The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
' H. 13 No. 68 BOARD OF GOVERNORS mT H T " 6 Bi?ANRYl- ' ,NANC JUJ. 2 3 OF THE F E D E R A L R E S E R V E SYSTEM 1962 J u l y 20, 1962 F E D E R A L RESERVE B A N K O F RIG H M O ] CAPITAL MARKET DEVELOPMENTS ABROAD I. II. III, I. Germany Foreign Exchange Marks t s i n May and June Nine Charts on F i n a n c i a l Markets Abroad Germany; Money and C a p i t a l Markets i n May and June Conditions i n German money and c a p i t a l markets continued to t i g h t e n during May and June, Both s h o r t money r a t e s and long-term bond y i e l d s advanced f u r t h e r , German i n t e r e s t r a t e s ( i n per cent per annum) have r e c e n t l y been: 1 9 January 6 March Treasury b i l l s (60/90 days) Inter-bank loan ratess Day-to-day Three-month 1 - l A " 2—3/I4. 2 - 3 / 8 - 3-7/8 2-3fh - 3 - 1 / 8 2—7/8 - 3~l/U Bond y i e l d s : Mortgage Industrial Public a u t h o r i t i e s T o t a l bonds 5.8 5«9 £.9 5.9 2 . May June July 2.13 2.25 2.38 1 - 7 / 8 - 3-l/U 2-3/h- - 3-7/8 3 — 3-1/8 3-1/8 60O 6»0 5.7 5.6 5.8 5.8 5.8 5.9 The r i s i n g tendencies i n s h o r t - t e r m money r a t e s , which culminated i n a l a t e June r a t e f o r day-to-day money close t o h per c e n t , r e f l e c t e d two f a c t o r s ^ (a) the attempt of the Bundesbank t o s t a b i l i z e t h e s h o r t - t e r m a s s e t s held abroad by the commercial banks by making s h o r t German y i e l d s more a t t r a c t i v e and (b) the reduced l i q u i d i t y of the banking system evident since l a s t March. To encourage the holding of l i q u i d a s s e t s w i t h i n Germany, the Bundesbank r a i s e d i t s s e l l i n g r a t e on Treasury b i l l s by 1/8 per cent on June 6 and again on July 16. At t h e same t i m e , the Bank r a i s e d t h e c o s t s t o German banks of swaps f o r D-marks against d o l l a r s to 3/lj. per cent f o r one t o two months and t o l / 2 per cent, f o r two t o s i x months. These developments ° i n the German money market help t o e x p l a i n the mid-July r i s e in the Eurod o l l a r d e p o s i t r a t e i n London although other f a c t o r s (including t h e r i s e i n the U.S. Treasury b i l l r a t e ) a l s o contributed to t h i s r i s e , (See Chart 5)» NOT FOR PUBLICATION DECONTROLLED AFTER SIX MONTHS NOT FOR PUBLICATION The reduced l i q u i d i t y of the commercial banks* which f i r s t became apparent i n mid-March when day-to-day money r a t e s were momentarily a t U per cent, has been produced by two basic f a c t o r s i (a) the substantial expansion i n the note c i r c u l a t i o n and (b) the strong cash position of the Federal G o v e r n m e n t S e a s o n a l tightening of the money market occurred i n midJune, as in mid-March, when heavy tax payments were due. More s i g n i f i c a n t l y , the Federal Government's cash p o s i t i o n t h i s year has been more r e s t r i c t i v e i n i t s impact on bank reserves than had been expected, in p a r t because subs t a n t i a l Federal payments abroad are included in budget expenditures< In addition, the Lander continue to show s i g n i f i c a n t cash surplusesWeakness i n the bond market reappeared during June, and the Federal Government's new issue carried a 6 per cent coupon, disappointing those observers who had hopd& t h a t German y i e l d s would move downward. As l a t e as May 10, the Reconstruction Loan Corporation had offered a 5-3/1; per cent coupon and some market observers had hoped a t t h a t time t h a t a 5=1/2 per cent coupon could be established for a prime market name. The DMUOO million ($100 million) Federal loan was quickly oversubscribed on July 6 and i s reported to have ' a t t r a c t e d buying by investors outside Germany, Stock prices f e l l lU per cent i n June but recovered more than half the loss in the f i r s t - half of July, The volume of stock placings so f a r t h i s year has been s i g n i f i c a n t l y l e s s than in similar periods of the past several years In May German net external reserves (combined holdings of Bundesbank and the commercial banks) rose $72 million b u t , because of heavy commercial bank r e p a t r i a t i o n of a s s e t s abroad in June, the $l5U million increase i n o f f i c i a l reserves i n June provides no r e l i a b l e clue to the net change i n reserves f o r the month. During May the D-mark remained a t around 2$ ,02 - 25.03 ILS. cents but moved up to 25.06 by June 22, and to 25*10 cents on July 18, Germany's trade surplus 9 seasonally a d j u s t e d , was only $62 million in May compared with the f i r s t quarter average of $109 millionr Money market «• After a sharp increase in the market eased s l i g h t l y u n t i l the second half of because of the demand^Tor funds during the period r a t e s rose rapidly to 3-7/8 "per cent a t the end of end of May r a t e s , (See Charts U and 5«) Recent short-term money in Frankfurt were: Day-to-day money money r a t e s i n e a r l y June, the month. Then, apparently of tax payments s day-to-day June s or about double the per cent per annum r a t e s on 3-month loans 2h - 31 1-7/8 - 2-1/U 3-1/8 1 8 16 2k 2-3/k 2-3 A 3 3-l/U - 3 7/8 - 3-3A - 3-7/8 3-1/8 3-1/8 n.a. n,a. - 7 - 15 - 23 - 30 NOT FOR PUBLICATION NOT FOR PUBLICATION In June, as i n March, the commercial banks r e p a t r i a t e d s u b s t a n t i a l amounts of short-term assets held abroad and also rediscounted commercial paper a t the Bundesbank, On June 6 the Bundesbank raised i t s s e l l i n g r a t e by 1/8 per cent t o ' 2-1/8 f o r Treasury b i l l s of l e s s than 60 days and by 1/8 per cent to 2-l/U on b i l l s of 60 t o 90 days* Again on July 16 b i l l r a t e s were increased another 1/8 per c e n t . The current r a t e on 60-90 day b i l l s i s thus 2-3/8 per cento These actions give a d d i t i o n a l inducement t o the banks to hold the primary l i q u i d a s s e t s i n Germany, The c e n t r a l bank hopes to reduce commercial bank switching of primary reserve funds t o and from f o r e i g n money c e n t e r s . Commercial bank funds again flowed out i n July a f t e r the tax period had passed. To slow down t h i s outflow, the Bundesbank on July 16 raised the cost to German banks of forward d o l l a r s into D-marks t o 3/U per cent f o r one to two months and t o 1/2 per cent for two to s i x months, ~ Bond markete Bond prices generally weakened during most of June and new issues were being offered a t a 6 per cent coupon. (See Chart 6 0 ) By July 6 bond prices had recovered to the end of May l e v e l . In May gross bond placings a t issue prices (DM971 million) were DM209 million more than i n April (DM762 million)„ For the f i r s t f i v e months t h i s year gross placings a t issue price t o t a l DM5,U26 m i l l i o n . Gross Security Placements a t Issue Value by Month or by Monthly Average f o r given Quarter (in millions of D-Marksj "Occasional" borrowers' bondssIndustrial Public a u t h o r i t y Foreign i s s u e r s Other bonds a / Total occasional borrowers' bondss Mortgage and communal bonds Total gross bond placements b / Gross share placements I 1961 II III IV I 39 Mil 16 78 8L 50 79 101 117 53 8h 112 31h 32 89 581 211 liil 213 526 1,107 k 525 k6k 736 605 35U 263 Total s e c u r i t y placements a t issue value 352 716 130 1962 Mar. Apr. 75 8 259 139 130 69 217 U3 5U7 126 328 U86 665 597 U3U m 1,212 723 762 971 185 126 230 322 l,U6l 999 957 8L6 1,397 819 992 3^93 a / Mostly bonds of specialized c r e d i t i n s t i t u t i o n s , e s p e c i a l l y i n 1961, b / Includes medium-term notes (Kassenobligationen). NOT FOR, PUBLICATION NOT FCR PUBLICATION - k - For the same period l a s t year gross placings were DMU,?U3 million, including almost DMlsl6U million borrowed by the Government f o r special development aide Firms are using debt financing much more heavily than i n the past few yearso This apparently i s necessary because of reduced retained earnings i n many business l i n e s , For the six months ending May 1962 i n d u s t r i a l issues t o t a l e d DM62U milliono For the twelve months ending November 1961 i n d u s t r i a l issues t o t a l e d only DM166 million, "• On July $ s a DMUOO million Federal Government bond was offered with a 6 per cent coupon for 20 y e a r s . The issue was immediately oversubscribed, The 6 per cent coupon was considered a setback to attempts to bring down the general level of German long-term i n t e r e s t rates„ Apparently the Government believed the market n e i t h e r receptive enough, broad enough, nor accustomed enough for such a large Government issue to attempt a lower coupon„ This decision i s reported to have been influenced by the f a c t t h a t the Treasury expects t o have t o come to the market for funds in e a r l y autumn, near the end of the year and possibly again in January 1963. For 1962 as a whole i t may possibly issue DM1,000 million of s e c u r i t i e s , Stock market. The Frankfurter Allgemeine a l l - s t o c k p r i c e index f e l l on low volume 23 per cent during JunA, from a high of 175 t o 152. A market r a l l y began a t the month end and continued into July, On July 9 the index was 162, down four points from the July high several days before . The o f f i c i a l I n d u s t r i a l s index declined 8 per cent from I4.78 on June 8 to U39 on June 290 (See Chart 7») Recent selected Frankfurter Allgemeine a l l stock index values were 1 April May 3 210.12 high 1 10 21 28 29 201.07 high 190,73 178,30 165.91 15>.1U low June 1 8 15 25 27. 29 175,07 high 172.35 166,51 155.73 l5lo61i. low l56o86 July 1 5 17 157,79 166.56 high 16U.55 A DM200 million new issue by Farbwerkhoechst e a r l y i n June and t a l k of r e s t r i c t i n g loans against s e c u r i t i e s are reported as two noticeable f a c t o r s influencing the d e c l i n e , Gross stock placings a t issue value in May were DM322 m i l l i o n . June data i s not yet available» Gross placings in the f i r s t f i v e months of 1962 t o t a l DM1,106 m i l l i o n . In the same 1961 period they were DM1,U20 m i l l i o n . The gross placings table has been revised to r e f l e c t actual savings rounded up and not the par value of the new i s s u e s . The discrepancy between par or "nominal" value and "issue" value usually has been s i g n i f i c a n t , well over 20 per cent and sometimes over 100 per c e n t , NOT FOR PUBLICATION NOT FOR PUBLICATION -5. ~ Foreign t r a d e , r e s e r v e s , and the d o l l a r exchange r a t e . Preliminary f i g u r e s for May show a f u r t h e r decline i n the s e a s o n a l l y a d j u s t e d t r a d e s u r p l u s . I t was $62 m i l l i o n , down from $137 m i l l i o n i n A p r i l and $168 m i l l i o n i n March, The higher imports r e p o r t e d i n 1962 r e f l e c t e d i n p a r t poor weather l a s t f a l l and t h i s spring which i n j u r e d crops and was a t l e a s t p a r t i a l l y r e s p o n s i b l e f o r January-May a g r i c u l t u r a l imports being 36 p e r cent above the l e v e l i n January-May 1961. Imports of f i n i s h e d manufactured goods were up 26 per cent i n January-May above the year-ago l e v e l 0 However, increased purchases of m i l i t a r y equipment and s u p p l i e s s which are expected t o t o t a l during t h i s and t h e next f i s c a l year $1.25 b i l l i o n . , are included i n t h i s c a t e g o r y . Recent f o r e i g n t r a d e d a t a (monthly or monthly average s s e a s o n a l l y a d j u s t e d i n m i l l i o n s of U.S. d o l l a r s ) a r e : Calendar year I960 I96I I II 1961 III "~TT" 1962 Maro. Apr. " I Exports 951 1,0# 1,017 1,077 1,060 1,165 l,110p Imports 8U8 917 852 936 911 960 99k 970 l,028r l,0l|8p Surplus 103 135 195 lUl 151 98 109 168 137r 62p r = Revised. 1,058 ' 1,103 1,138 W p = Preliminary. In May o f f i c i a l r e s e r v e s increased $h8 million^ and gross s h o r t - t e r m f o r e i g n a s s e t s of commercial banks increased $2U million„ Combined r e s e r v e s thus increased $72 m i l l i o n i n May. In June o f f i c i a l r e s e r v e s increased $l5k m i l l i o n . Although no o f f i c i a l monthly f i g u r e s have been y e t published f o r the changes i n commercial bank f o r e i g n short-term a s s e t s , s u b s t a n t i a l r e p a t r i a t i o n s occurred. Recent changes i n Herman r e s e r v e s ( i n m i l l i o n s of U.S. d o l l a r s ) have been: I II 1961 III IV I Mar. .+ 68 =14.63 +232 -207 + 25 Bundesbank- +300 -282 Comm. banks a / +U79 +hOk - 7k -127 +601 +122 -6UU -359 +138 Total +799 b/ -570 1962 Agr. Ma£ June - 56 +U8 +15U - 36 *2h n.a. - 92 +72 a / Balances with f o r e i g n banks and money market investments abroad<> b / A f t e r s p e c i a l debt prepayments of $776 m i l l i o n t o the United S t a t e s and""the United Kingdom. The t o t a l would be a reserve ga i n of $898 m i l l i o n , i f a d j u s t e d f o r these transactions<, NOT FOR PUBLICATION NOT FOR PUBLICATION - 6 - The Canadian drawing of $80 million worth of Deutsche Marks apparently reduced o f f i c i a l reserves of foreign exchange by an equal amount and r e g i s t e r e d no reserve asset increase = Accordingly, i f there had been no drawing, the o f f i c i a l reserve increase would be over $23U r a t h e r than the actual $l5U m i l l i o n . The D-mark rose s l i g h t l y against the d o l l a r during the f i r s t half of June, but moved up rapidly i n e a r l y July* Recent Friday quotations f o r the D-mark (in U.S„ cents) have been: June 1 8 15 22 29 25,025 25.030 25.Oil 25.061 25.061 July 6 13 18 25.100 25.119 25.101 The Bundesbank a t t r i b u t e s t h i s recent d o l l a r weakness to events outside Germany, namely, r e p a t r i a t i o n of Swiss c a p i t a l from New York, the r i s e in the price of gold on the London market, continued discussion of United States economic problems and suspicion because the United States s t a t i s t i c s f a i l e d to show gold losses for several weekse II. Foreign Exchange Markets i n May and June A study e n t i t l e d , '-Foreign Exchange Markets and Reserve Developments— May and June," by Rodney H. Mills and Division S t a f f , dated July 17, 1962, i s available upon application to s Europe and B r i t i s h Commonwealth Section^ Room 22U6 Division of I n t e r n a t i o n a l Finance Federal Reserve Board Washington 25, D. C, III. Nine Charts on Financial Markets Abroad Chart Chart Chart Chart Chart Chart Chart Chart 1 2 3 h 5 6 7 8 I n t e r e s t Arbitrage«, United States/Canada Interest Arbitrageg New York/London I n t e r e s t Arbitrage f o r German Commercial Banks I n t e r e s t Arbitrage, Frankfurt/London Short-term Bond Yields Long-term Bond Yields I n d u s t r i a l Stock Indices ? Spot Exchange Rates Major Currencies Against U.S. Dollar Chart 9 - 3-month Forward Exchange Rates - NOT FOR PUBLICATION Germany: Selected Money Market Yields and Exchange Rates (per cent per annum) 3-mo. Eurod o l l a r de3-mo. i n t e r posits bank loans London Frankfurt 3-mo, U.S. $ Spread i n t o Marks 3-mo. Treas. b i l l s i n favor uomiito London bank£/ Market U.K. Ger. U.S. 1961-oct. 6 Nov. 10 Dec. 22 3.25 3.31 3.88 a.00 3.63 3.75 -0.75 -0.32 +0.13 -0.25 -0.25 1962-Jan. 5 Feb. 16. Mar. 30 3.63 3.UU 3.69 3.00 2.75 2.63 +0.50 +0.56 +1.06 May 3.# 3.81 3.75 3.69 3.63 3.88 3.69 3.75 3.81 3.13 3.13 3.13 3.13 3.13 +0.L3 +0.68 +0.62 +0.56 +0.50 h 25 June 1 8 15 22 29 July 6 13 16 -0.60 -0.73 -1.30 6.00 5.31 5.28 2.13 2.00 2.00 2V31 2.L7 2.60 -0.25 -0.50 -0.25 -0.95 -0.62 -0.35 5.W1 U-3U ho3k 1.88 1.88 2.00 2.7U 2.83 2.75 -0.25 -0.25 -0.25 -0.25 -0.25 =0.25 -0.25 -0.25 -0.25 -0.50 -0.32 3.97 -0.35 3.69 -0.39 3.69 -0.35 3.69 -0.35 3.66 - 0 . 2 1 3.78 -0.31 3.8L -0.L3 3.81 -0.51 3.81 -0.65 2.13 2.13 2.13 2.25 2.25 2.25 2.25 2.25 2.25 2.38 2.73 2.69 2.69 2.65 2.71 2.7U 2.90 2.93 2.96 — a/ Bundesbank special r a t e f o r 2 to 6 month deposits• Germany: Selected Loan, Deposit and Security Rates (per cent per annum) 6-12 mos deposits Bond y i e l d s 5-1/2% Public Railway author1958-83 i t i e s Comm. bank loans£/ savings Time 1959-March Dec. 7.25 8.50' 3.25 3.25 2.50 3.2$ •5.U 5.9 1960-March Dec. 8.50 8.50 3-75 U.50 3.2S 3.50 1961-March Dec. 8.00 7.50 U.25 3.SO 1962-Jan. Feb. Mar. April May June 7.50 7.50 7.50 7.50 7.50 3.50 3.50 3.50 3.50 3.50 Share yields Yield gap 5»6 6.2 3.22 2.19 2.U 6.3 5.9 6.U 6.2 2.27 1.96 U.l U.2 3.25 2.75 5.8 6.0 5.9 6.0 2.11 2.U9 2.75 2.75 2.75 2.75 2.75 5.8 5.7 5.6 5.6 5.7 5.8 5.9 5-7 5.6 5.6 5.8 2.57 2.61 2.65 2.77 3.23 — a / Approved c r e d i t s on current account. — — — • U.o ^ 3.7 3.5 3.3 3.1 3.0 2.8 2.6 — INTEREST Thursday ARBITRAGE, UNITED STATES / CANADA figures THREE-MONTH TREASURY BILL RATES Per VV! RATE DIFFERENTIAL SPREAD AND FORWARD IN F A V O R Of CANADIAN DOLLAR EXCHANGE COVER CANADA + A/ RATE DIFFERENTIAL WITH FORWARD NET I N C E N T I V E IN F A V O R Of CANADA + .J .1.1.1.1.1 L..1. P . r an A INTEREST ARBITRAGE, NEW YORK/LONDON Friday figures 3-MONTH Pir 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 RATI DIFFERENTIAL WITH FORWARD IXCHANbe COVER AVOI )»to Of Ntw t o i l tint pir annum INTEREST ARBITRAGE FOR GERMAN COMMERCIAL BANKS Friday figures 3.MONTH . TREASURY EURO-DOLLAR BILLS, DEPOSIT INTERBANK RATES LENDING [ RATE T r H G E R M A N I N T E R B A N K L O A N RATE RATE DIFFERENTIAL AND FORWARD DEUTSCHE MARK INTERBANK LOAN RATE /!>• RATE - DIFFERENTIAL WITH NET I N C E N T I V E : . ,Ai. FORWARD EXCHANGE COVER IN F A V O R OF F R A N K F U R r>\ I N T E R B A N K L O A N R A T E $ Note: Special forward rale available to German com mere lal bonfrt $ y r I N T E R E ST A R B I T R A G E , Friday FR A N K F U RT / I O N D O N figures 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 \ A GERMAN INTERBANK RATE D I F F E R E N T I A L A N D | - 3 - M O N T ' H FORWARD STERLING S P R E A D IN F A V O R OF U N I T E D . K I N G D O M B i l l i i IRATE D I F F E R E N T I A L W I T H I - J FORWARD 1 i zr EXCHANGE COVER GERMAN INTERBANK 19 60 19 61 1962 SHORT-TERM INTEREST RATES * iUEO-DOlUB • LONDON". m v'V. / 1 CANADA hlf-v—-j SWITZEIIAND 1956 1960 3-month Ireoiury bill roles (or oil counlriei except Japan (3-month interbank deposit role) and Switzerland (3 month deposit role) . , 3-monlh rare lor U 5 dollar deposits in London LONG-TERM BOND YIELDS UlAP II M I II 1 I I I I I I I 1 1 II I I I I I I I I I I I I I I 11 I I I I I I I I ll I 1 I I I I Ub-lUl 2 -jJ -Lii l II l I l I l I I I I I i I l I 1 I 5l l I I l I I I I I I ll 1 I I 1 I I 1 I 11 I I II I I I I 1958 1959 ^ 1960 1961 1962 2 INDUSTRIAL STOCK INDICES RS 1959 CANADA 1961 1962 S P O T E X C H A N G E RATES - M A J O R CURRENCIES AGAINST U.S. DOLLAR GEUMMAARK fUWCH FRANC IfLGIAN FRANC JAPANESE YEN 1962 3-MONTH AGAINST FORWARD U, s E X C H A N G E RATES DOLLARS t SWISSFRANC AGAINST AGAINST POUND POUND STERLING - L O N D O N STERL N G - LONDON FRANC A BELGIAN DISCOUNT- FRANC
@FedFRASER