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WrnMNATIONAL FINANCE LIBRA RY~ V I 4UG 21.1963 H. 13 No. August 14, 1963 r%-\ Of;, APITAL MARKET DEVELOPMENTS ABROAD Canada Nine Charts on Capital Market Developments Abroad I. Canada: Money and Capital Market Developments in July Policy developments in both the U.S. and Canada combined to tighten Canadian financial market generally during the latter half of July.• Early in the month, the Bank of Canada withdrew its standing price support of certain government securities, and bond prices fell in all sections of the market. Later in the month, prices fell (yields rose) further after seven Federal Reserve Banks raised their discount rates on July 16 and the President announced that he was recommending an interest equalization tax to limit foreign borrowing in the United States as part of a general attack upon the U.S. balance-of-payments deficit. Finally on August 11, the Bank of Canada raised its discount rate from 3-1/2 to 4 per cent. Table 1. Selected Yields on Treasury securities in Canada and ;i • the United States ;(in per cent per annum) Canada Spread in favor United States of Canada June 26 July 24 change June 26 July 24 change June26 July 24 Treasury bills: 3-month 6-month 3.24 3.34 3.41 3.56 +0.17 +0.22 2. 99 3.07 3. 21 3.36 +0.22 +0.29 +0. 23 0.27 +0.20 0,20 Bonds: 8 year 20 year 35 year 4.03 4.85 4.88 4.33 5.08 4. 95 40.33 +0. 23 +0.07 3. 72 4.00 4.03 3.83 4.02 4.02 +0.11 +0.02 -0.01 0. 31 0.85 0.85 0.50 1.06 0.93 3.38 3.50 +0.12 3.19 3.31 +0.12 Canadian dollar,^/ Spot 92.80 34nonth: forward 40.06 92.45 -0. 20 -0.35 Finance paper 30-89 days / +0.19 0.19 b/. Covered spread on:— Treasury bills Finance paper _/ / +0. 30 40. 25 Dates shown are June 21 and July 22. Dates shown are June 27 and July 25. OFFICIAL USE ONLY (Decontrolled after six months) Flat -0 01 OFFICIAL USE ONLY As a result of these developments, there were general increases in interest rates in both Canada and the United States during July. In the shortterm sector, yields on Treasury bills moved closely together in the two countries and the differential in favor of the Canadian bill narrowed only slightly to 0.20 per cent on July 24. (See Table 1.) Because the forward Canadian dollar shifted from a slight premium to a discount, however, the covered differential of 0. 30 per cent in favor of the Canadian Treasury bill on June 27 had been eliminated on July 25. (See Table 1.) In the bond market, the differential in favor of Canadian yields widened slightly. After the change in the Bank rate announced on August 11, yields on Canadian Government securities of all maturity lengths advanced further. (See Table 2.) In addition, rates on commercial paper and one-year notes of a major chartered bank also increased by 3/8 of 1 per cent. Table 2. Canada: Recent Yields on Government Securities (in per cent per annum) July 24 August 7 August 12 3-month treasury bills a/ 3.41 3.52 3.55 Bonds: 3-3/4 2-3/4 4-1/4 3-1/4 4-1/4 3-3/4 4.43 4.33 4. 91 5.08 5.10 4.95 4.52 4.34 4.95 5.12 5.18 4.99 4.56 4.43 5.01 5.17 5.21 5.09 Sept. 1/65 June 15/67-68 Sept. 1/72 Oct. 1/79 Sept. 1/83 Sept. 15/96-Mar. 15/98 ,-/_a/ Thursday auction yields. With rising interest rates, the general public made substantial sales of government bonds during the month. These sales, which exceeded $200 million between June 19 and July 24, were offset by purchases of $118 million by the Bank of Canada and $97 million by the chartered banks. (See Table 3.) A decline in seasonally-adjusted general loans in June apparently encouraged the chartered banks to buy bonds. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 3. Canada; Net Purchases (+) or Sales (-) of Government Securities ($ millions, par value) May 1-May 29 Treasury Bills Other Bank of Canada Chartered banks Government accounts General public Change in total outstanding d/ a/ b/ c/ d/ - 3 Includes a Includes a Includes a Components -29 +64 - 3 - 6 1 9 6 3 May 29-June 19 Treasury Bills Other -34 -16 - 2 a J+21 -45 +60 +21 - 8 +192 --- decrease of decrease of decrease of may not add +61 +91 -- 1 b/-13 June 19-July 24 Treasury Other Bills +32 -38. +52 -45 +118 + 97 - 5 c/-257 -47 $23 million in holdings of Canada savings bonds, $80 pillion in holdings of Canada savings bonds. $30 million in holdings of Canada savings bonds. to total due to rounding. Prior to the announcement of the U.S. interest equalization tax, A. E. Ames & Co. reported $25. 3 million in new Canadian issues sold in the U.S. between June 10 and July 22, primarily by corporations. By July 22, new Canadian 'issues in the U. S. reported by Ames in 1963 amounted to a cumulative total of $628 million, nearly 4-1/2 times the amount sold during the same period last year. (See Table 4.) Table 4.. Total Provincial 628.4 142.1 135.4 45.0 --- 1963 to July 22 1962 to July 30 1961 to July 31 Source: Sales of New Canadian Securities Payable in U. S. Funds (in millions of U.S. $) A. E. Ames & Company: Provincial Guaranteed 368.0 . -- , Municipal. Corporation 29.7 15.3 26.4 185.7 126.8 109.0 Weekly Bond Sales Summary. Throughout most of the period under review, conditions in the foreign exchange market were unsettled. In the forward market, the Canadian dollar shifted to a discount in mid-July. The spot rate eased from 92.80 U.S. ' cents on June 27 to 92.45 U.S. cents on August 1 but the losses in official reserves for July, announced by the Canadian authorities oh August 6, suggest support operations by the Bank of Canada. Total losses for July amounted to $191 million including a $79.7 million repayment to the International Monetary Fund. OFFICIAL USE ONLY - 4 - OFFICIAL USE ONLY Money market. Canadian money rates rose about 1/4 per cent between mid-June and late July. From a low of 3.19 per cent on June 13, the weekly auction yield on three-month Canadian treasury bills rose each week to reach 3.48 per cent on July 18 and was at 3.43 per cent on August 1. (See Table 13 and Chart 5.) There was a parallel trend in the yield on six-month treasury bills. U.S. short-term yields rose about as much as Canadian rates between mid-June and late July, and left the uncovered yield spread between U.S. and Canadian treasury bills almost unaffected. Because the forward Canadian dollar shifted to a discount in July, the incentive in favor of the Canadian over the U.S. bill disappeared late in the month. (See Table 12 and Chart 1„) Short-term finance paper rates rose in both the U.S. and Canada by about 1/8 per cent between late June and late July. As a result, the uncovered yield spread remained about the same but the appearance of a discount oa_forward Canadian cover"Tate in July removed any incentive to move funds into Canadian finance paper on a fully-hedged basis. (See Table 5.) Table 5. U.S. and Canadian 3-month Finance Paper Arbitrage Calculation, 1963 (in per cent per annum) July 22 12 March 1 May 3 June 21 Canada United States Difference Three-month forward discount on Canadian dollar Favor Canada 4.13 3.06 1.07 3.50 3.06 0.44 3.38 3.19 0.19 3.38 3.19 0.19 -0.81 QL44 40.06 40. 25 40.23 40.42 40.26 3. 38 3.31 0.07 40.13 40.20 3.50 3.31 0.19 -0.20 -0.01 Bond market. Prices fell sharply on Canadian bond markets on July 8 when the Bank of Canada withdrew its standing prices and fell further after the U. S. discount rate was increased on July 16. Bond yields in the short and intermediate areas rose between 19 and 35 basis points between June 1.9 and July 24, and despite sizeable purchases by the Bank of Canada. (See Table 6.) Tabled?. Canada:- Changes in Selected Securities Yields, May-.l±L:l1963 (in per cent per annum) May S.May 22 Treasury bills -0.10 3-month -0.09 6-month Government bonds -0.09 4 per cent of May 1964 -0.03 2-3/4 per cent of June 1967-68* -0.04 3-1/4 per cent of October 1979 3-3/4 per cent of February 1996 -0.04 March 1998 OFFICIAL USE ONLY Changes May 22June 19 June 19July 24 Level on July 24 -0.01 40.01 40.19 40.24 3.41 3.56 -0.09 -0.09 40.03 40.35 +0. 31 40.23 3.96 4,33 5.08 40.05 4,95 — OFFICIAL USE ONLY Yields on corporate and local-government bond issues in Canada also rose quickly with the increase in the U.S. discount rate and uncertainties regarding the U.S. "equalization tax" to be levied on foreign security issues. Stock market. Uncertainties associated with the presentation of the budget on June 13 caused Canadian stock prices to fall abruptly during the last half of June. Following the announcement of the U.S. program, the Dominion Bureau of Statistics index of industrial stock prices fell almost 4 per cent between July 3 and July 24, about twice the decline in the New York Standard and Poor's Industrials index. (See Table 7.) Table 7. Canadian and U.S. Stock Prices May 30 DBS Industrials a/ N.Y. Standard and Poor Industrials b/ 5 139.4 73. 7 140.4 74. 1 June 12 19 140.1 135.3 73. 7 26 133.8 73.0 73.0 3 July 10 17 , 24 135. 3 135,9 130.3 130.4 73.0 73.3 72.2 71.5 a/ This series is the recently-published DBS index of 76 industrials (1956=100), and replaces the older DBS index of 66 industrials (1935-1939=100) previously reported in Capital Markets Developments Abroad series for Canada. b/ Average for the week ended on Friday. Bank loans and bank liquidity. General loans by Canadian chartered banks reversed their rapid advance of April and May and declined by $41 million during June. (See Table 8.) On a seasonally-adjusted basis, the decline was somewhat greater, amounting to $60 million (based on Wednesday averages)= During the first two weeks of July, however, these loans again expanded by $113 million. ' As general loans contracted during June, the chartered banks made purchases of government bonds amounting to $97 million. During the same period^ the banks made sales of $38 million in Canadian treasury bills, reducing the average cash ratio from 8.13 to 8.09, only marginally above the 8 per cent minimum. (See Table 8.) After" the increase in lending activity of early July, the liquid asset ratio remained (on July 18) at 17.69 per cent, well above the 15 per cent agreed minimum. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 8. Canadian Chartered Banks: Changes in Deposits and Selected Assetss 1962-63 (Cane $ million or per cent) Change during Quarter 1 9 6 2 1 9 6 3 III IV I II* 1. 2, 3. Reserves Cash Reserves Liquid Assets Ratios a/ Cash Ratio Liquid Asset Ratio General Loans ii. Other Assets b/ Treas.Bills Govt, Bonds Total, Govt, Securities Total Canadian dollar deposits f • 6 - Change during month 1 9 6 3 "Level on May June-- July 18 + 10 +135 1.168 2.5L9 8=13 8=09 P.11 17.9k 17:80 18=L9 17.6^ + 35 +209 +232 - hi _+196 +337 +128 + 86 + 13 +133 - 7 - 31 + 97 0/1,308 - 18 c/2,lt95 -631 +533 +21U +1U6 - 30 + 7? c/3,803 -6L2 +1016 -587 +U1U + 65 + 80 . - 53 - 81 + 17 +298 + 51 + 27 + 89 + + 8.16 8,16 8,11 8.12 15.87 17,96 18,32 +198 -299 - 71 -560 l Hi 6,802 111,619 Ratios given are averages for the periocb shownc Amortized value. Par value Preliminary. Canadian bank operations in non-Canadian currencies: The Canadian commercial banks continued in May to add to their non-Canadian dollar assets and liabilities. For the first five months of 1963* total assets increased about. $170 million and total deposits by $230 million, (See Table 9-) On the asset side, the new funds were invested chiefly in call loans in New York, Loans by these banks declined by $80 million3 On the liability side,, most of the deposits have come from nonbank investors rather than from banking customers, Foreign agencies added $62 million (U=S=) to their call loans iji New York during the first quarter, the latest available data (See Table 10): As a rough estimate, perhaps about $26 million came from Canadian banks and 326 million from non-Cansidian foreign agencies, OFFICIAL USE ONLY OFFICIAL USE ONLY - 7 - Table 9. Canadian Bank Operations in Non-Canadian Currencies (changes in non-Canadian-currency assets and liabilities in millions of Canadian dollars) Assets Deposits with banks Call loans Securities Other loans Total Liabilities Deposits by banks Other deposits Total Table 10. 19 6 3 April May 1960 1961 1962 +170. 7 +103.4 + 30.8 + 18.8 +323. 7 +475.8 + 29.3 +115.9 +255.0 +876.0 +196.7 -160.1 + 32.5 +297.2 +366.3 +138. 7 + 27.9 + 46.5 - 9.5 +203.6 -111.1 + 62. 9 + 25.9 - 38. 3 - 60.6 -19.9 +93. 7 -12. 7 -33.2 +27.9 +117.3 +165.2 +282. 5 + 55.6 +778.5 +834.1 - 8. 7 +478.2 +469.5 + 73.2 +141.5 +214.7 - 33.6 - 10.0 - 43.6 + 7.1 +53.0 +60.1 I Call Loans in the New York Market ($ million) Change during 19 6 3 I_ II 1961 1962 U.S. banks a/ +467 +655 -893 +446 Foreign agencies Canadian b/ Other c/ Total a/ - 20 + 30 + 10 -175 + 25 -150 + 26 + 36 + 62 n. a. n. a. n. a. . July to 10th -207 a/ Estimates by New York State Banking Department. b/ Call loans, as reported by Canadian banks, converted into U.S. dollars at month-end exchange rate. c/ Residual. Foreign exchange. After a quiet beginning in July, conditions in the foreign exchange market were unsettled. The Canadian dollar weakened moderately after the July 16 discount rate change; selling pressures intensified following the President's "interest equalization tax" request on July 19. On July 18, the market rate on the Canadian dollar momentarily reached its lowest level since the crisis of June, 1962: it closed at 92.1 U.S. cents in spiteof substantial apparent market support by the Bank of Canada. The rate strengthened again to 92.6 U.S. cents on' July 22 after it was revealed that new Canadian issues would be exempted from the tax but weakened once again the following day after Secretary Dillon's statement before a Congressional committee that the Canadian authorities had agreed to bring about a modest decline in Canadian interest rates. OFFICIAL USE ONLY OFFICIAL USE ONLY - 8 - The premium on the 3-month forward Canadian dollar also disappeared, and the discount which emerged in mid-July has remained at about 1/5 per cent into early August, During the month of July, Canada repaid $79=7 million to the International Monetary Fund on its $300 million drawing made during the exchange crisis in-mid-1962, In addition to this repayment, the Bank of Canada lost 110.9 million in official reserves during July. (See Table 11.) Table 11. Canada: Changes in Official Reserves March 1962-May 1963 (in millions of U.S. dollars) Gold and U.S. Dollars Special net nonmarket receipts (-) Adjusted change C h a n g e s 1 9 6 3 April May Total July 31. i9->3 1962 IV I + 94.8 +60.7 +71.3 +41.0 -20.4 .-190.6 a/ +195.0 b/-125.0 -- -- -- _c/+79. 7 +289.8 - 64.3 +71.3 +41.0 -20.4 June 2,501.C +110.9 a/ Includes repayment of half the assistance received from the Bank of England and the Federal Reserve ($175 million), the receipt of a Netherlands balance debt repayment ($30 million) and $125 million of the proceeds of a Government of Canada loan floated in the U.S. b/ Covers the balance of a Government of Canada loan floated in the U.S. c/ Repurchase from the International Monetary Fund. Europe and British Commonwealth Section. II. Nine Charts on Financial Markets Abroad Chart Chart Chart Chart Chart Chart Chart Chart Interest Arbitrage, United States/Canada Interest Arbitrage, New York/London Interest Arbitrage for German Commercial Banks Interest Arbitrage, Frankfurt/London Short-term Interest Rates Long-term Bond Yields Industrial Stock Indices Spot Exchange Rates -- Major Currencies Against U.S. Dollar Chart 9 - 3-month Forward Exchange Rates 1 2 3 4 5 6 7 8 - OFFICIAL USE ONLY Table 12c Canada: Treasury Bill Yields and Exchange Rates 3-moo Treas. bill arbitrage calculation 1962-High Low Canada a/ U.S. 5,51 3,01 2.98 2,6k 1963 Hay 23 3,23 29 3,19 June 6 3.28 13 3,19 20 3,22 27 3,2b July h 11 3,39 18 3.18 3oitl 25 Aug, 1 3.L3 T" a/ Thursday quotations» per annum. Discount equals 3-month Canadian dollar. y Difference 2.59 0*22 a/ b/ close c/ d/ e/ ?/ ~g/ h/ 0,13 -2,13 0,8k -0,11 Spot Can.# (U.S. cents) Finance paper 90-179 days 30-89 days 95.75 91,73 —- — • +0.28 0.28 3^/8 - 1/2 3-1/2 92.81 3-1/8. 0.20 +0,07 +0 = 27 92.80 3-3-1/8 +0.06 +0,35 3-1/8 - 1 / L 3"' Z2-5/8 0.29 92*72 3 j/8 +0.07 +0,28 3:5/8 0.21 92,67 +0,07 +0,31 3-3/8 3-5/8 0.2L 92,75 +0.07 +0-30 . 92,80 3-5/8 5^3/8 0,23 +0,13 +0,32 3-5/8 92,72 3-3/8 0 1-9 3»l/%.- 1/2 3 -5' 5 5/ 4 i'0,13 +0,28 92.70 0d5 — 0.28 -0.07 +0.21 92,53 -0.20 0.20 92.58 — 0,18 -0.13 +0.05 92,15 — Spread between spot and 3-month forward rate in per cent (5T c/ Net of difference in bill yield less discount on Selected Government of Canada Security Yields 6-mo. Treas . bills Spread Canada over y U.S. b/ 196j May • 15 22 29 June 5 12 19 26 July 3 10 17 2U y favor Can. bill c/ 2,95 2.99 2.99 2,98 2.98 2.99 3.07 3.2L 3.20 3.21 3.25 Table 13o 1962-High 3-mo. Can.* 5.7a 3.18 3.36 3.31 3:30 3.39 3.30 3.32 3.3L 3.36 j,L8 3,68 3.56 2.8L 0.19 0.37 0,28 0,23 0.31 0.23 0.2U 0.27 0.18 0,12 0.32 0.20 Intermediate bonds (8 yr.) Spread Canada over U.S. d/ Long-term bonds (20 yearJ (35 year) Spread Spread over Canada Canada over U.S. f/ U.S. h/ sJ 5.20 5 =U8 a.73 1,82 L,82 L.8L L.8L k.8L k,85 k.85 k.87 5.01 5.00 5.08 £/ UoOh 1,33 0,00 U.11 U dill .12 0,5k 0.50 OoUU hoik ' o.UU UoOl 0.36 k.02 0.30 0.31 L.03 0,21 UoOl U.18 , 6.33 U.10 0.23 0.50 L.33 , «/ 1.U7 0.73 0.90 0.89 0.89 0.87 0,86 0-86 0,85Q.8L 0.96 0.96 1.06 5.20 L.81 1,29 . 0.86 L.94 L.90 L.90 L.90 1.90 1,90 k,88 li.88 U.96 k.93 k.95 0.91 0.89 0,82 0.87 0.88 0 87 0,85 0,83 0.90 0.89 0.93 Average yield at weekly tender on Thursday. . Spread between Canadian auction rate and composite market yield of U.S. bill on of business Thursday. Government of Canada 2-3/U per cent of June 1967-68, Spread over U.S. Government 2-1/2 per cent of 1963-680 Government of Canada 3-l/U per cent of October 1979. Spread over U.S. Government 3-l/U per cent of 1978-83. Government of Canada 3-3/U per cent of September 1996 - March 1998. Spread over U.S. Government of 1995 » INTEREST ARBITRAGE, UNITED S T A T E S / C A N A D A fijJ 3 - M O N T H TREASURY 1 B I L L RATES RATE D I F F E R E N T I A L A N D FORWARD CANADIAN DOLLAR FORWARD RATE \ i RATE D I F F E R E N T I A L W I T H F O R W A R D EXCHANGE COVER. NET INCENTIVE IN FAVOR Of CANADA + .XI 1960 1961 1962 1963 INTEREST ARBITRAGE, NEW YORK/LONDON Friday figures I Per cent per annum 3 - M O N T H TREASURY \ | i BILL RATES LONDON RATE D I F F E R E N T I A L A N D 3-MONTH FORWARD STERLING Li. -! RATE D I F F E R E N T I A L j , WITH FORWARD EXCHANGE COVER J .1 LlJ.. .. 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 figu 3 - M O N T H TREASURY BILLS, I N T E R B A N K L E N D I N G RATE A N D - E U R O - D O L L A R DEPOSIT RATES GERMAN INTERBANK pLOAjl RATI Vv' .RATE DJ^FJERENTIAL A N D F O R W A R D DEUTSCHE MARK DISCOUNT ( — ) I, RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E COVER — NET I KENTiVE: — ~ T»TfA»OR Of fRANkTuBt"( + ) Nolo; Special forward role available to German commercial books. INTEREST A R B I T R A G E , FRANKFURT / 3 — M O N T H TREASURY BILLS A N D LONDON INTERBANK LENDING RATES LOAN RATE N — A GERMAN TREASURY BILLS RATE D I F F E R E N T I A L A N D J 3—MONTH . GERMAN INTERBANK LOAN RATE FORWARD STERLING GERMAN TREASURY BILLS 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 NET INCENTIVE OF UNITED KINGDOM OVER: IV. \l— 7v c,Q, 5 '-'~ SHORT-TERM INTEREST R A T E S * LONDON A , T X 3 month I r e n t u r y bill roin i or u 11 i u v n f i i u \ c * c t- M i Jatiun ( J tr.antr>. inti-rhar.k d e P c vi I rale) and Switzerland. (3-month d e p o i it rate) L O N G - T E R M B O N D YIELDS \-/ 1959 INDUSTRIAL STOCK I N D I C E S ^ GERMANY \ S P O T E X C H A N G E RATES - M A J O R CURRENCIES A G A I N S T U.S. DOLLAR Per cen A b o v e pa \-f ! CANADIAN DOLLAR J f M A M J J A S 0 N D J F M A M J V " / ' J A S V" 0 N l ] D J F M A M J J A S 0 N D 3 - M O N T H F O R W A R D E X C H A N G E RATE A G A I N S T 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 kA>MrVw,s$ fRANC u. S. DOLLAR A G A I N S T P O U N D STERLING - L O N D O N I] -_j L. , 1961 1962
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