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B O A R D OF e o v * * N O * s
D I V H I O N OF IN-
F I O K R A L HKICNVK SYSTEM
3
No'. 55
SPF ; 6
—• ——
April 13, 1962
196a
I
I. United Kingdom
lie Nine Charts on Financial Markets Abroad
1
j o united
Money
andjCapital
in March
'• 1 •Kingdoms
.wiii .
i ii r
" ' Markets
«
.!••••
The one-half per cent reductions in Bank Rate on March 8 and 22
brought money rates in London financial markets to levels substantially
below those in effect prior to the emergency measures of July 1961o The
extent of these declines can be seen in these selected yields (in per cent
per annum):
1961
July 7
Bank Rate
Treasury bills (tender)
Bondss U-l/2% 1962
k-1/2% 196U
3% 1965-75
5-1/2% 2008-12
3=1/2% War Loan
2=1/2% Consols
5
U=5H
L.98
5,68
, 6036
6.L3'
6c6U
6.L8
1962
Jan. IS™ Mar* 1
7
6.71
6,18"
6.50
6.65
6.73
6,72
6.56
Mar. 29
6
6
$*U3
5.61
5.85
5.51
5,18
6.25
6.35 .
6.L5
6.30
6.38
6.23
5 U.Uo
««
6.27
6.22
6.65
6.77
6.57
6.26
A heavy inflow of funds from abroad, attracted by high British
interest rates and by prospects for capital gains if the gilt-edged market
were to move to a lower level, was primarily responsible for the Bank Rate
action. The capital flow continued after the March 8 reduction but seems
to have slackened appreciable after the second cut. The foreign funds
moved in volume into the local-authority market and as deposits with hirepurchase houses. By mid-March, however, the incentive to place funds as
local-authority deposits was wiped out by the declining yields in that
market (see Table)»
In addition, a substantial flow of foreign funds also moved into
the gilt-edged and stock markets. An indication of the unexpectedly heavy
inflow of foreign funds into British securities is revealed in estimates of
Britain's net private capital inflow for 1961 in the balance-of-payments
White Paper released last month. Private investment flows from 1958 through
the second half of 1961 (in millions of pounds) were:
I960
1961
I
II
1
11
1958
1959
Foreign investment in U.K.
+ 87
+ 6U
>172
Direct
•1U6
:'S
+ 26 g
+106
+ 90
Other
152
Total
Tm
-rm
Tm
' tX5E
U.K. investment abroad
=3UU
-166 -170
-162
-205
-330
Net private investment
-137
-1U6
- 83
- 16
>56
- 7
DECONTROLLED AFTER SIX MONTHS
NOT FOR PUBLICATION
-
2
-
Accoirding'to these figures5 Britain not only showed a net inflow of private
investment in the second half of 1961 (despite a heavy volume of capital
investment abroad) but the sizeable inflow came not as "direct" but as
"other" investment. This "other" category combines (1) capital transactions of oil and insurance companies and (2) portfolio investments in
British securities» The large surplus in the second half of 1961 must
reflect chiefly substantial purchases of bonds and shares in London by
foreign investors »
In addition to the international factors 5 domestic considerations
also contributed to the decision of the authorities to reduce Bank Rate.
Economic indicators for January and February showed a continued soft
business situation° Industrial production fell one point further in
January; hire-purchase credit and retail sales for February did not reflect
any rise in demand for consumer durables 0
The financial press has been reporting a widespread feeling of
uncertainty and pessimism in British industry» Reports on conditions in
the Midlands industrial belt have emphasized "the sharp fall in orders for
new capital equipment from British firms* and the universal reluctance to
carry large stocks011 A survey among merchants (conducted for the first
time by the Association of British Chambers of Commerce) reported that
import and export merchants "have become more pessimistic about the general
business situation" than four months ago and they also "take a gloomier
view of export prospects 0" Most merchants expected to see little change
in export orders or deliveries during the next four months0 This pessimism
in business circles led the Financial Times to write that "industry will
continue to have little confidence in his /the Chancellorts/ policies"
and to maintain that this "failure of confidence is itself largely responsible for the present stagnation of the economy" (April
1962s page 10)„
Against this background* the Chancellor made only limited changes
in the over™all government budget for 1962-63» Even with a number of changes
in tax rates,, total budget receipts- are to be reduced by £9«5> million for
the yearD The over-all deficit is estimated at £7k million for 1962-63
compared with the realized 1961=62 deficit of £211 milliono The Chancellor
expects to be able to cover this deficit from nonmarket sources of
borrowing„
A summary of "Foreign Exchange Markets and Reserve Developments —
February-March" is available upon application to Division of International
Finance5 Room 22U6,, Board of Governors of the Federal Reserve System.
Money market. During the period under review, the after-tender
market rate for Treasury bills dropped rapidly from 5»UU per cent on March 2
to lu28 pgr cent on April 6 (see Table and Chart 2). Higher prices offered
by the discount houses enabled them to obtain more adequate supplies of
bills at the weekly tender than they did in February9 as the following
percentage figures shows
NOT FOR PUBLICATION
NOT FOR PUBLICATION
Feb. 2
9
16
23
23
22
28
21
March 2
9
16
23
30
- 3 37
53
hi
U8
57
Local authority deposit marksto Rates on 3-month deposits with
local authorities declined sharply after mid-March<, By April 6, the quoted
rate was about 5»5 per cent compared with a 6„U7 per cent average (midpoint)
for March 2 (see Table)» The rapid fall in yields reflected, in part,
reduced demand for short-term funds by the local governments as the fiscal
year came to an end and as the pressures from tax payments on short-term
credit supplies diminished.
By mid-March the yield on local authority deposits (with exchange
risk covered) was actually fractionally below the rate on 3-month Eurodollar deposits (see Table)o In this situation, the inflow of foreign
funds (direct and indirect) into this market came to an end. The net
yield on local-authority deposits (with forward cover) compared with Eurodollar deposits (in per cent per annum) was:
5
12
19
26
+0.2U
+0.09
+0.22
+0.13
Feb. 2
9
16
23
Mar. 2
+0.3U
+0.16
+0.31
+0.13
+0.31
Mar. 9
16
23
30
Apr. 6
+0.10
-0.01
-0.02
+0.05
-0.02
The figures on which this incentive has been calculated, found in the table
at the end of this report, are substantially revised from the series shown
in the United Kingdom "Capital Market Developments Abroad" for February
(No. 51, March 16, 1962).
On April 7 , the Treasury's Public Works Loan Board announced a
reduction of one-eighth per cent in shorter-term loans to local authorities,
as follows (in per cent):
Up to 5 years
5 to 15 years
15 to 30 years
Over 30 years
1961
Nov. 11
1962
April 7
6-7/8
6-7/8
6-3/U
6=3A
6-3/U
6-3/L
6-3/U
6-3/U
These charges are still substantially above the rates on call and shortterm credit in the local-authority market.
Gilt-edged market. Gilt-edged securities were in good demand
in the first half of March and a sustained investment demand was reported.
After mid-March, however, some selling, especially of longer-term issues
NOT FOR PUBLICATION
NOT FOR PUBLICATION
- u -
brought about higher yields. By the end of March, yields had returned to
around the March 1 level (see Table and Chart 6)•
„ During the past three months, gilt-edged yields in the short- and
long-term sectors have declined substantially but those in intermediate
maturities (where the Government Broker continues to hold substantial
supplies of two issues on tap) showed only limited movements, as may be
seen in the following selected yields (in per cent per annum):
Jan. 10
Treasury bills (tender)
Bonds s 1961*
1966
1965-75
1982-81*
1999-200U
War Loan
Consols
April U
luko
5.10
5.5k
5.U2
5.53
5.99
6.21
6.32
6.14*
6.61*
6.50
6.23
6.29
6.18
6.1*0
6.23
Change
-1.02
-0.1*3
-o.U5
+0.02
-0.03
-0.26
-0.2U
-0.27
In the local-authority sector, the Northern Ireland Exchequer
197U issue reached par in the general market advance in early March. A
£20 million offering of a 6-1/1* per cent Bond, 1975-77 at 97-3A was
announced on March 16 as the market began to turn and about 67 per cent of
the offering was left with the underwriters. In late March trading, the
bonds were quoted at a one-fourth to five-sixteenths of one per cent
discount.
On March 21*, the Treasury announced a one-fourth per cent reduction in return on Tax Reserve Certificates. The interest on these
Certificates was cut from 3-1/2 to 3-l/U per cent on November 25 and will
now yield 3 per cent.
Budget for 1962-63. The budget deficit for 1962-63 is expected
to be about £7U million compared with the realized deficit for 1961-62
of £211 million. The Chancellor expects to cover this deficit from sources
of borrowing other than sales of marketable bonds. The budget figures for
1961-62 and 1962-63 (iii millions of pounds) are:
1961-62
Forecast
Realized
Revenue
Expenditure
Current surplus
Below-line expenditure
Over-all balance
6,508
6,002
* 506
- 575
- 69
1962-63
Forecast
6,61*5
6,235
* 1*10
- 621
6,797
6J6U
• U33
- g07
- 211
-
NOT FOR PUBLICATION
71*
NOT FOR PUBLICATION
The tax changes introduced for the coming year will reduce total
tax receipts by only £9.5 million. The major tax changes were:
1. The 10 per cent temporary excise taxes imposed last July are
to be removed but additional excise taxes on special items
are to replace the revenue lost by the tax reduction;
2. Short-term capital gains on securities within six months
or on land within three years are to be subject to usual
income and profits taxation;
3. Alterations of purchase tax rates including new 15 per
cent tax on confectionery and soft drinks;
U. The special tax on owner-occupiers who must now compute equivalent
income for their housing is to be eliminated over the
next few years,
London clearing banks, Advances of the 11 London clearing banks
rose by £38 million between mid-February and mid-March. However, press
reports stress that the heavier borrowings seem to reflect the need of
credit for tax payments rather than any marked expansion of consumer demand.
At 32.60 per cent of deposits, the banks' liquidity ratio was substantially
above the 30 to 30.5 per cent range which is to be expected in mid-March
at the end of the tax season.
Recent changes in assets (in millions of pounds)
I960
(March)
June
Sept.
Dec.
Net
deposits
Liquid assets
Per
Amount cent
(6,073)
+103
•101
- 15
(2,217
* 36
+ 23
+123
1961
March
June
Sept.
Dec.
+ 2h
1962
Jan.
Feb.
Mar.
+133
-239
- 18
-118
+216
- Uh
-212
+207
+128
+1#
Loans to public sector
Govt®
Treas.
rities
bills
(31.5) (1,368) (9U1) (2,937)
+ 17
-122
(31.U)
-123
- 62 + 2U
(31.6)
- k
+ h7
* 2$
(31.9)
- 2k
(30.lt)
(32.2)
(3U.3)
(35.3)
- 85
-102
- 36
+ 6
-216
+177
+112
+ h
-3U9
+ 83
+ 72
+129
+120
•10U
-27U
-305
-133
- 79
a/ Includes loans to nationalized industries and call loans,
b/ Includes commercial and other bills.
+12U
-322
- 50
(36.1)
(32.2)
(32.6)
+ 3
- 27
+- 1
NOT FOR PUBLICATION
Loans to
private sector
To^i
Advances
(2,933) (3,086)
+129
+137
• 6U
> 51
• U8
- 7£>
+191
+158
-151
- 77
• 30
+ 93
• U6
+ U3
•'91.
> 5U
+133
+1UU
-180
NOT FOR PUBLICATION
-
6
-
Total
for July
Shops ^
Finance houses
Total
AU£,
- 1
+ U
+ 3
306
662
968
1
Installment credit* Installment credit declined further in February to
£598 millions the lowest monthly total since March I960. The decline reflects the
sluggish recovery in evidence in purchases of consumer durables., Automobile
sales showed some rise in February but were substantially below year-ago
levelso Credit by household goods shops which cover a wide range of
durable goods also fell slightly0 In February the volume of retail sales
were about at the level for January and for the preceding nine months.
Rising prices accounted for most of the rise in the value of retail sales
which occurred in December= Recent monthly changes in credit outstanding
(in millions of pounds) were2
- 2
=•16
7L8
Monthly changes
Oct, Novo Dec.
0
-11
-11
0
-11
-11
+ 6
"^10 •
-
h
Jan.
Feb.
- 5
-12
- 3
- 8
-11
-17
A commission war between finance houses on automobile financing
is spreadingo Last month, the largest hire-purchase firm breached the 10 per
cent limit agreed within the industry on commissions paid on
automobile
paper by offering 20 per cento Other major finance houses are now offering
20 per cent and there are fears that even higher rates may be offered
unless the houses come to agreement on a new limit.
Foreign tradeo Britain's trade position showed some further
improvement in March as exports rose and imports declined to a small extent.
As a result9 the seasonally-adjusted trade deficit was the smallest since
August 196l0 Recent seasonally-adj us ted trade returns (monthly averages
in millions of pounds) were:
Year
Imports
Exports
Re-exports
Trade balance
380
296
12
-72
I
1961
II
III
IV
Jan0
3#
309
_12
-6U
363
30$
-U
~U5
363
30s
-13
-U5
380
300
12
-68
357
309
-33
1962
Feb, Mar.
363
307
11
359
312
11
-U5
-36
Foreign exchange reserves 0 For the third consecutive month, the
United Kingdom reported a substantial rise in official reserves in March.
Adjusted for a £62 million repayment by Australia to the Fund, official
reserve accruals amounted to £72 million„ Foreign funds flowing into
British financial markets accounted for the reserve accruals <, After the
second reduction in Bank Rate on March 22, the inflow of foreign funds
slackened and the flow into the local-authority market may have terminated.
Recent monthly changes in official reserves (in millions of pounds) have
been %
NOT FOR PUBLICATION
-
NOT FOR PUBLICATION
Reported figure
Adjusted for special
transactions
- 7 -
1961
1962
Sept.
Oct. Nov! Dec.
Jan.
• 2U
- 8 + 9
-85
>33
+ 5
*10
•107
+112
-18
+33
+80
+72
+59
Feb. Mar.
Germany has agreed to make special purchases amounting to DM 600
million (£5U million or $150 million) in the United Kingdom during both
1962 and 1963 to help Britain meet the foreign exchange costs of the British
Army of the Rhine. Britain's array costs about £73 million and, thus far,
German purchases have been about £15 million a year. With the new purchases,
the foreign exchange cost of British troops will be reduced to £20
million. The German commitment, which is to cover actual payments rather
than orders to be placed, will finance military purchases in Britain and
rent for German use of British facilities in Germany. Some civilian procurement by the German Government is also expected.
Foreign exchange market. The pound showed sustained strength
during the period under review. The spot pound remained above $2.81-1/2
until the second reduction in Bank Rate and then moved to a level between
$2.8l-l/U to 1/2 through the early part of April (see Table and Chart 8).
The discount on the forward pound narrowed from 2.60 per cent per annum
on March 1 to 1*89 per cent on April 6 (see Chart 9).
Bullion market. The price of gold at the fixing moved generally
downward in March to a low of $35*071 on April 5, the lowest quotation
reported since mid-1961. Recent Friday prices at the London fixing (in
U.S. dollars per ounce) have been:
Feb. 23
Mar. 2
9
16
35.083
35*086
35.078
35.095
Mar. 23
30
Apr. 6
35.087
35.083
35.07k
Stock market. The stock market was generally quiet during March
and prices tended to ease somewhat. The index of industrial shares which
was at 309.6 in mid-January reached a bottom of 292.6 on March 30 (see
Table and Chart 7). The approaching budget, fears of a capital gains tax
to be introduced and the competition from many new issues contributed to
the weak market.
In early April, however, prior to the budget, a surge of buying
brought sharp price rises. On one day the stock price index rose U.9
points. By April 10, after the budget, the index stood at 306.6
Europe and British Commonwealth Section.
II. Nine Charts on Financial Markets Abroad
NOT FOR PUBLICATION
- 8
United Kingdom:
Treasury Bill Yields and Exchange Rates
3-mc>• Treasury bill arbitrage calculation
U.K.
*/
1961-High
Low
Jan» 5
12
19
26
Feb. 2
9
16
23
Mar. 2
9
16
23 30
Apr» 6
U.S. Differ3-mo*
*/
ence
poum£>/
6.7U
Uol7
2o7U
2.16
U.U5
1.88
5.3h
5=3U
5.22
. 5,16
2.7U
2.76
2.71
2.67
2.67
2.72
2.83
2.69
2.69
2.76
2.72
2.70
2,75
2.70
2.60
5ol6
5o3U
Sohh
Sohh
5ohk
5o03
Uo8l
L.38
U»3U
U,28
In favor
U.K. b H ] c /
-0.79
-Ho 36
—2.88
-2.67
-2.50
-2.56
-2.53
-2.66
2.58
2.51
2.19
2 .19
2.62
2.61
2.75
2.75
2.27
2.09
1.68
1.58
281.62
278.U7
-0.28
-0.09
0.01
-0.07
280.97
281<A5
281.185
281.16
281.27
281.16
281.55
281.51
281.60
281.61
281.71
281.32
281.39
281.38
-0.02
-2 .56
-2.60
0.15
-2.13
—0ol6
0.19
=»2.U5
=2.08
-1.93
*31.89
1.59
1.13
-2.12
-0.0U
-0.0U
=2.63
Spot
pound
(U.S.
cents)
-0.36
-0.U0
-0.3U
-0.31
London deposit fates
U.S.
local
dollar
authority
(3-BO.)
(3 MO.)
U.00
3.13
3.63
3.56
3.56
3.56
3.50
3*56
3»UU
3.56
3.56
3.69
3.69
3.63
3.69
3.63
7-1/2
6
6.50
6.32
6.28
6.25
6.38
6.38
6.38
6.25
6.U7
6.22
6.13
5.69
5.69
5.50
a / Market quotation for Friday.
b/ Spread between spot and 3-month forward rate in per cent per annua. Discount
equals (-).
c/ Net of difference in bill yield less discount on 3-month sterling#
United Kingdom:
Selected Capital Market Yields
U.K. Government bond yields
4-1/2*
3%
3-1/2% 2-1/2%
196U
1965-75 2008-12 War Loan Consols
1961-High
Low
6.65
5.15
6.68
5.95
em*
—
6.92
5.95
6.78
5.70
Share
yield
£/
Yield
gap.
]?/
5.U8
lt.22
1.90
0.86
365.3
287.7
1.U2
1.33
1.U2
307.1
305.3
309.6
302.8
30U.9
30li.li
303.lt
299.U
298.0
291.7
298.8
295.2
292.6
301.5
6.65
6.57
6.77
5.15
6.27
5.85
6.20
6.65
6.6U
6.50
5.17
5.80
6.68
6.60
6.52
5.10
6.21
5.65
6.60
6.71
5.21
6.23
6.53
5.71
5.18
6.50
6.63
6.W1
6.25
5-71
6.20
6.I1O
6.18
6.35
5.19
5.67
6.26
5.22
6.19
6.U3
6.35
5.65
6.U2
6.25
6.30
5.17
22
6.19
5.58
6.26
Mar. 1
6.22
6.1i5
5.19
6.35
5.51
6.25
6.30
6.1*3
5.27
8
6.23
5.L3
6.30
6.15
6.25
5.19
6.23
5.28
15
6.16
6.2U
6.25
22
6.33
5.25
5.08
6.38
6.25
•6.30
6.23
5.18
5.37
29
6.22
6.38
5.21
6.25
6.30
Apr. 5
5.27
a/ Financial Times.
"5/
Digitized
forDifference
FRASER between yield on 2-1/2 per cent Consols and share yield.
Jan. h
11
18 25
Feb. 1
.8
15
I.32
1.26
1.01
1.0b
1.08
1.07
0.98
0.96
0.91
0.86
1.01
Share
pric.es
2/
INTEREST A R B I T R A G E , U N I T E D STATES /
i Thursday
C A N AD A
figures
T H R E E - M O N T H T R E A S U R Y BILL RATES
vvVvA/^v^.
RATE D I F F E R E N T I A L A N D F O R W A R D C A N A D I A N D O L L A R
SPREAD IN FAVOR OF CANADA +
A'A
A /
RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R
N i l INCENTIVE IN FAVOR OF CANADA +
I
i
^.
INTEREST ARBITRAGE, NEW
YORK/LONDON
3 - M O N T H TREASURY BILL RATES
RATE D I F F E R E N T I A L A N D
|
' 3 - M O N T H FORWARD STERLING
1
1
1
1
1
RAT E DIP FERE N T I A l . W I T H
"~FOF( W A R D EX (" H A N GE C O V E R
-
Of l o w 10*
\
-
1
I
-
\
YOU \
1 1
M
1 1
J
1959
1 1
1 1
S
D
.
1 I
1 1
M
1 1
J
19 60
S
I 1
D
1 1
«
11
1 1
J
1961
S
11
1 1
D
M
11
11
11
J
1962*
S
O
INTEREST ARBITRAGE
FOR
GERMAN
COMMERCIAL
BANKS
Friday f i g u r e !
jb M 9- NTH
TREASURY
- EURO-DOLLAR
RATE
DIFFERENTIAL
\
l \
V
RATE
BILLS,
DEPOSIT
\
DIFFERENTIAL
AND
.
jj
INTERBANK
LENDING
RATE
AND
RATES
FORWARD
DEUTSCHE
MARK
.FORWARD RATI
I DISCOUNT ( — )
WITH
FORWARD
EXCHANGE
COVER
IN FAVOR OF FRANKFURT ( + )
' \ INTERBANK LOAN RATI
S
1960
Nale:
19 61
Special forward rale available lo German commercial bonks
1962
yjINTEREST ARBITRAGE, F R A N K F U R T / L O N D O N
Friday fig
" 3 - M O N T H TREASURY BILLS A N D
I N T E R B A N K L E N D I N G RATES
RATE D I F F E R E N T I A L A N D
|
- 3 - M O N T H FORWARD STERLING —
SPREAD IN FAVOR OF UNITED KINGDOM Bill
T
R
GERMAN INTERBANK
-
L
r . ~i
: i
I
: i : r
_i
RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R
I960
^
1961
1962
S H O R T - T E R M INTEREST RATES *
-f
tuto-poiut •
IQNDON
t
GERMANY
7
'A
|
j \
CANADA
"A*
3 month treasury bill rates lor oil countries except Jnpon (3 month interbank deposit rote) ond Switzerland (3 month deposit rote)
3 month rate lor U S dollar deposit* in London
^.
[Chorr^l
J L O N G - T E R M B O N D YIELDS
! 1958
I N D U S T R I A L STOCK I N D I C E S *
30*
1962
SPOT E X C H A N G E RATES - M A J O R CURRENCIES A G A I N S T
-
-
U.S. DOLLAR
'
Per
ten I
1_.
Above
V~^
pot
W
3 - M O N T H F O R W A R D E X C H A N G E RATES
A G A I N S T U. S. D O L L A R S
POUND STIRLING
A G A i H S T P O U N D STERLING - L O N D O N
A G A I N S T P O U N D STERLING - L O N D O N
J
A
S
0
D
J
r
I960
M A M
J
J
1961
A
S
0
N
D
J
r
M
A
M
J
1962
J
A
S
0
N
D
@FedFRASER