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UERARi September 11, 1963. 121 | AL MARKET DEVELOPMENTS ABROAD I. II. I. Canada Nine Charts on Financial Markets Abroad Canada; Money and Capital Market Developments in August The tightening experienced in Canadian capital markets from midJune to early August continued until late in the month but market yields on government securities tended to stabilize after Labor Day (see Table 1). A rise in the Bank of Canada's discount rate on August 11 from 3-1/2 to 4 per cent came toward the end of this upward movement in market rates. The Bank of Canada which had lost foreign-exchange reserves in June and July (in the face, of encouraging foreign-trade returns for the first seven months of 1963) reported further losses of $30.5 million for August. Canadian capital and foreign exchange markets were adversely affected by the uncertainties associated with President Kennedy's interest-equalization tax proposal. After that announcement, new issue activity was materially reduced in Canada and flotations of Canadian bonds in New York were temporarily halted. During August, Canadian stock-market prices remained sluggish. Table 1. June 12 Canada; Recent Yields on Government Securities, 1963 (in per cent per annum) , Changes from Actual Yields Aug 28 June 12 Aug. 7 Aug. Aug. Sept. Aug. 28 Sept 4 28 Aug. 7 4 7 Treasury bills; 3-months 6-months 3.19 3.30 3.52 3. 78 Bonds; 1964 1965 1967-68 1975-78 1996-98 3.62 4.07 4.07 4.88 4.90 3. 95 4.52 4.34 5.18 4.99 3.95 4. 64 4.48 5.26 5.06 3. 75 3. 98 40.33 + .48 +0. 18 + . 17 +0.05 + o 03 3.95 4.56 " 4.45 5.26 5.06 + + + + + .00 + .12 -r . 14 + .08 + .07 .00 - .08 - .03 .00 .00 .33 .45 .27 .30 .09 Money market. The yield on three-month Canadian Treasury bills, which had risen from a low of 3.19 per cent on June 13 to 3.41 per cent by late July, continued to rise in August, and closed the month at 3.70 per ; cent. (See Table 1 and Chart 1=) The increase in yields on the six-month bill was somewhat greater, aggregating 65 points from the June low. In both OFFICIAL USE ONLY (DECONTROLLED AFTER SIX MONTHS) OFFICIAL USE ONLY 2 • cases, the major portion of the increase came before, rather tha- following* the rise in Bank of Canada discount rate on August 11, uncovered differential of Canadian over U. S. yields tended tc widen. - The Prime Canadian finance company paper, which had remained at about 3-5/8 per cent for 90-day funds throughout most of June and early July, had climbed to 3-7/8 by late July. Further increases were registered in Augusts to a level of 4-1/4 per cent.. The corresponding rise in prime commercial paper of U.S. finance companies from 3-3/8 per cent throughout July to 3-1/2 per cent in early August created yield differentials in favor of Canadian paper that exceeded the forward discount on the Canadian dollar. Foreign exchange. The Canadian dollar fell below par on July 30 > and the spot rate showed ro strengthening tendency throughout August s closing the month at 92,36 U.S. cents. (See Chart 8.) The three-month forward Canadian dollar shifted from a premium to a decided discount immediately following announcement of the U.. S, "interest-equalization" tax proposal; the discount remained within a range of about 1/5 - 2/5 per cent per annum throughout the month. The forward discount was sufficient for the most part to offset the uncovered premium on Canadian over U.S. three-month Treasury bills, consequently> the covered yield spread was negligible or favored New York during most of the month (See Table 2). Both spot and forward races improved somewhat immediately after Labor Day. A further loss of $30.5 million in official reserves for the month of August brought the cumulative loss over the past three months tc $241.5 million. The full decline since May, when reserves reached the peak level of $2,712 million, was just under 9 per cent by the end of August. Table 2. Canada: U.S. covered Interest Arbitrage for Three months Treasury Bills (per cent per annum) July Canadian bill U.S. bill Spread in favor of Canada 12 26 2 9 August 16 23 30 Sept:. 6 3.35 3.19 3.38 3.18 3.43 3. 21 3,54 3.27 3.63 3,31 3,70 3. 35 3.%0_ 3.38 3.75 3,32 +0. 35 40.32 ^ +0,43 +0 .16 f0. 20 +0.22 +0.27 Forward Canadian dollar (3-month) 0.00 -0.20 -0.20 -0.34 -0.20 -0.34 -0.34 -0. 34 Differential in favor of Canada 40.16 0.00 40.02 -0.07 40.CI 40.09 OFFICIAL USE ONLY +0. 32 40.12 -0 02 OFFICIAL USE ONLY - 3 - Bond market. Yields on Government of Canada medium and long-term issues, which had risen 10-27 basis points in the course of July, extended their advance though generally at a somewhat reduced pace during August. Between July 3 and August 28 bond yields rose in the range of 18-47 basis points. Yields on provincial and municipal issues climbed during this period about 38 to 47 basis points but yields in the private sector on public utility and industrial bonds moved up somewhat less (See Table 3). During the month, more than $500 million of new Government of Canada issues were sold, and almost $250 million of new Provincial issues (See Table 4). Total sales of new Canadian.bonds for 1963 through September 2 are estimated at $7.9 billion, some 24 per cent higher than a year ago, with provincially guaranteed and corporate issues showing the largest rate of increase. Since early Augusta however3 new offerings of bonds in the United States payable in U.S. dollars have been negligible. Table 3. 10 10 10 10 40 Provincials Muncipals Public Utilities Industrials Bond Yield Averages Source: Canadian Bond Yield Averages Aug. 31 1962 June 28 1963 July 31 1963 5.86% 5.98 5.62 5. 67 5.29 5.41 5.42 5.26 5.44 5.59 5.50 5.43 5. 67 5.88 5. 61 5o 49 5. 78 5.34 5.49 5. 66 Aug.,30 1963 McLeod, Young, Weir & Co. Table 4. Sales of New Canadian Bonds (in million dollars) 19 6 3 1 9 6 2 to Sept. 3 to Aug. 6 to Aug. 5 to Sept. 2 Govt, of Canada Provincial Prov'l Guaranteed Municipal Corporation Total of which: Long term —' 5,370 91.8 604. 7 294.4 620.3 6,981.2 5,890 338.6 674. 7 310.0 671.8 7,885.0 4,605 284.8 232.8 298.5 36&8 5,789.8 /5 ,085.0 292.3 243.8 319.9 396.0 "6,337.0 2,417.2 2,796.0 1,961.8 2 ,019.0 a/ over one year. Sources: A. E. Ames & Company, Weekly Bond Sales Summary. OFFICIAL USE ONLY OFFICIAL USE ONLY The rise in Government bond yields since mid-Jura has been accompanied by continuing sales by the general public aggregating some$370 million. (See Table 5.) These sales by private holders have been offset by substantial purchases of bonds by the Bank of Canada ($177 million) and by the chartered banks ($116 million). Sales of Treasury bills by the Bank of Canada and the chartered banks since late July have contributed to recent rises in Canadian bill rates. Table 5. Canada: Net Purchases (+) or Sales (-) of Government Securities ($ million, par value) June 19 - July 24 Treasury Other Bills Bank of Canada Chartered Banks Government Accounts General Public Change in Total Outstanding +32 -38 +52 -45 +118 + 97 - 5 -257 July 24 - Sept. 4 Treasury Other Bills +59 +19 +11 -113 -74 -74 +26 +27 -119 -47 Stock market. The Dominion Bureau of Statistics index of industrial stock prices, which had declined 3—4 per cent immediately following the Canadian Budget Message of June 13 and again after the U.S. policy announcements of mid-July, increased only moderately in August (See Table 6). By the end of the month it had not quite regained the level of early April 1963, while the New York Standard and Poor's Industrials index had registered a 6 per cent increase. The President of the Toronto Stock Exchange announced the establishment-of"a separate Foreign Market, to commence operations on August 22, within which the Toronto Exchange would provide special facilities for the trading of Canadian stocks between American buyers and American sellers. Table 6. Canadian and U.S. Stock Prices, June-August 1963 DBS 76 Industrials New York Standard and Poor 425 Industrial a/ a/ J u n e n 20 140.1 135.3 73. 7 73.0 July jll 18 135.9 130.3 73. 3 ^72.2 A u g u s t 1 8 15 22 29 129.8 129.9 131.5 130.7 131.8 72.4 73.5 74.5 74.9 Average for week ended Friday. Bank Loans and Bank Liquidity. Chartered bank holdings of insured mortgages, provincial, muncipal and corporate securities, as well as general loans outstanding changed little between July 31 and August 28, 1963 (See Table 7). Holdings of Treasury bills alone fell $113 million, while loans OFFICIAL USE ONLY 75.6 OFFICIAL USE ONLY - 5 - to grain dealers were $80 million lower and to instalment finance companies were down $53 million. Partially offsetting these declines in assets was a combined increase of^$79 million in Bank of Canada notes and deposits, as the public reduced its currency holdings. On the liabilities side, personal savings deposits remained practically unchanged, but Government of Canada deposits were down $16g'million. The average liquidity of the chartered banks was somewhat reduced during August. The average cash reserve ratio declined from 8.13 per cent in July to 8.10 per cent in August, while the average liquid asset ratio fell from 17.84 to 16.96 per cent, the lowest level since September 1962. Table 7. 1. 2. Canadian Chartered Banks: Selected Assets and Liabilities June-August 1963 (million dollar or per cent) Reserves a/ Cash Liquid Assets Reserve Ratios a/ Cash Liquid Assets June July Aug. 30 31 28 1172 2571 1188 2488 8.10 18.50 8.13 17.84 1158 ' 2645 Change during mo. July August +14 -74 +16 -83 8.10 16.96 +„ 0 3 66 -. 03 -.88 3. General Loans 6734 6917 6914 4-183 4. Other Assets Treas. Bills Govt. Bonds Total Govt. See's 1318 2475 3793 1280 2529 3809 1167 2545 3712 -38 +54 +16 8364 8434 8433 +70 - 14,750 14,889 14,415 +139 -474 5. a/ Personal Savings Deposits Total Can. dollar Deposits Monthly average. Europe and British Commonwealth Section. OFFICIAL USE ONLY -113 + 16 - 97 1 INTEREST A R B I T R A G E , U N I T E D S T A T E S / C A N A D A T h u r i d o y fig 3 - M O N T H TREASURY BILL RATES "Ml v-vVY .1 .11 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 FORWARD RATE \ !J J _c - T 1 - i ! -- i • l. l .... i. v. ,L_:.-• .1. 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 NET INCENTIVE IN FAVOR OF CANADA +. T I960 1961 1962 1963 INTEREST ARBITRAGE, N E W Y O R K / L O N D O N Friday figures j , Per t e n t -| J I | 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 F O R W A R D S T E R L I N G F O R W A R D RATE __ 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 _J_L I960 1961 196J 1963 per annum I N T E R E S T A R B I T R A G E FOR G E R M A N C O M M E R C I A L B A N K S Friday ligu 3 - M O N T H TREASURY BILLS_, I N T E R B A N K L E N D [ N G RATE A N D - E U R O - D O L L A R D E P O S I T RATES T T GERMAN INTERBANK " T l O i N RATE ~ GERMAN TREASURY 1111$ RATE D I F F E R E N T I A L A N D F O R W A R D D E U T S C H E M A R K ^ I N T E R B A N K LOAN RATE F O R W A R D RATE DISCOUNT ( — ) 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 — NET I N C E N T I V E : 1961 * Note: F A V O R OF F R A N K F U R T ( + ) 1962 Special forward rale available lo German commercial bonks 1963 INTEREST A R B I T R A G E , F R A N K F U R T / LONDON 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 F O R W A R D S T E R L I N G V\G£BMAHTBIASUBVBIUS G t B W A N I N T E R B A N K L O A N BATE V 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 V— — V- SHORT-TERM INTEREST RATES * I v.-Vx . ^ - j T I U R O - D O I U R - LONDOH-V CANADA 3-month treasury bill roles lor oil countries except Jopon and Switzerland (3 month deposit rate^ f I Average rate on bank loons and discounts ) L O N G - T E R M B O N D YIELDS r.A7 W I N D U S T R I A L STOCK I N D I C E S * index ol 2 2 5 indi slnol Tokyo enchonge. V> S P O T E X C H A N G E RATES - M A J O R C U R R E N C I E S A G A I N S T U . S . D O L L A R J f M A M J J A S O H O J F M A M J J A S O H D J F M A M J J p,r A S O H D ten , Abovt par Below par 3-MONTH F O R W A R D E X C H A N G E RATE AGAINST, U S. D O L L A R S DISCOUNT A G A I N S T P O U N D STERLING - L O N D O N PREMIUM + U. S. DOLLAR \ X , . A G A I N S T P O U N D STERLING - L O N D O N -
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