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* •«& .y^ * y^ December 28, 1938 SHORTAGE OF TREASURY BILLS During the past three weeks the Federal Keserve System Open Market Account has had considerable difficulty in replacing maturing bills. This difficulty is likely to be even greater this week and early in January. All bills are now selling on a no yield or a premium basis, and last week not all par bids were accepted, and part of the issue was sold at a premium. Aside from the general fact that the supply of Treasury bills has been considerably reduced during the year, there are special reasons for the current shortage. One is purchases by individuals for tax avoidance; another, purchases by corporations and individuals of bills from banks at the request or suggestion of the banks. in order to reduce the banks1 assessment for the Federal Deposit Insurance Corporation. In January the situation will be aggravated by a special demand for bills for tax avoidance in the State of Illinois. On December 14, 21, and 28 the System was not able to replace all its maturing bills with bills and had to buy an increasing amount of notes On the latest date it had to buy $30,000,000 of notes out of a total of 149,000,000 of maturities. Further replacements by notes will become increasingly difficult with out disrupting the market for notes, which is already very high. Page 2 The System, therefore, faces the alternative of either (1) allowing its total account to decline, or (2) purchasing bonds in partial replacement of maturing bills. (1) It would not be good policy at this time to reduce the System Account, because this would be interpreted as a restrictive action, when no such action is desired or contemplated. It certainly would not look sensible to have reduced reserve requirements by ^750,000,000 last spring and no?; to cut down the System Account in order to absorb some of the resulting excess reserves. (2) To purchase bonds in the market at this time would also have disadvantages. Bond prices are. high, and certainly require no support, and a further advance may result sooner or later in a wave of profit-taking by present holders. If the System's holdings of short-time securities are allowed to decline substantially the System will not be in as good a position to support the long-time bond market when it needs support. In view of all these considerations, it would be highly desirable if the Treasury could increase the volume of bills in the market by raising the weekly offerings to, say, $150,000,000. This action would be helpful not only from the point of view of the System Account, but also from the point of view of the banks and of the money market as a whole, which is clearly suffering from a shortage of available shorttime material. ^ - December 28, 1933 S&mt&S OF TR£AS8Ey BILLS During tfet phst three weeks the Federbl Reserve System. Open Market Account has had considerable difficulty in replacing itMltij billt. This difficulty is likely to be even gre&ter tfcis week and early in January, All bills are now selling on • no yield or a premium basis, and lest week not all par bids were accepted, and part of tne isaue was sold at a premium. Aside from the general fact that the tmj&kf of Treasury bills has bees considerably reduced during the year, there are specie! reasons for tfttt current shortage. One is purchases by indiriduals for tax eToidance; another, pur-eto&ses by corporstions and individuals of bills froKi banks at the request or ©uggestioa of the banks in order to re- duce the bsnke* assessment for the Fa&er&l Deposit Insurance Corporation, In January the situation will be eggrair«iteti by a sp©cisl demand for bills for tax &Toidance in tlie State of Illinois. On December 14t 21, and 28 the System was not ebl@ to replace all its maturing bills with bills end had to buy &n incite*.:sing amount of r.otee» On tne latest date it bad to buy 130,000,000 of notes nut of & total of $49,000,000 of maturities. Further replacements by notes will become increasingly difficult wititout disrupting the market for notes, wfaicfc is already very high. The System, therefore, faces the altenactiTe of either (1) allowing its total account to decline, or (2) purchasing bonds in partial replacement of maturing bills. (1) It would not be good policy at this time to reduce the System Account, because this would be interpreted as a restfictive action, when no such action is desired or contemplated. It certainly would not look sensible to have reduced reserve requirements by $750,000,000 last spring end mm to cut d o m the System Account in order to absorb some of the resulting excess reserves. (2) To purchase bonds in the market at this time would also have disadvantages. Bond prices are high, and certainly require no support, and a further advance rcay result sooner or later in a wave of profit-tuking by present ho-ders. If the by-stem's holdings of short-time securities are allowed to decline substantially, the System will not be in as gpod a position to support the long-time bond market when it needs support. In view of all these considerations, it would be hi^ly desirable if the Treasury could increase the volume of bills in the market by raising the weekly offerings to, say, 1150,000,000. This action would be helpful not only from the point of view of the System Account, but also from the point of view of the banke and of the sioney market as a whole, which is clearly suffering from a shortage of available shorttime material.
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