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August 17, 1973 The big news on the Treasury front is the lack of heavy financing needs. Normally, in the second half of the calendar year, the Treasury makes very substantial demands on the securities markets. Last year, it was $16 billion, and the year before, $21 billion. This year, in contrast, the Treasury is likely to play only a modest role in the markets, largely as a consequence of its much-im proved budgetary position. Fiscal 1973 wound up with a $14billion deficit, but the budget was within $2 billion of balance in the January-June period, and the Ad ministration actually plans to bal ance its books in the new fiscal year. Inflation is a notably suc cessful tax collector, given the progressivity of our income-tax struc ture, and thus the budget benefited in recent months from an unanticipated inflow of tax reve nues, brought about by the infla tionary boom in income and profits. Another contributing factor was the Administration's success in holding expenditures well below the $250billion ceiling set in January. Labor Department outlays were close to $1.0 billion below the January esti mate, because of unexpectedly low spending for unemployment bene fits; defense spending was below estimate by roughly the same amount, because of reductions in personnel and operations; and HEW outlays were $1.6 billion below estimate, because of unanti cipated reductions in spending for social services and coal miners' “black lung" benefits. Foreign buying The Treasury's cash-management position benefitted not only from this upsurge in revenues, but also from the substantial increase in for eign purchases of U.S. Government securities early in the year. Fol lowing the international monetary turmoil in February and March, for eign central banks converted U.S. dollars obtained in dollar-support operations into Treasury securities, both marketable and nonmarket able. Foreign ownership of the pub licly held debt thus increased by almost $7 billion in February and by $2 billion more in March. (These acquisitions were double the amount sold off by domestic com mercial banks in their attempt to accommodate domestic loan de mands.) For a brief period, foreign purchases resulted in a scarce supply of bills and hence a lower level of bill rates, but this situation then reversed itself as the exchange markets eased and as official for eign institutions began to sell off bills in large amounts. Still, foreign participation in the Treasury securities market has in creased substantially over time, as a consequence of the substantial in crease in foreign dollar holdings caused by the steady succession of U.S. payments deficits, along with the increasing degree of interna tional capital-market integration. Last year, foreign purchases ac counted for $8.4 billion of the $14.6billion increase in the privately held Treasury debt, or five times as much as the increase in debt holdings by the commercial banks. Altogether, (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. the foreign share of the total pri vately-held public debt has jumped from 7 to almost 24 percent over the past decade. middle of the past decade. Between 1965 and 1972, the average maturity of the debt declined from 5 years, 4 months to only 3 years, 3 months. Extending out The Treasury opened its relatively light financing schedule for the cur rent half-year period with a $4.5billion refunding, which was high lighted by the attempt to place a moderate amount of long-term se curities into private hands. The re funding offer included $500 million of a 7V 2-percent 20-year bond, along with $2 billion in 73 A-percent 4-year notes and $2 billion in 35-day taxanticipation bills. The Treasury's efforts over the years to extend the average maturity have been partly stymied by the statutory 4V4-percent ceiling on the bond coupon rate, which of course has frequently lagged behind the market rate on Treasury bonds. The attempts to solve the problems cre ated by that limitation have taken several forms. The long-term bond resulted in a yield to maturity of about 8 percent, but despite that yield only $260 million of the issue was placed in private hands, partly as a result of investors' caution in this period of rapidly rising interest rates. The issue thus was not as successful as two earlier bond issues this year, which placed a total of $1.3 billion in 20-25 year maturities. Nonetheless, the Treasury recently has managed rather well to extend the average maturity of the public debt. In particular, by offering is sues of modest size, it has avoided placing unreasonable demands on the long-term market. The improve ment has been moderate—about a two months' increase in the average maturity of the debt— but at least it has reversed the prolonged down trend which began about the In the early 1960s, the Treasury conducted several advance-re funding operations, by offering holders of Government securities the opportunity to exchange their holdings for longer-term Treasury issues. In 1967, Congress increased (from 5 to 7 years) the maximum allowable maturity on Treasury notes, which are not subject to the 4V 4-percent coupon ceiling. In fol lowing years the Treasury relied increasingly on such note financing, since long-term Governments could be sold only at a prohibitive dis count during that period of highinterest rates. Then, in 1971, Con gress ruled that the Treasury could offer up to $10 billion in bonds outside the 41 /4-percent ceiling-rate limitation, and that set the stage for this year's offering of three long term issues. Looking ahead With the August refunding out of the way, Treasury demands on the capital markets are expected to be light for the remainder of the year, especially in view of the boomrelated upsurge in tax revenues. The only major refunding on the schedule is a $4.3-billion bond ma turing in mid-November. The lack of Treasury demand thus should ease the market pressures from this source. In contrast to the Treasury's rela tively easy position, the field is littered with a large number of major offerings by Federal agencies. For example, the Federal Home Loan Bank System has recently an nounced plans for a $1.8 billion offering, on top of the $3.4 billion raised in three major offerings in the first half of the year. (Looming large in this offering is the 93 Apercent $700-million issue maturing in February, which is certain to compete with Treasury bills.) Long term agency issues at the end of July were yielding 30-40 basis points more than long-term Governments. This spread has narrowed recently, however, and the new 20-year Treasury issue may cause the spread to narrow even further. The corporate-bond market has been having problems recently, even though there has been a scarcity of new issues in the market for most of the year to date. Corpo rate prices fell sharply after the Treasury announced plans to offer its 20-year issue; some Aa and Aaa utility issues fell 5 to 6 points in July and early August, resulting in yields as high as 8.44 percent. Moreover, despite the scarcity of new supply, the corporate market is increasingly sensitive to the rapid rise in short term rates, exemplified by increases of close to Vi percentage point in commercial-paper and CD rates in a single week in late July. In addition, the recent rise to 91 percent in the /4 bank prime-loan rate suggests the extent of the continuing pressures on the business borrowing side. The recent bond-market slump cannot be explained in terms of market demand, in view of the fact that Treasury and corporate require ments are so small at present. Rather, short-term rates now ex ceed long-term rates far more than in earlier tight-money periods, and thus provide an attractive reward to investors who temporarily wish to invest in the short-term end. In addition, increasing disinterme diation has forced thrift institutions and life-insurance firms to sell both long-term and short-term securities to meet their commitments, in cluding mortgages for the S&L's and contractual policy loans for the life insurers. Heavy commercial-bank lending to industrial firms and more recently to the liquidity-hungry nonbank institutions also has cre ated market pressures, since it has forced the banks to sell off their Governments and aggressively seek out CD funds. Above all, infla tionary expectations have by now become well entrenched in the cal culations of both lenders and bor rowers, thereby creating pressures for higher rates and lower security prices. Joseph Bisignano uoiSuiqseM . gem • m bm bh uo Sbjo • e m jo j! ^ . • EpeA9|vj . oi]ep| e u o zu y • e>)SE|v rp ir a flj Tunsg ° • Jj| B 3 'O D S p U B J J U B S ZSZ O N llW UHd S/ SX S/ /V a iv d 3DVlSO d s n 1IVW SSV13 1SMIJ s> s p s u g ai F ® F J 5 H ® U H !p ® d I® 0 H p jr a ® 8 ® ^ [ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Loans adjusted and investments * Loans adjusted— total* Com m ercial and industrial Real estate Consum er instalment U.S. Treasury securities Other securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD 's) Weekly Averages of Daily Figures Member Bank Reserve Position Excess reserves Borrowings Net free (+ ) / Net borrowed ( - ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases ( + )/ Net sales ( - ) Transactions: U.S. securities dealers Net loans (+ ) / Net borrowings ( - ) Amount Outstanding 8/1 /73 Change from 7/25/73 + + + + + 73,998 57,148 20,256 16,827 8,492 5,219 11,631 71,789 21,314 597 48,365 17,778 21,631 6,181 10,820 - + + + - + - + Change from year ago Dollar Percent + 10,204 + 10,432 + 3,510 + 2,872 + 1,336 1,010 + 782 + 8,896 + 1,554 269 + 7,202 424 + 5,858 + 880 + 5,357 259 374 111 57 43 59 56 335 19 231 195 99 305 118 219 + + + + + - + + + + - + + + 16.00 22.33 20.% 20.58 18.67 16.21 7.21 14.14 7.86 31.06 17.50 2.33 37.14 16.60 98.06 Week ended 8/ 1/ 73 W eek ended 7 / 25 / 73 71 199 - 128 23 189 - 166 + + 167 - 151 -1,006 - - - 75 11 Com parable year-ago period 25 18 7 198 in c lu d e s items not shown separately. Inform ation on this and other publications can be obtained by callin g or w riting the Adm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702, Digitized for F R A ^ p r a n c is c o , California 94120. Phone (415) 397-1137.
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