The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
\
BOARDOTOOVERNORS
D i v e ION OF I N T E R N A T I O N A L F I N A N C E '
OF T H E
{ ' Ar: ]- 1:
H .13
No. 2
FEDERA L RESERVE SYSTEM
I
•
j
CAPITAL MARKET DEVELOPMENTS ABROAD
April 10, 1961
- '
I. United .Kingdom
II. Five Charts on Financial Markets Abroad
United Kingdom:
Money and Capital Markets During March
Substantial capital outflows, following the German and Dutch
exchange revaluations on March £, unsettled financial markets in Britain
during March. The United Kingdom has reported actual reserve losses of
$17L million for the month, but it is known that Britain obtained substantial temporary help from continental central banksrfollowing an agreement by European central banks for close cooperation in the exchange - markets
which was announced on March 13• The amount of such assistance extended
to Britain in March has not been disclosed. Britain's reserves and temporary
borrowings were drawn upon for exchange market support operations by. the
Exchange Equalization Account to hold the spot rate for the pound, but the
discounts on forward sterling and on security sterling Jiad widened sharply
by the end of March.
The wider forward discount reduced or eliminated incentives for
foreigners to keep funds iir London money markets with the exchange risk
covered, even at the high current yields. During the preceding 12 months,
a yield differential in favor of Treasury bills in London over those in
New York (on a covered basis) had been maintained at about 1 per cent,
but the net incentive dropped rapidly in March and had disappeared altogether by the latter part of the month (see Table and Chart)> The wide
forward discount can be expected to lead foreign investors to withdraw
funds from London as their investments mature.
During March, money market and bond yields were stable. The.
yield on the British Treasury bill changed only about 5 basis points between March 3 _and March 30. Bond yields were also unchanged during the
month, except for a sharp rise in the yield on 2-1/2 per cent Consols which
had failed during the preceding months to follow the rapid rise in Mar
Loans. The yield on War Loan was close to 6.2 per cent, the highest market
yield on an undated British Government security in 163 years.
Sales by foreign investors and continued selling pressures from
banks in Britain contributed to a sluggish tone in the gilt-edged market*
The London clearing banks continued to sell bonds in March as continued
commercial lending pushed their liquidity position close to the 30 per
cent ratio convention. The combined position for all the banks was only
30.1+3 per cent compared with 31.U7 per cent a year ago3 and three of the 11 London banks showed liquidity ratios below 30 per cent in their midMarch statement.
-
security
On April
compared
On March
1.5)0 per
2
-
Despite unsettled conditions in the foreign-exchange and in
markets, stock prices continued to rise rapidly -during the month.
7, the industrial stock index stood at an all-time peak of 3^1
with 323 on February 2k and 305 at the end of December (I960)•
30 the average share yield had declined to
per cent and was
cent below the yield on Consols.
Money market conditions. The yield on the 3-month Treasury bill
fluctuated narrowly between kohh and U.U9 per cent during the month. At
these yields, the London bill rate was more than 2 per cent above the
bill yield in New York. Because of the sharply wider discount on the forward pound, however, the net incentive in favor of London declined after
the March £ exchange revaluations and had disappeared altogether by
March 2h (see Table and Chart).
Bond market. Bond yields remained unchanged during March despite
the disturbed conditions in the foreign exchange market. The selected
bonds shown in the Table were about at the same level on March 30 that
they had been on March 3 (see Table). The principal exception was the
2-1/2 per cent Consol the yield of which rose rapidly after having lagged
behind the general advance in bond yields over the past few months.
The City of Birmingham offered a £10 million, 6 per cent issue,
197U-76,'at a price of £99 in the latter part of March which was oversubscribede
The gilt-edged market had a generally unsettled tone during the
month. Several factors contributed to the sluggish demand conditions.
Sales Qf some £105 millions of securities by the Iron and Steel Holding
and Realization Agency (representing the sale of formerly nationalized
steel company properties to private investors) in early March undoubtedly
absorbed or committed a large volume of money which might otherwise have
moved into the gilt-edged market. The London clearing banks continued in
March substantial sales of bonds to relieve their liquidity positions
which has become tight as a result of continued expansion in lending to
the private sector. [
International factors also contributed to the difficult position
in the gilt-edged, market„ ' Unfavorable foreign trade and balance-ofpayments returns do not encourage immediate prospects for an easing of
money rates in Britain, even though long-term bond yields are at historically
high levels. This outlook, together with other developments, have encouraged foreign holders to continue to dispose of British long-term
securities whicji they bought late in I960; the large discount on security
^sterling is thought to be explained by security sales by foreigners.
Press reports indicate that U.S. residents had been important „
buyers, and are now important sellers, of long-term bonds. These reports
have suggested that as much as half last year's capital inflow into London
went into the gilt-edged market. Recent quarterly changes in marketable
public debt holdings of major investor grouping were as follows (in millions
of pounds):
.
-3 -
1959
Banking system
Official overseas
Nonbank (home and
overseas)
tl
I960
II
III
IV
1I£_
_2__
+16
+2 9
+160
- Uo
+79
>71
-562
+ •38
-100
- 55
- 70
- 13
+ 96
- Uv
+30
+36
+28
+ 5U
+ U2
+365
+198
I
'
London clearing banks. The mid-March statement of the London
clearing banks showed sales of £50 million of Government bonds since midFebruary. With loans continuing to expand, the banks' liquidity was only
30.U per cent and three banks were below the 30 per cent conventional ratio
on statement day. The bai>ks were under liquidity pressures from the seasonal
inflow of tax funds to the Exchequer, The Bank of England is reported to
have helped the banks out of their liquidity difficulties by taking the
bonds off their hands but there were no releases from the clearing banks'
Special Deposits.
During the past year of monetary restriction from March I960 to
March 1961, the banks reduced their lending to the Treasury at about the
rate they expanded their loans to the private sector. Total lending to <
the Government was reduced by ȣU69 million and total private loans increased
by £3h9 million. March-to-March changes in major clearing bank assets
between 1959-1960 and 1960-1961 were as follows (in millions of pounds)$
1959 to
I960
1. Government sector:
Call loans to money market
Treasury bills
Bonds
Loans to nationalized industries
Total
Private sector:
Other call loans
Commercial bills
Advances
. Total
I960 to
' 1961
57
6U
-I4J4.8
- 1
^3?H
-13
-151
-29U
- 11
q^9
k
26
6U3
"555
la
60
%9
"Bo
-
-
Liquid assets
-16U
Net deposits
2h6
'
- 29
61
Coming in a period of recession in some durable goods industries*
the growth in private loans probably financed the increases in inventories
which took place in I960. The rate of inventory accumulation, in turn,
explains the high level of imports in i960. A downturn in imports in
February may mark!the beginning of a long-awaited slowdown in inventory
trends in Britain.
- u Hire-purchase credit. Even though the relaxations in hire-purchase
regulations were not in effect until January 20, new installment credit
sales showed some,recovery in January; credit sales of household goods had
begun to pick up slightly in December. Nonetheless, repayments exceeded
new credit extended in January. As a result, total credit outstanding in
January at £928 million was £7 million below the December figure. Recent
changes in outstanding credit (in millions of pounds) have been:
Household shops
Finance companies
Jui2
I960
Oct.
- Nov.
Dec.
332
639
971
322
623
9&
325
610
93?
322
620
9H2
1961
Jan.
321
607
, w
Treasury financing. Exchequer returns for the 1960-61 fisal year
ending April 1 show an ordinary budget surplus of £lU7 million compared
with the estimate of £lU3 million. A £U5 million shortfall in tax receipts
due to recessionary factors was matched by an equivalent reduction in
ordinary expenditures. The below-the-line deficit for capital spending
was £81 million below the earlier estimate largely because the needs of
the Coal Board were reduced by the rise in coal prices last year and the
reduction in coal stocks.
Bullion market. Activity in foreign exchange was not communicated
to the London gold market in March. The price of gold declined slightly
from $35>.08£2 per fine ounce early in March to $35.0779 in early April.
Its present level is below the cost of buying gold from the U.S. Treasury
in New'York.
-
March 3
10
17
2k
30
April 7
-
Sterling
fixing price
Spot
sterling
Dollar
fixing price
25l/250/9-1/2
250/7
250/8
250/10-1/2
250/7
279.#l
279.77
279.87
279.78
279.75
' 279.97
35.0822
35.0819
35.0653
35.0657
35.0911
35.0779
Foreign exchange. Spot sterling fell steadily between midJanuary and eaKLy March (see Table). From a low of 279.30 U.S. cents on
March 7, the spot sterling rate strengthened later in the month and closed
on April 6 at 279*99 U.S. cents. Official support operations account for
the strength of the spot rate.
The discount on 3-month forward sterling widened rapidly from
March/) to March 2h and thereafter declined slightly (see Table ).s The
price of security sterling declined from 279.125 U.S. cents in early March
to 275.375 U.S. cents in early April.
Britain's gold and foreign currency reserves fell by $62 million
in March to .£1,079 million, the lowest level since August I960. It was the
biggest drop of any month since December 1959, when Britain had to make
large special payments. Actual reserve losses were much larger but were
covered by special credits to the Bank of England provided by continental
central banks,under the March 13 agreement for greater intra-European central
bank cooperation in exchange markets. •
Stock market. The prices of industrial shares continued to rise
rapidly on the London Stock Exchange and in the week following the Easter
holiday set a record on each of the four days since the market reopened.
The Financial Times Industrial Ordinary share index rose to 3f>l#U on
April' 7 (see Table). This was a gain of 9.2 points over the week* The
previous high before April 3 was recorded on January U, I960, when the
Index reached 3U2.9. Thereafter prices tended generally to decline with the
index closing the year at 305* The recent increases have been said bymarket commentators to be in response to investors' hopes for an expansionist
budget on April 17, and probably reflect recent stock -trends in the United
States and improved prospects for business expansion in Britain and in
continental countries.
British Commonwealth Section.
- 6 -
United Kingdoms
Treasury Bill Yields and Exchange Rates
3-m6 0 Treasury ^bill
Discount
.
. Differon 3-mo.
u 0 Ko*/ U a S J y
ence
sterling£/
Date
1959 - High
Low
1960 - High
.. . V
Low
Feb. 3
10
17
2U ,
3o6
3o0
5068
2d3
Uo?
206
U.59
2,05
-Id
0 0I4.
3.63
-O08U
(P)„6U
'"2„33
Uol7 :
Uo30
L.38
2.28
2.39
2 0I4.O
1.89
1.91
1.98'
0.79
0.83
0.91
U0U0
2.52
1.88
Net
incentive
to hold
.
U.K. billA/
—
1.00
.
Exchange rate
Spot
Discount
sterling
on 3-mo»
£/
sterling^/
— •
=«»
1.95
- .23
—
-=-»
281.58
279.83
1.10
1.08
Io07
280.20
280.20
280.00
0.88
279.63
Mar, 3
-&.LL
2.51
1.93
1.01;
0.89
279.62
10
U=U9
2oU2
2.0?
I0U6
0.61
279.80
17
hok9
2.30
2.19
1.96
0.23
279.86
2ii ^
• U.U9
2.32
2.17
2.32
-0.15
-279.77
• . ?°
k°h Q
M 2
2.06
2.11
-0.07
• 279.70
a/ Average yield at Friday weekly tender.
.
% / Closing market yield for Friday in New York.
0/ Spread between spot and forward rate in per cent per annum.
d/ Net of difference in bill yield less discount on 3-month sterling.
e/ Spot rate in New York market in U.S. cents.
f/ Spread between spot and forward rates in U.S. cents.
United Kingdomg
6-year
bondfy
-»=.
1.61;
(P).U7
'
0.#
0.58
0.61;
0.70
0.73
1.02
I.37
1.62
l,ii9
Selected Capital Market Yields
15-year
bonce/
War
loan£/
Consols
jy
Share
yield®/
Yield
gap£/
Share
pricefig/
I960 - High
' Low
6,11
.L.93
6.00
5.33
5.9k
5»53
_5.70
5„02
L.96
3.7L
1.U9
0.63
338.6
29L..6
Feb. 3
10
17
2li
Mar. 3
10
17
2k
30
6 oi:l
_j6.10
5,07
5.96
6.05
6.02
6.06
6,09
6.07
6.05
6 0 08
6.07
6.06
6,10
6,08
6.08
6,10
6.11
6.12
6.15
6.18
6.13
6018
6.15
6.15
6.18
6018
,5.8k
5.85
5.86
5.8o
5.88
5.8L
5.87
5.91
5.95
k.65
U061
L.60
U.96
U.5U
U.U6
U. bh
hokb
U.U5
1.19
1.2k
1.26
1.21;
1.3U
1.38
1.1*3
1.57
1.50
315.0
322.5
319.9
323.1
328.9
338.0
337.0
339.k
3U1.3
a/
0/
c/
d/
e/
T/
&/
-
5-1/2 per cent Exchequer* 1966.
3 per. cent Savings Bond 1965-75»
3-1/2 per cent War Loan (undated)»
2-1/2 per cent Consol (undated)
Financial Tiroes„
JJli'l'erence between yield on 2-1/2 per cent Consols and share yield.
Financial Times.
,
THREE-MONTH
Thursday figures
;
CANADATREASURY
RATE DIFFERENTIAL
BILL
UNITED
STATES
RATES
_?.•!
AND
FORWARD
CANADIAN
SPREAD IN f A V O B OF CANADA
RATE
:
DIFFERENTIAL W I T H
FORWARD
1959
•
p«r 01
DOLLAR
+
EXCHANGE- COVER
19*1
INTEREST A R B I T R A G E ,
NEW
YORK/FRANKFORT
3 - M O N T H TREASURY B I L L R A T E S A N D G E R M A N Y 3 - M O N T H B A N K L E N D I N G RATES
Friday figures
'
Per t e n l
L E N D I N G RATE - z " " \
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
\ L E N D I N G RATE
F O R W A R D RATE D I S C O U N T ( - )
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
IN FAVOR
OF F R A N K F U R T
<+ )
per
INTEREST A R B I T R A G E , N E W Y O R K
Friday
/
LONDON
I i goret
3 — MO N T H
rREASU RY BILL RATES
\
A V
k
1
,1
r
l
l
i
i
11
I
|
I
jW
l
/
v
'
-
-
von
I
I
I
I
I
RATE DIFFER l E N T I A l . A N D
3 — M<O N T H F O R W A I RD STEIU I N G
-
I
I
I
I
I
I
I
I
I
I
I
RATE D I F F E R E N T I A L W I T H
FORWARD EXCHANGE COVER
I
I
I
I
I
I
ll
s
I
I
I
:. -
z
iv % i
r o t WA16 IA1
Oil
I
I
I
\j
3
I
L
\
V
V
K y "
10ND(
I
I
I
1
1
1
1
1 1
1
-
1
I I
I I
SHORT-TERM
INTEREST
CANADA
,J
RATES
INDUSTRIAL
STOCK
INDICES
@FedFRASER