, Yialdnon sawAaa.roiad aublicutililyjgSjora basad Sourcan: Fadamal lanai..lash al NowYork, Board alQovamnaru al tha Fadaral aspricas onkad byandnrwriting nyndicason.adjantad to mahasham aqsivolnnt Ia a Binary.Synlom, Maady'n InvonlarnSnrvica, Inc., andThn band Inyor. In November, M2 expanded at about an 11 percent requirements plus certain nondeposit liabilities—grew in rate, approximatelythe same rate thatprevailed inOctober. November at only a 0.5 percent annual rate. The slow The three-month growth rate of M2 through November growth has been partly a reflection of the higher costs to is 8½ percent, and for the year so far it is 7¾ percent. banks of raising funds in the CD market since the reserve The interest rate ceilings that were imposed on four-or- requirement on CDs was increased. It is also caused by the more-year consumer-type time deposits last month accom- fact that, during the last week of September, the rate on panied by higher short-term interest rates caused the commercial paper fell below the prime rate and business growth of other time deposits to diminish somewhat in credit demand shifted to the commercial paper market. November. Despite this slowdown, other time deposits This reduced the banks' need for funds and tempered still expanded at a healthy 12 percent rate. their CD sales effort. Since late September, the volume of Contrary to the behavior of the other monetary aggre- commercial paper outstanding has increased noticeably gates, the adjusted bank credit proxy—which consists of while the credit proxy has shown virtually no growth. daily average member bank deposits subject to reserve The fall in the volume of CDs is, in some measure, 298 MONTHLY REVIEW, DECEMBER 1973 Table I responsiblefor the decline in reserves available to support FACTORS TENDING TO INCREASE OR DECREASE nonbank (RPD) November. After MEMBER BANK RESERVES, NOVEMBER 1973 private deposits during showingno growth during October, RPD contracted at an In millions ofdollars; (+) denotes increase (—) decrease in excess reserves 11 percent rate during November. Changes in daily averages— THE GOVERNMENT SECURITIES MARKET week ended Net Factors changes The interest rate on three-month bills fell Non. Nov. Nov. Nov. Treasury 7 14 21 25 slightly in November, while the rates on six-month and 52-week bills advanced modestly. Throughout the month, 'Market" factor, the market's tone was affected by several competing fac- Member bank reoulred reserves +457 — — ' + 389 + 488 tors. Among these was concern over the short-run impli- Operating transactions (subtotal) + 198 + 508 .—1,72e + 378 — 849 cations of the international of the dollar relative Federal Reserve float strength — 51 + 182 + 388 + +1.019 to certain currencies. The demand for the Treasury operations' + 343 + 998 — 800 + 108 + 845 foreign strong Gold account — — and foreign 53 248 + 23 — 84 — 372 dollar created a situation in which foreign central banks Currency outside banks ._289 — 532 —1.051 — 44 —1,916 needed funds to their own currencies. To obtain the Other Federal Reserve liabilities support funds, the central banks sold some of their hold- and capital + 256 — 46 — 198 — 35 — 23 required Total "market" factors of United States securities. In the + 655 + 158 —1,737 + 74 — 181 ings Treasury addition, spreading consensus that monetary policy was unlikely Direct Federal Reservecredit to promote ease in coming months and the continued high transactions costs of financing dealers' inventories both exerted upward market — 325 — — Open operations (subtotal) 848 +2,161 827 + 181 pressure on short-term rates early in November. Against Outright holdings: these accumulating concerns, the Treasury's announce- Treasury securitles — 65 —1,140 +1.484 — + 278 Bankers' acceptances + 1 — 5 — 2 + 1 — 5 ment that it would auction a strip of bills totaling $1.1 Federal agency obligations — — + 14 + 42 + 59 billion to raise cash because of foreign central bank re- Repurchase aaraementn: of certificates contributed to Treasury securities — 232 250 893 — 727 demptions special Treasury + + + 193 climb rates month. Bankers' acceptances — 8 + 10 + 25 — 22 + the sharp in early in the The "strip" Federal agency obligations — 21 + 28 + 147 — 118 + 38 consisted of a $100 million addition to each regular weekly — Member bank borrowings 285 + 351 + 48 — 281 — 167 bill issue maturing between November 23 and January 31.