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123
FEDERAL RESERVE BANK OF NEW YORK
Recent Developments in the Capital Markets
Pressures have mounted again in the nation’s capital
markets after having eased in late 1966. Corporations and
state and local governments have borrowed record amounts
in the capital markets so far this year, and in recent weeks
yields on long-term obligations have approached—and in
some cases exceeded—last summer’s peaks. The prospect
of very substantial Treasury financing in the second half
of the year and a growing belief that the rate of economic
advance will accelerate sharply have weighed more and
more heavily on the markets and have led to some anticipa
tory borrowing.
These developments emphasize the need for prompt
action to reduce the Federal budget deficit significantly. A
substantial tax increase would go far to relieve the tensions
that have been building up in the capital markets. At the
same time, a tax increase would help assure that the re
newed growth of the economy is held to a sustainable pace.
of business loan growth this year in part reflects corporate
restructuring of debt in the wake of very heavy borrowing
from banks in 1966. According to data from registration
statements filed with the Securities and Exchange Commis-
Chart I
COMMERCIAL AND INDUSTRIAL
BUSINESS INVESTMENT AND FINANCING
Billions of dollars
Billions of dollars
70
B U S IN E S S F IN A N C E
Despite the general slowdown in the economy, business
firms have had to raise a substantial volume of funds dur
ing the first half of 1967. While the need for funds for
inventory investment and for new plant and equipment
declined since the beginning of the year, internally gener
ated funds (retained earnings plus capital consumption
allowances) also fell, with the result that corporations have
had to continue to rely heavily on outside sources of financ
ing (see Chart I ). In addition, corporate needs for funds
were augmented during the first half of the year by accelera
tion of tax remittances to the Treasury. The speedup in
collections of social security contributions, withheld income
taxes, and excise taxes in the first quarter drew off an esti
mated $650 million of business working capital, and the
continued acceleration of the corporate income tax pay
ment schedule added an estimated $4.3 billion to business
tax remittances in April and June.
So far in 1967, businesses have exhibited a preference
for obtaining funds through the capital markets rather than
from the banking system. Through the first half of 1967,
bank loans to business have grown at a slower rate than
the 14.3 per cent gain recorded in 1966. The reduced rate
1
Pu blicly offered
corporate bonds
Annu<al rates
*4
IT T T m m l llllA
1958
1959
1960
1961
1
20
1
Privately placed
corporate bonds
1
l i .Li
1962
1.1 ! i m i 1111ii 1
1963
1964
1965
1966
1967
Note: First quarter 1967 figures are preliminary estimates.
o Indicates net total of bond and stock issues for the fourth quarters of 1963 and 1964,
third quarter 1965 through first quarter 1966, and fourth quarter 1966.
Sources: Board of Governors of the Federal Reserve System;Securities and
Exchange Commission.
124
MONTHLY REVIEW, JULY 1967
sion, market borrowing for repayment of bank debt rose
to 28.6 per cent of new bond financing in the first quarter
of 1967 from 21.6 per cent for the same period of 1966,
and preliminary data indicate a further increase in the pro
portion during the second quarter of 1967. The shift to
capital market financing was facilitated in the early part
of the year by the decline in market rates that followed
the move to monetary ease late in 1966. The decline in
market rates made borrowing through the issue of capital
market instruments relatively attractive, since bank lend
ing rates dropped less during this period.
Gross new public and private issues of corporate bonds
during the first six months of 1967 are estimated at $10.6
billion (compared with $8.4 billion in the same period last
year), a record amount for any half-yearly period. During
the first half of 1967, as in the second half of 1966, the
amount of new bonds publicly offered has substantially
exceeded the amount of new bonds privately placed with
insurance companies and other institutional investors. The
last half-year period in which the volume of publicly offered
bonds exceeded that of private placements was the first six
months of 1962 (see Chart I ). Individuals and mutual sav
ings banks lent important support to the long-term cor
porate bond market by purchasing a sharply increased
amount of corporate bonds in the first three months of
this year.
With the sharp rise in the volume of new issues, and
expectations of even heavier demands on the markets in
the second half of 1967, long-term corporate yields have
reversed the decline which began in the fourth quarter of
1966 and have approached—and in some cases have ex
ceeded—the postwar highs recorded late last summer. The
market has at times been quite congested with new issues
and, partly as a result, the spread between underwriters’
offering rates on new corporate bonds and the market rates
on outstanding corporate issues has been widening. Never
theless, the spread remains below the levels attained in the
third quarter 1966 period of peak interest rate pressures.
Business firms appear to have recently placed somewhat
more reliance on the equity markets as a source for long
term funds, although this source of financing continues to
be marginal. Estimated new issues of common and pre
ferred stock (net of repurchases and retirements of out
standing issues) increased in the first quarter of 1967 from
the final quarter of 1966. With bond yields rising (see Chart
I I ), corporations have turned increasingly to the issuance
of convertible bonds, which, because they can be converted
to equities, bear lower interest rates than comparable bonds
which lack this feature. Moreover, convertible bonds may
appeal to a wider spectrum of investors than regular debt
issues.
In addition to having raised a record volume of funds
in the long-term capital markets in the first half of this
year, corporations have turned increasingly to the com
mercial paper market as a source of funds. Issues of
commercial paper by nonfinancial corporations had risen
sharply during the second half of 1966, as business firms
strove to find a source of funds alternative to the use of
commercial banks. Through the first five months of 1967,
nonfinancial corporations appear to have expanded their
outstanding volume of commercial paper at a somewhat
faster rate. This partly reflects the lower cost of raising
funds in the commercial paper market as compared with
the cost of borrowing at commercial banks.
C O N S U M E R FIN A N C E
Consumer spending continued to grow through the first
quarter of 1967, but at a slower rate than disposable per
sonal income. As a result, personal savings rose to 6.5 per
cent of disposable income, %o percentage point above the
average savings ratio in the 1953-66 period. Total con
FEDERAL RESERVE BANK OF NEW YORK
sumer spending on durable goods absorbed a lower propor
tion of income in the first quarter of the year than in 1966,
and the growth of consumer credit—which usually
finances a major part of such expenditures—slowed during
this period (see Chart III). During the second quarter, it
appears that there was only very modest further growth
of consumer borrowing as the demand for durables re
mained relatively weak. However, if the recent pickup in
automobile sales is maintained, the growth of consumer
credit should accelerate once more.
The thrift institutions—savings and loan associations
and mutual savings banks—which are the major suppliers
of home mortgage loans have experienced sharply in
creased savings inflows so far in 1967. These large in
flows reflect the rise in consumer savings and the reduced
rates on competitive savings instruments, such as short
term marketable securities. During the first five months
of 1967, savings and loan associations recorded a $4.1
billion net inflow of funds, in sharp contrast to the $932
million inflow recorded during the comparable period of
1966. Similarly, mutual savings banks have also experi
enced greatly increased inflows of funds thus far in 1967.
A substantial portion of the enlarged savings flows to
Chart HI
INDIVIDUALS’ BORROWING PATTERNS
Billions of dollars
Billions of dollars
15
10
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
* Seasonally adjusted.
Sources: Board of Governors of the Federal Reserve System; United States.Department
of Commerce;' Federal Reserve Bank of New York.
125
the thrift institutions has not moved into the mortgage
market, reflecting in part a less rapidly expanding supply of
immediately available mortgages. Savings and loan associa
tions repaid $2.5 billion of their borrowings from the Fed
eral Home Loan Banks in the January-May 1967 period, in
contrast to a net increase in borrowing of $711 million dur
ing the same period last year. In addition, all thrift institu
tions have been rebuilding their liquidity through the
purchase of short-term securities, and mutual savings banks
have purchased a large amount of long-term corporate se
curities. Nevertheless, during the first five months of 1967,
these institutions have expanded their mortgage holdings on
a seasonally adjusted basis at a rate more than twice that
recorded during the last half of 1966. Rates on FHAinsured thirty-year mortgages declined during the first four
months of 1967, but edged upward again in May (see
Chart II ), reflecting rising rates throughout the long
term capital markets.
G O V E R N M E N T FIN A N C E
Despite a continuing rise in revenues, state and local
governments have made record demands on the capital
markets thus far in 1967. These borrowers marketed $4.1
billion (gross) of new bond issues in the first quarter—
the largest quarterly volume on record—and are estimated
to have marketed an additional $3.5 billion in the second
quarter. Commercial banks, after having sharply reduced
their net purchases of state and municipal bonds in 1966,
have lent important buying support to this market thus far
in 1967. Market yields on tax-exempt bonds declined dur
ing the early weeks of the year but have subsequently
moved up sharply.
In contrast to state and local government financing, total
Federal Government financing has been smaller in the first
half of 1967 than in the same period a year ago. Total
Treasury and agency financing in the first half of 1967 has
resulted in an estimated increase of $0.3 billion in out
standing securities, compared with an increase of $4.7
billion in the first six months of 1966.
The first half of the calendar year is traditionally a
period of debt redemption by the Treasury, and estimated
net redemptions of direct Treasury obligations through
June are expected to exceed $3.0 billion, compared with
redemptions of $1.0 billion in the same period of 1966.
At the same time, net agency debt outstanding is esti
mated to have fallen by over $500 million in the JanuaryJune period, as opposed to the net increase of $3.5 billion
over the comparable period of 1966. The Federal National
Mortgage Association increased its outstanding indebted
ness at a much slower rate in the first six months of the
MONTHLY REVIEW, JULY 1967
126
year, reflecting its declining mortgage purchases. The
sharply increased growth of deposits at savings and loan
associations has enabled these institutions to repay a large
portion of their borrowings from the Federal Home Loan
Banks. Consequently, the Federal Home Loan Banks re
duced their own outstanding debt by $2.3 billion in the
first six months of the year, compared with a net increase
in borrowing of $1.1 billion in the same period of 1966.
Sales to the public of participations in Federal loans have
risen moderately in the first half of this year, with the
total amounting to $2.9 billion, up from $2.2 billion in
the first six months of 1966. An additional $900 million
of participation certificates was sold directly to United
States Government trust funds during the first half of
1967.
Yields on some outstanding long-term Government
bonds have recently surpassed the peaks recorded in late
1966, reaching the highest levels in forty years. With yields
remaining substantially above the AVb per cent ceiling on
interest rates for Government securities with maturities
exceeding five years, Treasury financing operations have
been confined entirely to short- and intermediate-term is
sues. Consequently, the average maturity of the public
debt has been shortened from four years eleven months
in June 1966 to an estimated four years seven months as of
the end of June 1967.
R O L E O F T H E B A N K IN G S Y S T E M
Net funds raised by domestic nonfinancial borrowers
other than the Federal Government grew at a substantially
increased rate during the first quarter of 1967, but com
mercial banks supplied a greatly reduced percentage of the
funds obtained by these borrowers. In the first quarter
of 1967, bank credit supplied only 15 per cent of total
household, business, and state and local borrowing. This
ratio has declined steadily from the peak level of 48 per
cent in the first half of 1965 (see Chart I V ). In view of the
continued sluggishness of borrowing from banks in April
and May, it is doubtful that commercial banks accounted
for a significantly increased percentage of total funds sup
plied to the private sector during the second quarter.
Reflecting both the reduced pressure of demands from the
private sector for bank financing and their desire to rebuild
liquidity, commercial banks acquired large amounts of
Federal Government securities. As a result, in the first
quarter, the commercial bank share of total credit—which
includes funds supplied to the Federal Government—moved
up sharply from the reduced levels of the third and fourth
quarters of 1966.
Total bank credit appears to have grown at a seasonally
Chart IV
PRIVATE SECTOR BORROWING
Billions of dollcrs
Billions of dollars
SOURCES OF PRIVATE NET FUNDS:
PERCENTAGE DISTRIBUTION
1958
59
60
61
62
63
64
65
66
67
Note: Figures are semiannual averages, seasonally adjusted at an annual rate. Latest
data plotted are preliminary estimates for the first quarter of 1967'.
^ Households and nonprofit organizations, nonfinancial businesses, and state
and local governments.
Source: Board of Governors of the Federal Reserve Sytem.
adjusted annual rate of 11 per cent over the first six months
of the year, almost twice as large as the annual rate of
increase recorded for the year 1966. Measured on a sea
sonally adjusted basis, commercial banks purchased $3.1
billion of Government securities during the first five months
of 1967, in contrast to their liquidation of $2.7 billion of
these securities during the same period of 1966. In the
first quarter of 1967, commercial banks purchased an
estimated 68 per cent of the net increase in state and local
securities, up markedly from the depressed 30 per cent re
corded in 1966. Preliminary data indicate that this pro
portion has remained high during the second quarter as
well.
While bank holdings of securities have increased sub
stantially so far this year, loan growth has been slower than
in 1966. Business loans in the first six months of the year
are estimated to have risen at a rate below last year’s. The
FEDERAL RESERVE BANK OF NEW YORK
net extension of real estate loans has remained markedly
below last year’s rate of growth. Consumer loans have also
grown more slowly thus far in 1967, reflecting the weak
ness in demand for consumer durable goods.
Commercial bank time and savings deposits are esti
mated to have grown at a seasonally adjusted annual rate of
17 per cent during the first half of the year, more than
127
double the rate of increase recorded in 1966. Corporations,
which had reduced their holdings of time deposits by $2.1
billion (seasonally adjusted) during the last half of 1966,
added an estimated $2.5 billion to their time deposits dur
ing the first three months of 1967. These deposits were
attractive to investors, given the relatively low yields then
available on short-term Government securities.
The Business Situation
Business activity appeared to be gaining momentum as
the economy moved through the second quarter. While
the effects of the inventory readjustment continue to be
felt in some sectors of the economy, the most recent data
indicate a widespread strengthening of demand forces.
May saw a strong and broadly based rise in new orders for
durable goods, a further gain in residential construction,
and—according to the advance report—the third consecu
tive increase in retail sales. At the same time, the latest
survey of capital spending plans pointed to renewed growth
in such outlays in the second half of the year. Prices rose
on a broad front in May. The consumer price index climbed
0.3 per cent in both April and May after several months
of relative stability. Food prices moved up for the first time
in nine months, while prices for other nondurable com
modities, durable goods, and services all showed substan
tial increases. Rising prices of farm and food products
pushed the wholesale index up by 0.5 per cent in May,
and preliminary data point to an increase of about the same
magnitude in June.
manufacturers assembled new cars at a seasonally adjusted
annual rate of about 7% million units, matching the April
pace. However, partly because of a strike in the rubber
industry, the overall production index for autos and related
products dropped back a bit after having risen sharply
in the two preceding months. The aggregate output of
other goods for consumer markets was virtually unchanged
in May. Television set production rose during the month,
a gain which contrasted with the steep decline during
the earlier months of 1967. May witnessed a further
substantial advance in the output of defense equipment.
In the course of the first five months of 1967, the index
of defense equipment production rose at an annual rate of
about 24 per cent, which represented a slight acceleration
from the already rapid growth recorded in 1966.
The process of adjusting business inventories to bring
them into better alignment with sales has played a major
role in dampening the pace of industrial production this
year. Trade firms have made some actual reductions in the
level of their stocks, while manufacturers have added to
their inventories at a slower rate. In May, the increase in
manufacturers’ inventories was the smallest in more than
P R O D U C T IO N , IN C O M E , A N D
two years and was only about half as large as the average
CONSUM ER DEMAND
accumulation of the two preceding months. Though some
Industrial output eased slightly further in May. The further adjustments may occur in the trade sector, the prob
Federal Reserve Board’s seasonally adjusted production lem of excessive inventories now appears to be centered in
index declined by Vi percentage point to 155.5 per cent of manufacturing. At the close of the first quarter, accord
the 1957-59 average (see Chart I ). Output of industrial ing to a Commerce Department survey taken in May,
materials continued to slacken and business equipment almost one third of total inventories in manufacturing
production also fell somewhat further, while overall pro was in the hands of firms that felt their stocks were too
duction of consumer goods changed little. Automobile high relative to sales and orders. The survey also found,
128
MONTHLY REVIEW, JULY 1967
by the large rise in May of new orders for durable goods.
Following some months of virtual stability, the flow of
orders increased in May by a strong IV2 per cent. The
advance was partly due to a sharp rise in orders received
by the defense-oriented industries—that sector accounted
for about one third of the overall rise—but sizable gains
were widespread throughout other lines of durables man
ufacturing. Machinery and equipment producers reported
a third consecutive improvement in orders volume, with
bookings in May reaching the highest level since De
cember. The general expectation that the investment tax
credit and accelerated depreciation allowances would be
restored retroactive to March probably accounted for
some of the sharp increase in new orders. At the same
time, total shipments of durable goods rose appreciably
in May, recouping most of the April decline. The ship
ments volume was nevertheless substantially less than the
large inflow of orders, and the backlog of unfilled durables
orders expanded by a very large $1 billion. This was the
first increase this year in the orders backlog, which had
dropped by almost $2 V2 billion in the first three months
of 1967 and then held about unchanged in April.
The continued sluggishness in May of activity in manu
facturing and in some lines of construction was reflected
in some further easing of demands for labor. This, in turn,
dampened the growth of personal income. Total wage
and salary payments in manufacturing were down for
the second month in a row, with a strike in the rubber
industry accounting for about half of the decline. In
the private sector as a whole, employee income was about
unchanged, but government wage and salary disbursements
continued to grow at a substantial rate. Overall income
growth in May was boosted by a sizable rise in payments
for medical care under the social security program. The
increase in total personal income, while double the April
rise, was nevertheless somewhat smaller than the monthly
average in the first quarter.
Preliminary data indicate that retail sales volume rose
however, that manufacturers were quite optimistic about in May for the third consecutive month. The expansion of
sales prospects in the second and third quarters. In ap sales from February to May, at an annual rate of more
parent reflection of this optimism, producers reported that than 9 per cent, represented the first sustained advance
they were planning further additions to inventory in both in nearly a year. The May rise was centered in sales of
quarters, though at a rate slower than that of the first nondurable goods. In the durables sector, outlets selling
quarter and far below the pace in the second half of last motor vehicles and related goods reported a further in
year. Thus, there may well be some additional cutbacks crease in dollar volume, but sales in other durables lines
in the rate of inventory accumulation and even further moved lower. Sales of new domestically produced cars,
liquidation in some lines of business. These adjustments, which had recovered strongly in March and April, held
however, are likely to be considerably smaller than those about unchanged in May at an annual rate of approxi
in recent months and should therefore exert less drag on mately IV2 million units. A renewed surge in June raised
economic activity.
sales by nearly 15 per cent to an annual rate of more than
The near-term outlook for production was brightened 8 V2 million units.
129
FEDERAL RESERVE BANK OF NEW YORK
B U S IN E S S IN V ES T M E N T P L A N S AN D
C O N S T R U C T IO N
The results of the latest survey of business capital out
lay plans are in line with earlier indications that such spend
ing will show renewed strength in the second half of 1967,
following a dip in the first two quarters (see Chart II).
According to the May survey by the Commerce Depart
ment and the Securities and Exchange Commission, busi
ness spending on plant and equipment in 1967 will total
$62.4 billion, a modest gain of 3 per cent over the 1966
figure. The survey finding represents a downward revision
from the 4 per cent increase indicated by the previous
Commerce-SEC survey taken in February. Virtually all
this downward revision reflected a reduction in estimated
outlays in the first half of the year in nonmanufacturing
industries. Outlays in the third and fourth quarters com
bined are now expected to average 5 per cent, at an annual
rate, over the first half.
Total capital spending in the first quarter of 1967 is
reported to have been at an annual rate of $61.7 billion,
more than $1 billion under the fourth-quarter rate. At the
time of the February survey, it was anticipated that firstquarter outlays would be only very slightly below the
fourth-quarter rate. Following an expected small further
decline in the April-June quarter, renewed growth is
planned, with capital spending running at a $63.2 billion
rate in the second half.
Within the total for all businesses, manufacturers plan to
expand plant and equipment spending by 3 Vi per cent
this year. A majority of individual manufacturing indus
tries anticipate that their capital expenditures in 1967 will
be larger than last year, with the sharpest increases planned
by the machinery and petroleum industries. Reduced
spending, however, is foreseen in several industries, includ
ing motor vehicles. In the nonmanufacturing sector, the
most striking feature of the survey was the very large drop
in spending planned by the railroads, a decline from 1966
amounting to almost $0.5 billion or nearly 25 per cent.
It is generally believed that the suspension last fall of tax
incentives for investment was felt particularly heavily by
the railroads as well as by commercial firms, which also
intend to reduce spending this year. Other nonmanufactur
ing industries anticipate increases in spending that, while
smaller than the gains posted in 1966, are considerably
stronger than those projected by the manufacturing sector.
The latest Commerce-SEC survey was taken before
the actual passage of the legislation restoring the 7 per
cent investment tax credit and the use of accelerated
depreciation allowances. The general expectation that the
incentives would be restored was probably reflected in
some of the plans reported in the survey. The restoration
itself, however, has already accelerated spending in some
lines. For example, immediately following the President’s
signature of the restoration law in mid-June, there was a
strong surge in railroad orders for rolling stock. According
to industry sources, such orders in 1967 had been running
at only about one fourth of the year-earlier volume. More
over, the pressure of labor costs may well provide some
additional stimulus to capital investment in coming months.
Industrial and commercial building activity has been
relatively weak in recent months, reflecting the general
slackening of business fixed investment. In contrast,
residential construction has been improving significantly.
The seasonally adjusted rate of housing starts in May
recorded a strong further advance, rising by more than 11
per cent over the April pace, with gains reported in most
regions of the country. At the same time, there was an
other increase in the number of housing units authorized
by new building permits, and the value of residential con
struction contract awards reached the highest point in a
Chart II
ACTUAL AND ANTICIPATED
PLANT A N D EQUIPMENT SPENDING
Billions of dollars
70
Ratio scale
Seasonally adjusted annual rates
Billions of dollars
70
60
60
All business
50 —
~ 50
40
- 40
Nonmamifacturing
I--------
^ --------
30
30
—
"• X T '
— o
Manufacturing
20
15 ._
20
I I l
1 1 1
1964
1965
1
1 !
1966
1
1 1
1967
15
Note: Figures shown for the second, third, and fourth quarters of 1967are estimates fromthe
MayCommerce-SEC survey.
Sources: United States Department of Commerce; Securities and Exchange Commission.
130
MONTHLY REVIEW, JULY 1967
year. The upturn in residential activity thus far in 1967
has been stronger than was apparently expected by many
observers. Housing starts in the first five months of the
year averaged 1.2 million units at a seasonally adjusted
annual rate, equal to the 1966 total and almost 25 per
cent above the depressed pace in the fourth quarter of
last year. Moreover, the restoration of accelerated deprecia
tion allowances on apartments (and other buildings) cost
ing more than $50,000 may well provide a further stimulus
to residential construction.
The Money and Bond Markets in June
Yields in the capital markets rose sharply again in June.
The prospect of very substantial Treasury financing in the
second half of the calendar year, as well as continuing heavy
current and prospective demands for funds by corporations
and state and local governments, led to increasing pressures
on the markets. Against this background, the atmosphere in
the Treasury market on several occasions became quite
demoralized and prices fell at times with very little resis
tance. By the end of the month, some new corporate issues
were being offered at record yields and yields on Treasury
coupon issues were up by as much as 84 basis points from
their end-of-May levels. In this environment, there was
increasing discussion of the need for a tax increase to help
ease the pressures in the markets during the months ahead.
While most market participants seemed to feel that some
tax increase would be enacted, there was widespread con
cern that it might not be large enough to relieve significantly
the pressures in the capital markets.
In the Treasury bill market, rates moved down for a
time in June—particularly on short maturities which were
in heavy demand—but then rose very sharply in the final
week of the month. Expectations that the Treasury was
soon to begin its financing for the second half of the year
were confirmed on June 28, when the Treasury announced
that it would sell in early July $4 billion of new tax anticipa
tion bills and would also begin raising the size of the weekly
and month-end auctions by $100 million each. By the end
of the month, the bid rate on the latest outstanding threemonth bill had climbed to 4 per cent, 54 basis points higher
than a month earlier, and bid rates on longer bills were as
high as 4.90 per cent. Rates on other short-term market
instruments also rose somewhat during June, particularly
during the last week of the month when bill rates were un
der such heavy upward pressure.
Money market conditions remained relatively comfort
able in June. Nationwide net reserve availability was ample
throughout the month, as free reserves fluctuated around
the range for May. Although these reserves tended to shift
away from banks in the money centers at times during
the month, there was a substantial return flow through the
Federal funds market, where funds traded predominantly
in a 33A to 4Vs per cent range.
T H E G O V E R N M E N T SE C U R IT IE S M A R K E T
Activity in the Government securities market came close
to a standstill during the first week of June, while par
ticipants awaited developments in the Middle East. Prices
of Government securities were marked temporarily lower
upon the outbreak of hostilities on June 5, but no signifi
cant selling pressures developed, and a steady tone quickly
emerged with the limited trading that did take place
conducted in an orderly fashion. In fact, quotations of
notes and bonds improved somewhat in subsequent ses
sions, when reports that the United States and the Soviet
Union were cooperating toward bringing about a cease-fire
relieved concern that the Middle East situation would
escalate further.
By June 8, however, the atmosphere in the Treasury
securities market began to deteriorate again, as market par
ticipants directed their attention to the heavy Government
demand for funds anticipated for the months ahead on top
of the already crowded calendar of other securities offer
ings. Moreover, the spread between yields on Treasury
issues on the one hand and high-grade corporate and Gov
ernment agency securities on the other continued to widen,
FEDERAL RESERVE BANK OF NEW YORK
inducing some investor switching into corporate and agency
issues. As midmonth approached, market attention
focused upon the pricing of new participation certificates
to be offered by the Federal National Mortgage Associa
tion (FNM A). When the initial offering yields on these
certificates proved to be well above those anticipated
earlier by market observers, expectations of higher inter
est rates were reinforced. In this atmosphere, trading
activity was very light, and dealers’ attempts to trim in
ventories of Treasury issues contributed to the sharp price
declines.
Bond prices weakened further during the week ended
June 21. A modest rally took place on June 22, largely
reflecting some investment interest, professional short
covering, and demand from other sources. However,
during the remainder of the month, bond prices resumed
their decline when participants again focused upon the
heavy current and anticipated demands for funds in the
capital markets. By the end of June, prices of most Gov
ernment coupon issues were at their lows of the year and
in some cases were below even the lows reached in August
1966. Yields in the one- to five-year and five- to ten-year
maturity areas were as high as 5.34 per cent and 5.27 per
cent, respectively, and were generally 28 to 84 basis points
above their end-of-May levels. In the long-term end of
the market, yields averaged around 4.95 per cent, com
pared with 4.93 per cent at the August 1966 peaks.
In the market for Treasury bills, rates moved irregularly
during the first three weeks of June and then soared in the
closing days of the month. At the beginning of June, the bill
market displayed a fairly strong tone. Investment demand
favored bills maturing within five months, and rate declines
generally clustered at the shorter end of the maturity scale.
Rates on longer bills edged higher. (See left-hand panel of
the chart on page 133.) From June 6 through June 16,
demand abated and some selling of bills by various types
of investors developed. Augmented by aggressive attempts
of dealers to lighten inventories, these pressures pushed
bill rates up quite sharply.
With the passage of the midmonth quarterly corporate
dividend and tax payment period, however, a steadier tone
developed in the bill market. Substantial demand stemmed
from the reinvestment of the proceeds of maturing tax an
ticipation bills, approximately $3.5 billion of which was
redeemed for cash on June 22. Part of the proceeds of a
Federal agency issue maturing on June 26 also found its
way into the bill market. In addition, there was some de
mand for bills from commercial banks preparing for
publication of their midyear statements and from the
Federal Reserve to meet the pre-July 4 reserve needs. Once
again, private demand centered in the short maturity area
131
and, as these issues became increasingly scarce in the mar
ket, short bill rates moved down sharply. By June 23, the
bid rate on the three-month bill was down to 3.33 per cent,
its low for the year. Supplies of longer term bills were more
adequate, and rates on some of these securities edged higher
during this period. Thus, the yield spread between the latest
outstanding three- and six-month bills widened to as much
as 50 basis points, reflecting the general expectation in the
market of a sharp turnaround in short rates once the special
demands of the midyear period were satisfied.
If anything, the turnaround came sooner and was con
siderably sharper than had been expected. As investment
demand contracted, and participants became cautious in
view of the belief that an announcement of Treasury financ
ing plans was imminent, the bill market became rather
weak on Monday, June 26, and this atmosphere continued
through the rest of the month. Bidding in the weekly bill
auction on June 26 was quite restrained, as dealers tended
to be more cautious about increasing their inventory posi
tions. Average issuing rates were set at 3.462 per cent for
the new three-month bill and 3.950 per cent for the new
six-month bill (see Table III), about 2 basis points lower
and 22 basis points higher, respectively, than average rates
at the final weekly auction in May. Even greater restraint
was evident in the auction of month-end bills on June 27,
with the average issuing rate on the new one-year bills set
at 4.732 per cent, up 80 basis points from the average set
a month earlier. Some tenders were accepted in that auc
tion at rates as high as 4.84 per cent.
On June 28, the Treasury announced the first steps in
its program of borrowing to meet cash needs during the
fiscal year beginning July 1. The Treasury scheduled a
July 5 auction of $4 billion of tax anticipation bills, includ
ing $2 billion maturing on March 22, 1968 and $2 billion
maturing on April 22, 1968. Payments for the bills will
be due on July 11, with commercial banks permitted to
make payment in the form of credits to Treasury Tax and
Loan Accounts. The Treasury also announced that its
weekly offerings of three-month bills will be enlarged by
$100 million beginning with the July 10 auction, and that
$900 million in new cash will be raised through additions
to the regular monthly auctions of nine-month and oneyear bills during the new fiscal year. The heavy tone con
tinued in the bill market following the announcement, and
the upward trend in bill rates accelerated over the final
days of the month. From June 27 through June 30, rates
on bills maturing within three months rose 45 to 65 basis
points, rates on issues maturing in three to six months
increased by 38 to 63 basis points, and longer bill maturities
rose by 40 to 58 basis points. By the close of the month, the
latest outstanding three-month bill was quoted at 4 per
MONTHLY REVIEW, JULY 1967
132
Table I
Table n
FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, JUNE 1967
RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS
JUNE 1967
In millions of dollars; (+ ) denotes increase,
(—) decrease in excess reserves
In millions of dollars
Daily averages—week ended on
Factors affecting
basic reserve positions
Changes in daily averages—
week ended on
Net
changes
Factors
June
7
June
14
June
June
28
21
— 153
Total “market” factors .................
-254
—
101
4 . 171
+ 137
+ 27
— 436
1
—
— 654
4-442
+ 451
-f 59
+ 271
—
— 113
+ 235
4- 72
4- 84
4- 385
— 591
— 300
— 431
— 5
4-191
— 45
4- 443
— 212
— 206
1 + io
— 430
4-201
4- 258
— 75
Total ...............................................
June
21
June
28*
-4- 31
Oi
— 286
4- 273
Reserve excess or deficiency(—
10
8
15
27
Less borrowings from
Reserve Banks ................................
25
7
—
•—
Less net interbank Federal funds
451
559
purchases or sales(—) .....................
567
922
1,212
1,284
1,333
Gross purchases ..........................
1,669
882
Gross sales...................................
645
725
747
Equals net basic reserve surplus
or deficit (—) .................................. - 547 - 550 — 939 - 436
Net loans to Government
securities dealers .............................
729
1,077
1,086
584
15
8
625
1,375
750
-
618
869
Thirty-eight banks outside New York City
D irect F ederal Reserve c re d it
tra n s a c tio n s
Open market instruments
Outright holdings:
Government securities.....................
Bankers’ acceptances......................
Special certificates..........................
Repurchase agreements:
Government securities.....................
Bankers' acceptances......................
Federal agency obligations ............ .
Member bank borrowings...................... .
Other loans, discounts, and advances...,
June
14
Eight banks in New York City
“ M arket” facto rs
Member bank required reserves*..........
Operating transactions (subtotal) .........
Federal Reserve float ........................
Treasury operations!..........................
Gold and foreign account .................
Currency outside banks* ....................
Other Federal Reserve accounts (net)J
June
7
Average of
four weeks
ended on
June 28*
- f 212
— 273
21
4-349
+
12
—
-f
67
— 51
-f 48
— 53
4- 42
4-
48
4- 50
4- 39
— 419 i 4- 106
+i
4- 303
4- 24
4-184
+ 3
+ 15
+ 24
+ 2
— 25
+5
Excess reserves* ................................................
—
—
1+ 7
— 106
12
Reserve excess or deficiency ( —
27
11 —
9
21
Less borrowings from
Reserve Banks ................................
2
40
28
17
Less net interbank Federal funds
1,703
1,051
purchases or sales(—) ...................... 1,465
1,622
2,342
2,028
2,222
Gross purchases ..........................
2,437
638
815
977
Gross sales ...................................
757
Equals net basic reserve surplus
or deficit (—) .................................. - 1 ,4 5 4 - 1 ,6 8 4 —1,651 - 1 ,08 8
Net loans to Government
274
484
516
securities dealers .............................
424
13
22
1,460
2,257
797
- 1 ,4 6 9
425
Note: Because of rounding, figures do not necessarily add to totals.
* Estimated reserve figures have not been adjusted for so-called “as of” debits
and credits. These items are taken into account in final data,
t Reserves held after all adjustments applicable to the reporting period less
required reserves and carry-over reserve deficiencies.
Table III
Daily average levels
AVERAGE ISSUING RATES*
AT REGULAR TREASURY BILL AUCTIONS
In per cent
M ember bank:
Total reserves, including vault cash*......... 23,183
Required reserves* .................................... 22,840
343
Borrowings ................................................
77
Free reserves* ........................................... 4- 266
Nonborrowed reserves* ............................. 23,106
23,215
22,848
367
43
4-324
23,172
23,763
23,502
261
91
4- 170
23,672
23,562
23,117
445
141
4-304
23,421
23,431§
23,077§
354§
88§
4- 266§
23,343§
Changes in W ednesday levels
Weekly auction dates—June 1967
Maturities
June
5
June
12
June
19
June
26
Three-month..
3.386
3.505
3.572
3.462
Six-month.....
3.758
3.796
3.841
3.950
Monthly auction dates—April-June 1967
System A ccount holdings of G overnm ent
secu rities m atu rin g in:
Less than one y e a r ..................................
More than one y e a r ..................................
— 260
4-113
— 566
—
4-832
4- 102
— 164
4- 55
— 158
4-270
Total .................................................. — 147
— 566
-j- 934
— 109
4- 112
Note: Because of rounding, figures do not necessarily add to totals.
* These figures are estimated,
t Includes changes in Treasury currency and cash,
t Includes assets denominated in foreign currencies.
§ Average for four weeks ended on June 28.
April
25
May
24
June
27
Nine-month................................
3.842
3.944
4.723
One-year.....................................
3.832
3.933
4.732
* Interest rates on bills are quoted in terms of a 360-day year, with the dis
counts from par as the return on the face amount of the bills payable at
maturity. Bond yield equivalents, related to the amount actually invested,
would be slightly higher.
133
FEDERAL RESERVE BANK OF NEW YORK
cent (bid), 54 basis points above the rate quoted at the
end of May, while the newest six-month bill was bid at 4.41
per cent on June 30, 67 basis points above its May 31
rate level.
The market for Government agency securities concen
trated during the early part of the month on preparations
for the June 15 public offering of $650 million of FNMA
participation certificates. (An additional $250 million of
the certificates was placed with Treasury trust accounts.)
The public part of the offering consisted of $350 million
of 27-month notes priced at par to yield 5.25 per cent
and $300 million of five-year notes priced at par to yield
5.50 per cent. These yields—in each case Vi percentage
point higher than had been offered on similar maturities of
participation certificates last March—seemed quite attrac
tive relative to yields available on comparable maturities
of Treasury issues. However, investors apparently were
focusing on recent increases in rates on negotiable certifi
cates of deposit (C /D ’s), to around 5 per cent on longer
maturities, as a base for comparison. Thus, even though
market reports indicated that the shorter issue was fully
sold on the offering day and that the longer term issue was
accorded a good, albeit somewhat less enthusiastic investor
reception, both issues turned out to be less than completely
placed when released for free trading in the secondary
market on June 20, and their prices dropped sharply be
low par. Other agency issues floated during June encoun
tered mixed investor receptions.
SELECTED INTEREST RATES*
Aprii-June 1967
MONEY MARKET RATES
A p ril
M ay
Ju n e
BOND MARKET YIELDS
A p ril
M ay
Ju n e
Note: Data are shown for business days only.
* MONEY MARKET RATES QUOTED: Daily range of rates posted by major New York City banks
on new call loans (in Federal funds) secured by United States Government securities {a point
indicates the absence of any range); offering rates for directly placed finance company paper;
the effective rate on Federal funds (the rate most representative of the transactions executed);
closing bid rates (quoted in terms of rate of discount) on newest outstanding three- and six-month
Treasury bills.
BOND MARKET YIELDS QUOTED: Yields on new Aaa- and Aa-rated public utility bonds are plotted
around a line showing daily average yields on seasoned Aaa-rated corporate bonds (arrows
point from underwriting syndicate reoffering yield on a given issue to market yield on the
same issue immediately after it has been released from syndicate restrictions); daily
averages of yields on long -term Government securities (bonds due or callable in ten years
or more) and of Government securities due in three to five years, computed on the basis of
closing bid prices; Thursday averages of yields on twenty seasoned twenty-year tax-exempt
bonds (carrying Moody's ratings of Aaa, Aa, A, and Baa).
Sources: Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System,
Moody’s Investors Service, and The Weekly Bond Buyer.
MONTHLY REVIEW, JULY 1967
134
O T H E R SE C U R IT IE S M A R K E T S
The corporate bond market was still dominated by the
heavy volume of current and prospective financing. Ap
proximately $1.6 billion of new corporate issues was floated
publicly in June, roughly matching the record set in March.
Thus it appears that the volume of public corporate flota
tions in the first half of 1967 exceeded $7 billion, roughly
double the $3.5 billion issued in the first half of 1966. The
new corporate issues in June met with mixed investor re
sponse, despite rising yields which approached, and in some
cases exceeded, the peak levels reached last August. Some
scheduled offerings were postponed because of adverse mar
ket conditions. On June 20, underwriters reoffered a $75
million issue of Aa utility bonds carrying five-year call pro
tection at a yield of 6.10 per cent; this was a record for such
an issue at the original underwriting terms. The next day, a
$40 million Aaa-rated utility issue was reoffered to yield
6.00 per cent—a record yield for a Aaa-rated utility offer
ing. Both issues were very well received and quickly moved
to premiums in secondary market trading. Subsequent is
sues came out at roughly comparable rates, and by the end
of the month some market participants expressed the hope
that 6 per cent might prove a viable yield level for highgrade corporate bond offerings at least for a time.
Prices in the municipal market remained fairly firm
through midmonth, with substantial demand from banks
and insurance companies. Particularly good support ap
peared for longer maturities for the first time in some
weeks. After midmonth, however, prices of tax-exempt
bonds began to decline under the mounting pressure of a
congested market and the relatively heavy schedule of new
offerings. Receptions of new issues were only fair, and
sales from dealers’ inventories proceeded slowly. By the
end of the month, the volume of tax-exempt issues adver
tised on the Blue List stood at $638 million, compared with
$576 million at the end of May. The Weekly Bond Buyer's
series for twenty seasoned tax-exempt issues, carrying rat
ings ranging from Aaa to Baa, rose by 10 basis points to
4.06 per cent (see chart). This index is, however, based on
only a limited number of seasoned issues and does not
necessarily reflect market movements fully, particularly in
the case of new and recent issues.
BANK RESERVES AND THE MONEY M ARKET
Conditions in the money market continued generally
comfortable in June. Pressures stemming from the heavy
midmonth corporate dividend and tax payments were gen
erally accommodated with ease. On a nationwide basis,
free reserves averaged $266 million during the month (see
Table I), roughly in line with the average level in May. Free
reserves did drop temporarily to an average of $170 million
in the week ended June 21, partially under the pressure of
sharply rising bank loans and accompanying increases in re
quired reserves, but a good flow of money was in evidence
as “country” banks turned loose previously accumulated
excess reserves. Most trading in the Federal funds market
during this week as well as during the month as a whole
was in a 3% to AVs per cent range. This ready flow in the
funds market enabled most banks to cover their reserve
deficiencies with little recourse to the Federal Reserve “dis
count window”. Thus, member bank borrowings from the
Reserve Banks averaged only $88 million during June,
compared with an average of $94 million in May.
The basic reserve positions of the forty-six major money
market banks, which had improved late in May, deterio
rated sharply in the first several weeks of June. The com
bined basic reserve deficit deepened to an average of
about $2.6 billion by the third week (see Table II). At the
major banks in New York City, reserves employed in
dealer financing operations increased substantially over the
period, since other sources of dealer borrowing tended to
recede around the quarterly dividend and tax payment
dates. In addition, business loans rose sharply in the weeks
before and after the midmonth tax date, following earlier
weakness in such lending.
The money market banks stepped up their efforts to at
tract and hold C/D’s during June. (During the month, over
$ 3 ^ billion of C/D’s matured at large commercial banks.)
Such certificates outstanding at thirteen large New York
City banks rose by $296 million during the first two weeks
of the month, declined by $203 million in the week ended
June 21, and then edged upward by $15 million in the final
June statement period. Banks gradually raised their offer
ing rates; by the end of the month, the most frequently
quoted rates on new C/D ’s ranged from 4.25 per cent for
the shortest maturities to 5 per cent for longer C/D ’s, with
the actual rates offered prime customers tending to be well
up toward the top of this range.
Interest rates on several other short-term money market
instruments also were raised during the month. By the end
of June, offering rates on 30- to 239-day directly placed
finance company paper had advanced by V% percentage
point to 4 V2 per cent and dealers in bankers’ acceptances
had raised their rates by V2 percentage point.
@FedFRASER