172 MONTHLY REVIEW, JULY 1974 The Money and Bond Markets In June Most interest rates resumed their upward course in June THE MONEY MARKET, BANK RESERVES, AND shortly after the beginning of the month as an initially op- THE MONETARY AGGREGATES timistic mood was dispelled, Although some market ob- servers hoped that interest rates had peaked, others Rates on most money market instruments held steady felt that inflationary expectations had yet to be fully in- in the early part of June but soon resumed their upward corporated in current interest rates and that pressures •n course (see Chart I). The effective rate on Federal funds the creditmarkets would continue. Inflationary forces were advanced to a new record and averaged 11.93 percent for confirmed by the incoming price statistics, and upward the month, up 62 basis points from the previbus record movement in the Federal funds rate along with reports of level set in May. Dealers raised their offering rates on heavy bank borrowing by businesses seemed to support prime cOmmercial paper by a net 1¼ to 1½ percentage the latter view. Consequently,yields resumed their climb. points over the month, establishiriga rate of 12 percent on Several short-term rates set new records, among them the 30- to 119-day paper and 11/8 percent on longer term prevailing prime rate, which reached 11¾ percent by paper. Secondary market rates on large 'negotiable CDs the month end. dropped early in the month but climbed sharply thereafter The corporate and municipal bond markets sagged as to around 12½ percent for three-month maturities, a 110 a number of medium-grade new issues sold slowly. In- basis point gain for the month. vestors continued to reevaluate the implications for the Business demand for loans, which had shown signs of utility industry of higher energy prices and inflation. Gen- slackening in May, burgeoned again in the second week erously priced intermediate-term issues sold well, but in- of June and was also strong over the June 15 tax vestors were wary of longer term offerings. Near the end date. Consequently, the move by a handful of banks in of the month,- a record yield was set on a telephone issue, the first week to reduce the prime rate from 11½ per- although most yields remained a touch below the highs cent to 11¼ percent was not followedby other banks. By reached in 1970. the third week, most of those banks had returned to an In contrast, Treasury obligations proved to be in de- 11½ percent prime rate. On June 24 a few banks lifted the mand, and rates on short-term bills experienced net prime rate to 11¾ percent, and by the end of the month declines during the month. Among the factors buoying most other banks had followedsuit. demand were large purchases by foreign central banks, In the face of strong credit demands and money market the absence of default risk attached to Treasury issues, pressures, member banks were again heavy borrowers and reports that the oil-exportingnations might be invest- ,from the Federal Reserve. Average borrowings for the ing some of their funds in Treasury securities. Technical month were $2,949 million (see Table I), the highest. factors also supported the market since the increased de- monthly average ever. Part of this again reflected sub- mand came at a time when dealers' inventories were un- stantial lending to Franklin National Bank, although the usually low. bank was able to reduce somewhat its borrowing from the Growth in the monetary aggregates speeded up again in System after it arranged to buy up to $250 million of Fed- June after slowing in May. Both Mi—private demand de- eral funds on a secured basis from Clearing House banks posits adjusted plus currency outside commercial banks— in New York and certain other banks. andM2—which also includes time depositsother than large According to preliminarydata, the monetary aggregates negotiable certificates of deposit (CDs)—grew more advanced at a rapid pace in June after having grown rapidly in the four weeks ended June 26 than they had in moderately in May. For the four weeks ended June 26, May. The growth of large CDs, while still rapid, slowed M1 grew at an 8.4 percent seasonally adjusted annual from the explosivepace of the previous two months. rate relative to its average of the last four weeks in May. In FEDERAL RESERVE BANK OF NEW YORK 173 ChartI SELECTED INTEREST RATES April- Jun. 1974 BONDMARKET YIELDS Percent 14.00 13.00 12.00 11.00 Nsw Aoo-rorsd sO.00 Aoa-rotsd seasoned bonds corporat. bonds t public utility 9.00 8.00 ;_, _____.t_____ 3. to 5-ysor Government sscuritis; 7.00 Long-fsrm Govsrnmsnt securities JZsortou..xsmptbonr 6.00 111111 111111 11111 11111111111 c An liii IIIIi liii 1111:11 1:1:1111; 1d 1 8 15 22 29 5 12 19 26 3 10 1724 1 8 152229 5 12 1926 Jun. April May Jun. April May 1974 1974 Nuts:Data ars shown for busiosss days only. at toast doily onsrogss ot MONEY MARKET RATES QUOTED: Prims commercial loon roteat mostmajor banks, standard Aoo.ratod bond at twenty ynors maturity; at on 90. to commsrCiOt yisldson ssosansd Aoa.rotsd corporals ban4 daily oneragesat yisldson ottsring rotss quossd intsrms at rots discountj t19.dotprims cullabls in tsn or thrss at ths tins dsotsrs that rsport their rotss, orlbs midpoint of tong.tsrmGansrnmsut sscuritiss bonds das or ysors morsj PSPI!quoted by sururitiss dos in thrss to finnygwi, campussdon lbs basis ths rangs quoted it no consensusis onuilobls; ks sttsctirs rots on Fsdsrot funds ondan Gorsrnmsnt lbs transactions bid rates qootsd 0t closing bid prices; Thursdayonsragss at yistdson twsnty seosonsd the rots mostreprsssntotins at eoscussdj;closing at Aoo,Aa, A, and Boaj. in terms at rots at discountj on nswsst outstanding thrss.month Treosury,jjs. ysor ton.sasmpjj2nds,jcorrying Moodysrotiugs Rsssrne Book 0t New Board at Governorsat lbs Psdsrol MARKET YtELDS QUOTED: Yields on nsa Aoo.rotsdpublic utility ssssttors bossd Sasrrss: Fedsrol York, BOND Rsssrns lnrssturs Service. Inc., and The BondBuyer. on prinss oshsd by ondsrwriting syndicates,odjustsd to mobs thsm squirolsntto o Systsm,Moodys comparison to the four-week average of a year earlier, M1 ated somewhat in June, but its growth rate from thirteen grew 5.8 percent in the four weeks ended June 26 (see weeks earlier was an unusually strong 20.9 percent. Chart H). The acceleration in the growth of M2, to an estimated 10.5 percent rate for the four weeks ended THE GOVERNMENT SECURITIES MARKET June 26 relative to the average of the four previous weeks, reflected a bulge in the time deposit component at the be- Prices of Treasury securities moved irregularly during ginningof June following some sluggishness in May. Aver- June, with the strongest performances being shown by age time deposit growth over the eight-week period ended the shorter maturity issues. At times the inflationary in late June was close to the pace of expansion of the pre- worries that were contributing to upward movements in ceding two months. Large negotiable CDs grew at an esti- other interest rates also put pressure on Treasury secu- mated 28.8 percent rate in the four weeks ended June 26, rities. For the most part, however, the Treasury sector compared with the explosive 120 percent seasonally ad- was shielded from these forces, as investors showed a justed annual rate in the previous two months. Conse- strong preference for Treasury obligations—particularly quently, growth of the adjusted bank creditproxy moder- bills—over other marketinstruments. 174 MONTHLY REVIEW, JULY 1974 Table I In the Treasury bill market, rates moved irregularly FACTORS TENDING TO INCREASE OR DECREASE in the first two weeks of and then shorter'rates MEMBER BANK JUNE 1974 higher June, RESERVES, in the third week. Rates on most issues due within Inmillions ofdollars; (+) denotes increase plunged and (—) decrease in excessreserves six months fell 22 to 62 basis points that week, with the three-month bill rate falling by more than 100 basis points ChangesIn daily averages.— to 7.30 percent. In the final week of the month, many week ended Net declines been Factors changes participants became concerned that the had June June June June exaggerated, but rate increases attracted buyers and 5 12 19 26 were quickly reversed. By the end of June, rates on longer term bills were 2 basis points below to 22 basis, points "Market" factors above their month-earlier levels,while rates on bills matur- Member bank required reserves + 100 + 396 — 793 + 38 —259 ing within six months were 6 to 77 basis points lower. In Operating transactions (subtotal) + 467 +1.710 —1,463 — 650 + the last half of June, the three-month bill rate averaged Federal Reserve float + 406 — 100 + 133 — 110 + 269 more than 4 percentage points below rates available on Treasury Operatlons + 338 +1.895 — 571 —1,143 + CDs or commercial paper of the same maturity. This is Gold and foreign account + so —.o8 + —so considerablygreater than the normal spread between these Currency outside banks — 235 — 363 — 242 91 — + which less than 1½ percentage Other Federal Reserve liabilities instruments, averaged points in 1973. and capital + 14 284 — — 137 + + A substantial portion of the demand for bills came from Total market" factors 567 —2.258 — 189 + .f2,iiu foreign central banks. Marketable debt held by the Fed- Reserve in for Dlret Federal Reserve credit eral custody official foreigners increased transactions by a net $1,206 million between May 29 and June 26. Open marketoperations (subtotal) — 24 —1,990 +1.828 + 925 + Some of this demand came from one country, which Outright holdIngs: was restructuring its Treasury debt holdings to achieve a Treasury securities — 279 —1.283 +1.310 — 234 —286 better balance.