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D I V I S I O N OF I N T E R N A T I O N A L F I N A N C E
B O A R D OF GOVERNORS
1
F E D E R A L RESERVE SYSTEM
H. 13
No. 1U6
April 29, 196U.
/^•CAPITAL MARKET DEVELOPMENTS ABROAD
I. Canada
II# Nine Charts on Financial Markets Abroad
I. Canada: Money and Capital Markets, March-April 1961;
Fiscal developments provided the highlights of a continuing-period
of relative quietude in Canadian money and capital markets. Long-term yields
fluctuated within narrow limits but Treasury bill rates eased in early April.
The emergence of.a slight premium on the forward Canadian dollar in late
March materially widened the covered Treasury bill arbitrage in favor of
Canada to over 30 basis points; some funds are reported to have movqd into
Canadian finance paper. (See Table 5«) On March 16, the Minister of Finance
introduced a featureless budget, primarily notable for a one-third reduction
in the projected deficit. (See Table 1.) From March 31-April 2, there was
a renewal of the continuing dialogue between federal and provincial authorities
concerning their respective sources of fiscal revenues and areas of financial
responsibility.
Table J., Canada:
Fiscal year
ended March 31.
1960
.
1961
,
1962
1963
196U (est'd)
1965 (projected)
Budget Revenues, Expenditures, and Deficits 1960-65
(millions of dollars)
~~~
~
Budgetary- Budget
Revenues Expends. Deficit
#89,8 ,
5617.7
5729.6
5878,7
6207.0
6700,0
5702,9
5958,1
6520,6
6570.3
6892,0
7155,0
U13.1 1
3U0,U
791.0
691,6
685.-0
155:0
Overall
Cash w
Reqrs. ~
375*5
291-3
177,6
1163*9
518*9
895,0
Deficit on
nat, inc,
accts.basis
536
369
221
U0
1
1/ Including various non-budgetary receipts and disbursements t
Source: Budget Papers (196U-65) and Bank of Canada Statistical Summary.
No change in general tax policy.
The Canadian budget statement is noteworthy for its moderation,
particularly in comparison with the budget presented a year ago. With anticipated
expenditures already some 6 per cent in excess of revenues, and high levels of
unemployment largely confined to the Atlantic Provinces and Eastern Quebec, the
OFFICIAL USE ONLY
(Decontrolled after six months)
OFFICIAL USE ONLY
- 2 -
Government decided against proposing any general reduction in income tax
analogous to recent U.S. legislation. The punitive 20 per cent rate of
withholding tax proposed for dividends paid non-residents by foreign-owned
companies has been withdrawn, but the favoralle 10 per cent rate for companies
meeting designated criteria of Canadian ownership continues in effect. There
is no further mention of a Canadian Development Corporation to encourage the
repatriation of Canadian equities; instead, increasing reliance is to be
placed on private investment trusts, pension funds, and life insurance
companies*
Overall cash requirements in 196U-65 are estimated at $895 million,
up considerably from the preliminary figure of $518.9 million for 1963-61;
though much below the $lU63«9 million level of the preceding year, when advances
t{y the exchange fund apcount absorbed $9U3 million. On a national-income
accounts basis, the deficit is expected to be a nominal $U0 million, after
falling steadily from $536 million recorded in fiscal 1962,
Over one-third of the expected budget expenditures is in the defence
($1.6 billion) and public debt charges ($1,0 billion) categories. Personal
and corporate income taxes together will continue to contribute about onehalf of budgetary revenues.
~
Government security yields moderately lower.
^
The gradual hardening of Treasury bill yields that began in midJanuary had run its course by early March* (See Table 2.) In the succeeding
five^weeks, the yield on the 3-month bill recorded a net decline of 8 basis
points, while that on the six-month bill fell even more sharply* Yields on
longer-term bonds, however, continued to stiffen until early April, before
moderate.declines set in.""
The Honourable Walter L, Gordon,. Minister of Finance, announced
details of a cash offering on April lU of SHOO million Government of Canada
non-callable bonds to be dated and delivered .on May 1, 196U as follows:
(1) $325 million, open as to maturity, in the form of
(a) 1 year 2 month 3-1/2 per cent bonds due July 1, 1965
at a price of 98,90 per cent to yield about UrU? per cent
to maturity,
(b) 2 year 7-1/2 month U-l/2 per cent bonds due December 15, 1966
at a price of 99*65 per cent-to yield about U*6U per cent to
maturity, and
(c) 5 year 2 month 5 per cent bonds due July.-1, 1969 at a price
of 99-3/U per cent to yield about 5*05 per cent to maturity;
(2) $75 million of 26 year 5-l/U per cent bonds due May 1, 1990
at a price of 98-5/8 per cent to yield about 5-35 per cent
to maturity =
OFFICIAL USE ONLY
OFFICIAL USE ONLY
- 3 -
Table 2. Canada; Market Yields on Government Securities
Selected Dates January 1963 - April 196U
Dates
Treasury Bills
6-moSo
3-mos0
Sept.
June
Bonds
Jan.
1965
1967-68
1975-78
U.U8
Uo07
U.U8
a.07
5.12
U.88
. 5.27
Sept. 1996March 1998
1963
Jan.
June
Sept.
Oct.
Dec.
196k
Jan.
Feb.
March
April
2
12
11
16
31
.
8
22
29
26
5
12
19
25
1
8
_
3,9k
3.19
3.78
3.5U
3.7U
. U.06
3.30
3.98
3.69
- 3«93
3.80
3.7U
3.77
3.88
3.90
3.85
3.88
3.88
3.87
3.82
3.96
3=92
3.9U
h.02
•
h.06
3.99
U.03
It.OU
lt.02
3.88
'
'
U.60
U.oo
1*20
'
.
U.31
L.25
L.33
U.29
U.U3
'h o3k
. UoU2
U.U8
U.U9
U.Uo
U.U8
U»29
U.U2
U.U3
U<>5o
Uo5i
U.U8
U.56
U.56
U.56
U.61
U.61
U.60
.
5.03
5.10
a.90
5.1U
:5.0k
5.16
5.02
5.17
5.18
5.19
5.20
5.25
5.01
5.01
5.22
5.22
5.25
5.28
5.26
5.oi
5.02
5.oU
;
5.03
5«oU
5.07
5.io
5.07
The new U - l / 2 per cent bonds due December 15* 1966 are an addition
tof $25)0 million of U - l / 2 per cent bonds due December 15, 1966, dated September IS,
1961 and December 15, 1963«
The proceeds of this offering will be used to redeem $360 million of
U per cent Government of Canada bonds maturing May 1, I 9 6 U and for general
purposes of the Government of Canada0
The Minister stated that the Bank of Canada has agreed to acquire
$2^0 million of the new 5 year 2 month bond in exchange for an equal par value
of 3-3A per cent bonds maturing September-1, 196$. This would be in addition
to the cash offeringo He noted that this exchange with the Bank of Canada
would reduce the amount of the outstanding September 1, 1965 maturity to $750
million„ This 1965 maturity was originally issued in the amount of §1267 million
and this transaction with the Bank of Canada is the second sbep in a programme
designed to reduce the amount of the ultimate refunding at maturity to more
manageable proportions »
The differential yields on Canadian securities issued in Canadian
markets over comparable Canadian issues in the U.S. had previously shown some
indications of widening in the period immediately following the U.S. interestequalization tax proposal. In four typical instances, however, the differential
in recent weeks has slipped slightly below peak levels attained at various
earlier dates. (See Table 3.)
OFFICIAL USE ONLY
OFFICIAL USE ONLY
Table 3. Differential Yields on Canadian Securities in U.S. and Canadian Markets,
'
'
(in per cent per annum)
'
19 6 3
Nov.
July
20
3
Government of Canada
Canada (1975)
United States (197k)
Differential
Province of Ontario
Canada (1981)
5ll9
UiU3
+• 76
5;27
luU6
+• 8 1
U,U7
+.78
'
SiLO
'
•
5;L5
'
5iL5
16
Sl21
U®63
+.69
5*19
UiUl
+.78
+.58
5;17
U.5o
+.67
5:21
'
5^7
'
5iL8
5tL0
U;U3
U*57
lu56
Quebec Hydro
Canada (1982)
United States ( 1 9 8 U )
Differential
'
5;3L
U;62
+.72
'
5;63
U;68
+•95
'
$;68
Ui68
+1®00
Toronto Metro
Canada (1982)
United States (1979)
Differential
5;3L
U;UU
+.90
'
5;52
Ui 55
+.97
'
5;52
U;58
+•9k
United States (198U)
Differential,
,+«78
+.80
April
Feb.
27
U;30
L;99
1 96 U
March
"23™
12
Jan.
+*92
9
5; 2$
k*56
_U«56
+@89
+.85
'
5^70
1*;65
+1.05
5;68
U;65
+1*03
'
5;68
U;69
+*99
' ^
5;68
1:67
+1.01
'
5;<9
l+i 58
+lo01
5:59
UiU9
+1.10
5;59
lw5l
+1.08
.
5:59
U56
+lo03
Ui
+@88
+• 8U
6^
Source 1 Nesbitt, Thompson & Co. Ltd. Financial Notes.
Little change in other bond yield averages.
At the end of March, the McLeod, Young, Weir index of bond yields
remained at 5s5%, unchanged from the preceding month. ' (See Table. U» ) A
small decline in the provincial, list was offset by lesser increases for
public utilities and industrials, whereas the normally volatile municipal
groups held steady, At its present level, the overall index remained 7 percentage points below its 'recent peak, attained at the end of August 1963o
Dominion-provincial fiscal negotiations renewed.
Particularly difficult problems of fiscal relationships between the
"-Federal and Provincial governments came up for renewed discussion at a threeday conference at Quebec City, March 31-April 2, 1961;. At issue are conflicting
views concerning appropriate sources of funds and distribution of responsibilities
among the respective jurisdictions, particularly as they involve shared-cost
welfare programs aimed at creating nation-wide standards of performance in the
face of uneven fiscal capacity of the various provinces. Programs are of t.o
types: (a) those which provide current welfare services, of which by far the
largest is hospital insurance, estimated to cost the federal Treasury over $L00
million in fiscal 1965> and (b) conditional grants in support of various capital
programs, such as the trans-Canada highway, which are an inevitable element of a
flexible federal policy to promote general economic activity and higher levels
of employment.
OFFICIAL USE ONLY
OFFICIAL USE ONLY
•
End of
Month
- 5 -
Table L.
Canada: I4.O Bond Yield Average
10
10
Ablic
10
10
Industrial
Utilities
Municipal
Provincial
Uo
Average
1962
April
July
5.19
5.87
5.38
6.17
5.17
5.7U
5.15
5.77
5.22
5.89
$.36
5.39
5,29
5.67 .
5.51
5.53
5.5L
5,51
5.39
5.88
5.66
5.67
5.U3
5.U9
5.3k
5.61
5»U8
5.50
5.29
5.U2
5.26
5.U9
5»U0
5.39
5-Ui
5.U5
5,32
5.66
5.51
5.52
5.58
5.61
5,57
5.72
5,71
5.71
5.55
5.57
5.U8
. 5.U9
5.52
5.57
5.59
5.59
+*38
-*30
+.33
-.Uo
-.17
+.05
+.37
'+*37
-.30
1963
January
March
May
August
October
December
1961
January
February
March
Change since
April 1962
July 1962
August 1963
October 1963
•
-.10
+•06
+*Uo -*17
••-.oU
+.09
-.25
+.03
+.12
.
-„07
+,08
Source: McLeod, Young, Weir and Company.
The Quebec Premier detailed a plan for contracting-out of over 60
shared-cost programs involving federal payments to the provinces of over $1
billion in fiscal 1965> while wishing to remain a party to various of those
programs that, though involving capital expenditures, are necessarily terminal
in character, Quebec also jeopardized the future of the Canada Pension Plan
by insisting on its intention of moving ahead on a provincial basis, Quebec's
submission to the Conference re-emphasized its support for adoption of a
"25-25-100" tax formula to cover the provincial portion, respectively, of
personal income, corporate income, and inheritance taxation.
A rather bland communique, issued at the termination of the Conference,
(a) indicated agreement that the federal government should immediately enter
into negotiations with provinces concerning possible contracting-out from
programs of a permanent nature involving fairly regular annual expenditures;
and (b) "gave consideration" to the immediate establishment of a tax structure
committee, that would deliver an interim report before the end of 196U.
OFFICIAL USE ONLY
OFFICIAL USE ONLY
- 6 -
Subsequently, on April 20, the Prime Minister announced'an agreement
on new tax-sharing arrangements that provides the basis for a new contributory
Canadian Pension Plan,, applied uniformly across Canada, ' The federal government
will make available to the^provinces an additional 2 per cent in personal
income tax abatement for the fiscal year- 1965-66 (estimated to represent some
$60 million)5 and a further 2 per cent in 1966-6?« Under existing agreements,
the provinces receive 18 per cent of personal income tax collections9 about
22 per cent of corporate i/,..:- : me taxes, and 75 per cent of federally-collected
succession duties,
New bond flotations below preceding year,
According to reports of A,E» Ames & Company5 by the end of March new
bond flotations in 1<?6U had reached a cumulative total of $906,33. million$ as
contrasted with the figure of. $1320-91 mj 21i.cn tc the corresponding date a
year ago* During this periodhowever - tne amount cf capital'supplied• from
Canadian sources alone a r. m a M y rc - e f-lightiy./ by contrast with the decline
of $UU5 million of f1otatidns m U,S. currency* Other information suggests that
the current, rate of new borrowing in the U»S, may be .somewhat higher than these
figures imply.
Stock markets active and strong»
Beginning iri-ear \ Ma > ' e D»B,S. index cf *t-c )k market prices
hit record peaks' for six > uc c r<° w^eks, rising from s. weekly average of
1U8 »0 to 158-3- Texas Gu; i Su :hu
3 nnoxmcsmexr-.- of.; zna.jor mineral discovery
in the Timmins: Ontario- arec p rre^t feverish activity on the Toronto Stock
Exchange; where a re-'.crd tu<*c cl
er 28 mi;Ir on sne.res changed hands on
Friday; April I 7 .
Government of Canada depc-itc &?,- :Y-b~ erer banks rema^.. high.
The total money supply • a-?. measured by chartered -bank, deposit
liabilities and total currency cut-side bank.? ^mounted to $26,9U2 million
by mid-April-. The increase :Ver the past year was 8 per. cent-. A goodly
portion of the rise continued to be ioic-biix-'-eo. in Government of Canada
deposit balances . which were acwr < L cm 3
o t x cr :r; February 2br _96U
to $721 million by April'
cut coi» => v i r -*tp y w l th a level cf $97 million
at the end of April 29o j Oic =ira. g ge <= d
d s : l the chartered banks.-,
on a seasonally ad jus tea ha^i - avp -gel Z u " I < n :.n March I96U as
compared'with §6607 mi , j; on a year age • box r.ne period Apr: 1 7 22 .'.y6U the chartered banks cash ratio averaged 8 - r s . : cent and liquid asset ratio.
i? 02 per cent
Stability continues in f crei.gr exchange quotation -
-
The range in variation ci> the u S dc j J. ar que fata on on Canadian
currency, which has been ex:eedir\g ..y -~rrcw since T he beginning of the calendar
year, has been even mr re 1 : ,tu ted 'i; - v: g Ma r: 1' rV.i v ne firs': half of April -
OFPIClAlJfSR W 1 Y
OFFICIAL USE ONLY
Table 5«
- 7 -
Large Issues Sold During March 196U
(in millions of dollars)
March
Anglo American
Molybdenite Mining
Corp,
'
5
6-1/2%
March 1, 1973
10
5-3/1%
February 1, 1 9 %
Toronto-Dominion Tower Ltd
First Mortgage Sinking Fund Bonds 20
5-
April 1, 1989
^Simpsons Acceptance Co, Ltd,
Secured Debentures
10
5-3/1%
April 1, 198U
h
-16
5-3fh%
5-3/U
•April 1, 1966-70
April .1, 198U
Canadian Breweries Ltd,,
Sinking Fund Debentures
25
5-1/2%
April 1, 1989
Province of Ontario
SO
Alberta Municipal
Financing Corp.
^Simpsons Ltd, Debentures
Dominion Tar 1 Chemical Co, Ltd,
Debentures
S-l/k%
%
April 15, 1973
April 15, 198it
15
3-1/2%
April 15, 1965
East Coast Smelting &
Chemical Co, Ltd,
5
IS
5.55*
5.85%
March 15, 1968-72
March 15, 1986
Niagara Finance Co, Ltd.
10
5-3/U%
April 15, 198U
Source : A,E» Ames & Co,,Weekly Bond Sales Summary,
Possibly duplicating items, though listed separately in source.
Cffered rates in the New York market have held very close to the vicinity of
92,55 U,S» cents, despite the announcement of a further loss of $76.8 million
in official reserves during March, the fourth successive month of minor decline:
End of month
November
December
January
February
March
1963
1963
196U
196U
196U
Cdn. $ in U.S. funds
(U.S. cents)
92.76
92.53
92.57
92.57
92.5U
OFFICIAL USE ONLY
Cdn. official Reserves
(million of U.S. dollars
2,631,0
2,595.0
2,582.a
2,5U2.3
2.U65.5
OFFICIAL USE ONLY
-
8
-
Incentive for arbitrage inflows increases.
The small discount on the forward Canadian dollar that prevailed from
mid-January through mid-March reduced the covered,interest arbitrage on threemonth Treasury bills to as little as .10 per cent per annum as of January 23.
The margin widened to . 3U per cent in late March, as the forward discount was
converted into a comparably small premium. By April 16, the net incentive had
narrowed somewhat, despite some upward pressure on the forward rate, as the
Canadian bill rate declined in keeping with a lower rate on U.S. Treasury bills,
(See Table 6,)
Table 6. Canadian-U.S. Arbitrage Computations on
Tforee Month Paper, Selected Dates
(per cent per annum)
*
Cdn.
Bill
N.Y.
Treasury Bill
.
U.S,
Spread Fwd,
Canada
Bill
Favor Canada Bill
N.Y.
Canada Dollar Diff'l.
13
3.#
3.U9
+.10
3
2U
3.66
3.66
3.51
3.U9
3.51
3.55
3.55
3.53
3.53
3.52
3.51
. 3.U6
3.U6
+ .15
+ .17
+ .17
Dates
Week
of
1963
Dec.
196k
Jan.
Feb.
March
April
lU
26
5
12
19
26
2
9
16
3.68
3.79
3.81
3.75
3.73
3.79
3,78
3.76
3.66
+ .2U
+.26
+ .22
+ .20
+ .27
+ .27
+ * 28
+ .2D
+ .10
+ .07
-.07
-.OU
-.oU
-.oU
- «oU
+.oU
+ .07
+ .07
+ .07
+ .07
European and British Commonwealth Section.
+ .22
+ .10
+ .13
+ .20
+ .22
+ .18
+ .2U
+.3U
+ . 3U
+ «35
+ .27
Prime Finance Company Paper
Cdn.
.. Cdn,
Cdn.
Paper
Paper Fully
U.S. Paper
Cdn. $ Hedged
Paper Diff'l.
U.25
U.20
U.20
3.85
3.90
U .02
u.125
U.125 U.02
U.02
U.125
U.125 . U . l ? <
U.125
U.125
U.125
U.125
-U.125
U.125
U.125
U.125
U.25
U.oo
U.oo
3.75
3,875
3.75
3.75
3.75
3.875
3.875
3.875
3.875
3.875
3.75
3.75
,U5
+ .325
+ .10
+.15
+ .27
+ .1U5
+.1U5
+ .25
+ .25
+ .25
+ .25
+ .375
I N T E R N A T I O N A L M O N E Y M A R K E T Y I E L D S FOR U . S . D O L L A R I N V E S T O R S
3 - M O N T H E U R O - D O L L A R DEPOSIT VS. CERTIFICATE OF DEPOSIT^
|
YIELDS
E U B 0 - D 0 U A 8 DEPOSIT / " \ |
-
-
U . S . C E R T I F I C A T E O f DEPOSIT
—i
xn
I
1
1
1
DIFFER!ENTIAL: EU R O - D O L L A R OVER
U . S . CERTIFICA TE OF DEP OSIT
1
1
1
1
1
1
1
i
i
N E W YORK OFFER RATES O N SELECTED 3 - M O N T H I N V E S T M E N T S
Friday f i g i r t s
TREASURY BILLS- F u l l y H e d g e d
w
COMMERCIAL PAPER.Fully H e d g e d
nui
' C A N A D I A N FINANCE COMPANY
ru«vn«3i
^
1
1
1
1
INTEREST A R B I T R A G E , UNITED STATES /
CANADA
3 - M O N T H TREASURY BILL RATES
UNITED STATES
RATE DIFFERENTIAL A N D F O R W A R D C A N A D I A N DOLLAR
SPREAD IN FAVOR OF CANADA +
r
i
i
1
1
1
1——i
1—~i
RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E COVER
I I' i
NET I N C E N T I V E I N F A V O R OF C A N A D A
Il I l I
M
J
I I I I I LLJ..I 1 I J_LL
S
D
1961
M
J
1962
S
D
+
1I
M
r
U. 1 I
J
1963
S
D
I I
M
I I II I
J
1964
S
1
D
w
INTEREST A R B I T R A G E , N E W Y O R K / L O N D O N
Friday
fig
3 - M O N T H TREASURY BILL RATES
U . K . LOCAL A U T H O R I T Y D E P O S I T S
RATE D I F F E R E N T I A L A N D -3 - M O NTH F O R W A R D STERLING
~ SPREAD I N FAVOR O f L O N D O N
~ 7
RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E C O V E R
1961
1962
1963
1964
INTEREST A R B I T R A G E FOR G E R M A N
3-MONTH
COMMERCIAL
TREASURY BILLS, I N T E R B A N K
EUROTDOLLAR
DEPOSIT
LENDING
RATES
BANKS
RATE A N D
I
EURO-DOLLAR LONDON
I
|
GERMAN TREASURY I l l t S
RATE D I F F E R E N T I A L
AND
FORWARD
DEUTSCHE MARK
FORWARD RATI DISCOUNT ( - )
TREASURY BILLS
RATE D I F F E R E N T I A L W I T H
NET INCENTIVE:
I
FORWARD
EXCHANGE
COVER
IH FAVOB Of FRANKFURT
INTERBANK LOAN RATE
\
A
•
SHORT-TERM INTEREST R A T E S *
EURO-DOLLAR • LONDON
I ond Swilxerlond 13 month depolil roll.)
3 month role I or U S dollar de poiil« in London
.
V A
LONG-TERM B O N D YIELDS
/X'XZ'V,
->U I I I I I ] M I I I 1 I I I I I I I I I I 1 I I I 1 1 1 I 111 I 1 I 1 I I 1 I I I I I 1 t I 1 1 I I I I IJJJ 3
L U
M
111
I I I I I- I I- 1 i J _ l - U J J - L i _ L J
I I I I I I LLI
I I I I I I I I I I
I I I I I I I I I U J
2
195 8=10 0
I N D U S T R I A L STOCK INDICES
Rotio
scolt
<50
350
V-xV/
1
f
150
7
'
:
SO
1961
1962
1963
* New leries. Swiss Bonk Cor por «l iori indu tlr ml Mock indu*
Japan index of 2 2 5 industrial ond. olln»r slocks If odt*d on llin Tokyo e *c Itontji*
1964
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
—
c.nt
Above
par"
Above
par
,pp
Above
par
3 - M O N T H F O R W A R D E X C H A N G E RATE.
Friday ligum
A G A I N S T U.S. DOLLARS
A G A I N 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
PREMIUM +
FRENCH FRANC
V963
1964
@FedFRASER