102 MONTHLY REVIEW. MAY 1969 The Money and Bond Markets in April During April the money market was subjected to pres- from the Federal Reserve Banks and a marked rise in the sure from greater monetary restraint and from unusually prevailing range of Federal funds rates. For April as a large reserve drains around midmonth. The Federal funds whole, borrowings at the discount window averaged ap- rate and other short-term interest rates advanced in the proximately Si billion, a rise of close to $80 million from wake of the April 3 announccment of increases in the March. Since excess reserves declined on balance, net Federal Reserve discount rate and reserve requirements borrowed reserves in April advanced $160 million to $860 on demand deposits at member banks. (For details, sec million. the statement of the Boardof Governors reproduced in full The Federal funds rate, after having remained mostly in on page 75 of the April issue of this Review.) Accompany- a 6¼ to 6% percent range in March, moved up to a 7 ing the firmer money market conditions that emerged dur- to 7½ percent range following the announcement of the ing the month were variations in day-to-day rates which discount rate and reserve requirement increases in early reflected some fairly abrupt shifts in the distribution of re- April (sce Chart I). About midmonth the rate rose further serves between money center and other banks. In large part, to around 7¾ percent. The distributional effects of the these fluctuations were due to wide swings in the size and Treasury operations on the major money market banks distribution of Treasury cash balances around the mid- were quite pronounced during April. Chart 11 records the month tax date. After mid-April, however, short-term pattern of basic reserve deficits during the February-April to Treasury bill rates began to reverse the upward movement period for the past three years. The early- mid-April which had occurred earlier, and by the month end rates jump was far more than seasonal in 1969 and, indeed, the were below March 31 levels. $2A billion rise during thc two-week period was one of Sentiment in the bond markets, particularly in the cor- the sharpest on record. The major money market banks, porate sector, continued to improve, and some feeling in seeking to cover their combined deficit of over $4½ funds developed that yields had already hit their peaks for the billion, were instrumental in bidding up the Federal year. New issues were aggressively sougit for a time at rate. While a subsequent reversal of the skewed distribu- declining yields, prices of outstanding bonds rose sharply, tion of reserves brought a temporary respite, Federal funds and the market resisted such potentially bearish price in- continued to trade at 7¾ percent or above for most of fluences as a rebound in the volume of new offerings, the the last half of the month. Indeed, on April 30, the final report of a strong first-quarter advance in gross national day of a statement week, some transactions at rates as product, and new trouble with North Korea. The marked high as 9½ percent were reported. to with the revival of expectations that lower interest rates lay ahead Reserve management in April had deal with re- stemmed from a growing belief that the anti-inflation pro- effects of the increase in reserve requirements and Reserve credit the Trea- grams of the Federal Reserve and the Administration, course to temporary Federal by including the proposed repeal of the investment tax credit, sury to bridge the gap between receipts and expenditures. would prove cifective. Renewed optimism over progress At the beginning of April, Treasury balances were inade- toward a settlement in Vietnam worked in the same direc- quate to cover net outlays until the inflow of tax receipts funds into tion. By the month end, however, the rally began to lose after midmonth. As a consequence, flowing were with- steam as money market rates remained high and signs of large banks for the account of the Treasury a slowing of price inflation remained sparse. drawn daily, and remaining cash shortfalls were financed by the sale of special certificates to the Federal Reserve. reserveswere redistributed from center bank DANK RESERVES AND THE MONEY MARKET Thus, money to others, and at the same time credit extended to t Increased pressure on bank reserves during April was Treasury by the System was creating new reserves which apparent in some increase in member bank borrowings had to be offset by open market operations. As corporate FEDERAL.RESERVE BA15K OF NEW YORK 103 ChartI SELECTED INTEREST RATES P.rc.nt MONEYMARKET RATES February-April 1969 BONDMARKET YIELDS Percent a.3U Yields on new publicutility bonds Reofferingyield — Market yield: Aaa 6.00 Aa 0 0 — — 7.50 7.00 LAaa.rat.dseIonedcorporotond: — 3- to 5.yearGovernment securities I — 6.50 p—s.. —. we S,• - — — 6.00 'ecurifle\Long.tsrmGovernment - 5.50 onds eortax-exempt 5.00 II Illillil tutu Ii iii III 11111 It 11111ill 1111111 uult iii liii A fl 5 11 19 26 5 12 19 26 2 9 16 23 30 5 11 19 26 5 12 19 26 2 9 16 23 30 February March April February March April Note: Data areshown far business days only. MONEYMARKET RATES QUOTED: Dailyrange at ratesposted bymajor NewYork Citybanks immediotetyafter ithas been released from syndicate restrictions); daityaverages afyieldson on KOIIJQOSI(in Federal funds) securedby United States Government securities )a point seasonedAoa.rat.dcarparote bonds, dailyaverages of yields an 21,9-termGovernment indicatesthe absenceaJ any range); attiring rates tardirectly placed finance camp.gpypopu; iecsrities (bondsdue or callable in ten years ormore) andan Government securities due in the .ltectivsrate onFederal funds(therats mostrepresentative at the transactionsexecuted), threeto five yearn, computedon the basiuof closingbid pricenThursday dverages of yields closing bid roles(quoted in terms at roteof discount) an newestoutstanding three- andsix-month an twentyseasoned twenty.year lax-nemptbonds (carryingMoodys rasingsat Aaa, Aa, k,owviJliL A, andBaa). BONDMARKETYIELDSQUOTED; Yields an newAna. andAo.rated publicutilitygnj )orranrs paint Sources:Federal Res.rve Bank of NewYork. Boardof Governors of the Federal ReserveSystem. tram rrnderwritinasyndicate reatlerino wieldan a given issueto marketyield an thesame issue Maady'sInvistoru Service,and The We.klyJgjttygL tax payments began to flow in at midmonth, balances in transactions absorbed reserves, and the impact tended to Tax and Loan Accounts at commercial banks were re- fall on money marketbanks, where reserve pressures were storedand indebtedness to the Federal Reserve was repaid. already great. The percentage point boost in reserves In sum, Treasury cash management operations provided required against member bank demand deposits applied about $1 billion in reserves in the week ended on April 16 to deposits in the week that began April 3. Because of the and then withdrew around $1.2 billion during the sue- two-week lag in reserve settlement, however, the full im- ceeding week as operations were reversed (see Table I). pact was delayed until the week beginningApril 17, when Confronted with the need to absorb a substantial vol- this action accounted for about $650 million of the total ume of reserves in the week ended on April 16, and to rise of $940 million in required reserves for that week. reverse direction in the following week, the System re- In spite of these reserve pressures, monetary aggregates rted extensivelyin the earlier week to matched sale and were buoyant. Total depositssubject to reserve requirements chase transactions. These operations involved sales of (the bank credit proxy) rose about 6 percent (seasonally Treasury bills by the System to dealers under agreements adjusted annual rate) in April after a 5 percent drop in to repurchase during the next week. Initially, then, these the first quarter. Adjustment to include liabilities to foreign 104 MONTHLY REVIEW,MAY 1969 branches would have more than halved the first-quarter decline, but would not have altered the April results much THE OOVERNMENT SECURITIES MARKET (although sales of assets by domestic banks to their for- eign branches introduced some distortion). Liabilities to In the market for Government securities most yields foreign branches, which had advanced about $3.9 billion declined on balance during April, although some bill rates in the first three months of 1969, registered a drop of $200 were higher during the first half of the month. The upturn million in April. This reversal coincided with a slowdownin was attributable in part to bank sales of issues acquired the rate of decline in time deposits at commercial banks. in late-March Treasury offerings and to money market While large certificates of dcposit continued the slide that pressures which increased dealer financing costs. Many has taken place throughout 1969, liquidations in April bill rates initially jumped from 5 to 9 basis points in were little more than seasonal. Indeed, total time deposits reaction to the April 3 announcement of monetary policy on a seasonally adjusted basis were about unchanged in actions, although bills due after six months soon retraced April after a drop of 6½ percent in the first quarter. Fol- most of the rise. lowing a 2 percent risc in the first quarter, the money After midmonth, upward impulses subsided and rates supply registered a surprising 13 percent annual-rate gain worked lower. The Treasury announcement that $200 in April. Part of this upsurge was related to a sharp, tem- million of the maturing April 30 bill would not be porary fall in the amount of cash items in process of col- refunded, public fund demand, and reinvestment of the lection. In turn, this drop was associated with a lull in proceeds of maturing tax anticipation bills contributed to transactions involving foreign banks, which wcrc closed the improved performance.