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DIVBION OF • O A R D O F OOVERNORS OF THK F E D E R A L R E S E R V E SYSTEM 1961 H.t AU; 2 9 No J 22 ^ y... 1 August 2 8 , 1961 | CAPITAL MARKET DEVELOPMENTS ABROAD I. II. I. Switzerland Nine C h a r t s on F i n a n c i a l Markets Abroad Switzerland: Money and C a p i t a l Markets During June The money market became somewhat e a s i e r i n J u l y , when t h e r e were f u r t h e r l i q u i d a t i o n s of f o r e i g n i n v e s t m e n t s , and s h o r t - t e r m r a t e s f e l l s l i g h t l y « The l o n g - t e r m bond market t i g h t e n e d f u r t h e r i n J u l y , governments y i e l d i n g around 3 . 1 1 p e r c e n t compared t o about 2 . 8 3 p e r c e n t a s r e c e n t l y a s mid-May. Response t o new s e c u r i t y i s s u e s was p o o r i n J u l y f o r t h e f i r s t t i m e t h i s y e a r . T h i s was b e l i e v e d t o r e f l e c t a s a t u r a t i o n of t h e market i n t h e wake of t h e v e r y h i g h volume o f new f l o t a t i o n s t h i s y e a r . New i s s u e s , f o r e i g n and d o m e s t i c , were a g a i n a t h i g h l e v e l s i n J u l y . I n e a r l y August t h e money and c a p i t a l m a r k e t s were q u i e t , showing l i t t l e change. S t o c k p r i c e s f e l l s e v e r e l y d u r i n g most of J u l y , c o n t i n u i n g ttie d e c l i n e t h a t began a f t e r m i d - J u n e . Both t e c h n i c a l f a c t o r s and t h e i n t e r n a t i o n a l s i t u a t i o n were c i t e d a s c a u s e s of t h e drop c I n August p r i c e movements h a v e been e r r a t i c . Funds moved i n t o S w i t z e r l a n d from abroad on a s u b s t a n t i a l s c a l e i n J u l y . However, i n t h e f i r s t h a l f of August t h e i n f l o w was a p p a r e n t l y much r e d u c e d d e s p i t e t h e worsened B e r l i n s i t u a t i o n . The s p o t d o l l a r was a t o r n e * r i t s s u p p o r t l e v e l t h r o u g h o u t J u l y and was n o t much s t r o n g e r i n t h e f i r s t t h r e e weeks of August. Spot s t e r l i n g r a l l i e d d r a m a t i c a l l y a f t e r t h e B r i t i s h measures announced J u l y 25>, and h e l d t h e g a i n s t h r o u g h t h e t h i r d week of August. However, t h e d i s c o u n t on t h r e e - m o n t h s f o r w a r d s t e r l i n g d i d n o t narrow a p p r e c i a b l y a f t e r J u l y 2$ b u t h a s remained above 5 p e r c e n t p e r annum. The f o r w a r d d o l l a r c o n t i n u e d a t a d i s c o u n t of o v e r 1 per cent. I n a move t o check i n f l o w s of w hot money*, t h e Swiss N a t i o n a l Bank i n August renewed f o r a second y e a r t h e s o - c a l l e d g e n t l e m e n ' s a g r e e ment of August I 9 6 0 u n d e r which Swiss commercial b a n k s d i s c o u r a g e f o r e i g n deposits. Money M a r k e t . The s h o r t - t e r m money m a r k e t became somewhat e a s i e r i n t h e l a s t t h r e e weeks of J u l y a f t e r h a v i n g t i g h t e n e d s i n c e t h e middle of May. This r e s u l t e d i n p a r t from l i q u i d a t i o n s of Swiss i n v e s t ments a b r o a d , which h e l p e d t o meet some of t h e c o n t i n u e d h i g h demand f o r f u n d s f o r c o n s t r u c t i o n . I n August, t h e r e was l i t t l e a c t i v i t y i n t h e NOT FOR PUBLICATION DECONTROLLED AFTER SIX M0I7TH5 NOT FOR PUBLICATION — 2 — market. Rates on three-months d e p o s i t s , which had moved up t o 1 3/U 2 ^ p e r cent on J u l y 7 , f e l l back t o 1 3 A = 2 per cent on J u l y 1 5 , and no f u r t h e r changes have been r e p o r t e d . Rate on 3=>months Interbank d e p o s i t s with l a r g e c a l l loan banks i n Zurich r a t e i n Zurich Jan. 7 May 15 July 7 J u l y 15 1 3/U < 2 1 11/2 1 3A - 2 lA 1 3A - 2 • 1 1 1 Bond Market. In J u l y t h e long-term bond market was markedly t i g h t e r . This was evidenced by t h e d i s a p p o i n t i n g r e c e p t i o n given t o a number of new bond i s s u e s as w e l l as by lower bond prices,, The y i e l d t o m a t u r i t y on t h e 3% Swiss Confederation bond of 19&7-7L r o s e a b r u p t l y from - 2.95 p e r c e n t on June 30 t o 3.12 p e r cent on J u l y lit and s t o o d a t about 3 . 1 1 p e r cent f o r t h e remainder of t h e month 0 There was a d e c l i n e t o 3,08 p e r - c e n t on August Uo The pronounced r i s e i n bond y i e l d s s i n c e the middle of May i s shown i n t h e t a b l e below c This movement seems i n p a r t t o be i n r e a c t i o n t o t h e extremely l a r g e volume of new i s s u e s f l o a t e d on t h e Swiss market beginning i n March and c o n t i n u i n g through July* Despite t h e e s p e c i a l l y heavy demand f o r c o n s t r u c t i o n loans t h i s y e a r , t h e r a t e on new mortgages on houses and i n d u s t r i a l b u i l d i n g s has r e mained unchanged a t 3.76 p e r c e n t , where i t has been s i n c e t h e autumn of 1959. Jan. May 12 J u l y 1U J u l y 28 Aug. li ^ Gov't bond y i e l d New mortgage r a t e 2.96 2.83 3.12 3oll 3.08 3.76 3.76 3.76 n,a, n0a0 The y i e l d s on medium-term d e p o s i t c e r t i f i c a t e s remained a t 3 . 2 5 - 3.29 p e r cent on J u l y 15, unchanged from a month e a r l i e r , b r i n g i n g t o an end t h e c o n t i n u i n g d e c l i n e s s i n c e December I960* Y i e l d s on depost c e r t i f i c a t e s 12 c a n t o n a l banks 5 l a r g e banks Jan. June July 30 15 15 3.33 3.29 3.29 NOT FOR PUBLICATION 3o3U 3.25 3.25 NOT FOR PUBLICATION = 3 «= New I s s u e s o For t h e f i r s t t i m e t h i s y e a r , p u b l i c r e s p o n s e t o new i s s u e s was p o o r i n J u l y c I n v e s t o r s f a i l e d t o s u b s c r i b e f u l l y t h e bonds o f f e r e d by PETROFINA of B r u s s e l s and to o f f e r i n g s of f o u r v a r i e d t y p e s of Swiss e n t e r p r i s e s 0 The t e r m s and c o n d i t i o n s of t h e s e o f f e r i n g s were i n l i n e w i t h t h o s e of e a r l i e r l o a n s t h i s y e a r c F i n a n c i a l a n a l y s t s a s c r i b e t h e s e r e s u l t s t o market s a t u r a t i o n a f t e r t h e new i s s u e a c t i v i t y of r e c e n t monthsj t h e y a l s o s u g g e s t t h a t i n v e s t o r s h e l d o f f i n J u l y i n t h e hopes of h i g h e r i n t e r e s t r a t e s i n t h e n e a r f u t u r e * There i s a b e l i e f t h a t t h e terms of f u t u r e new i s s u e s w i l l have t o b e more a t t r a c t i v e i f they are to be successful* New p u b l i c i s s u e s i n June were h i g h f o r t h e f o u r t h c o n s e c u t i v e month and b r o u g h t t h e J a n u a r y - J u n e t o t a l of new money r a i s e d t o $312 m i l l i o n compared t o $220 m i l l i o n i n t h e f i r s t h a l f of I 9 6 0 and t o $181 m i l l i o n i n t h e same p e r i o d i n 1959* I n c o m p l e t e f i g u r e s on new i s s u e s i n J u l y t o t a l l i n g $ 5 U . m i l l i o n a l s o exceed t h e f u l l amounts r a i s e d i n J u l y of t h e p r e v i o u s two y e a r s c The t a b l e below shows t h a t t h i s y e a r ' s l a r g e volume of t o t a l new i s s u e s r e f l e c t s g r e a t l y i n c r e a s e d o f f e r i n g s of f o r e i g n bonds and of Swiss s t o c k s , b u t t h a t new i s s u e s of d o m e s t i c bonds have l a g g e d . S e v e r a l of t h e f a c t o r s which h a v e a c t e d t o s w e l l t h e volume of new f o r e i g n bond i s s u e s were d i s c u s s e d i n " C a p i t a l Market Developments'* f o r J u l y 2lu In the c a s e of Swiss i s s u e s s t h i s y e a r ' s much h i g h e r p r o p o r t i o n o f i s s u e s of s t o c k s r e l a t i v e t o bonds may b e r e l a t e d t o t h e g r e a t e r p u b l i c demand f o r s t o c k s which h a s pushed s t o c k p r i c e s i n g e n e r a l f a r above t h e I960 levelsc New P u b l i c I s s u e s (new money r a i s e d ) $ m i l l i o n s ) Jan,-June 1959 1960 1961 Swiss bonds Swiss stocks 90.2 130*0 12Lu6 T o t a l i s s u e s 3 1961, J a n , - 31=3 Feb, - 3 6 , 0 Mar, =125*5 28cU 30*9 63:2 by months Foreign bonds 62,8 58,9 12L3 Totals 181,3 J 219.8 312.1 Apr, - 3 2 , 7 May = 1*2*6 June = U u O F o r e i g n b o r r o w i n g s i n J u l y of $35 m i l l i o n were e s p e c i a l l y h e a v y and f u r t h e r r a i s e d t h e c u m u l a t i v e t o t a l f o r 1961 compared t o p r e v i o u s y e a r s c The J u l y l o a n s , each i n t h e amount of SF 50 m i l l i o n ( $ 1 1 e 6 m i l l i o n ) , were i s s u e d by PETROFINA, S, Ac, of B r u s s e l s 2 t h e I s t i t u t o M o b i l i a r e I t a l i a n o , and R o b e r t Bosch, G.mobeHe, of S t u t t g a r t 0 The new i s s u e market i n August h a s been v e r y q u i e t , and no f o r e i g n bond i s s u e s have a s y e t b e e n r e p o r t e d f o r t h i s month. NOT FOR PUBLICATION NOT FOR PUBLICATION Foreign Borrowings in July IKE ( I t a l y ) R o b e r t Bosch (Germany) PETROFINA, S„Ao (Belgium) Amount (milp $ ) Term Coupon Rate Issue Price Yield to Maturity 11.6 11 0 6 11.6 1968-77 1968=77 1972-76 L50 L«50 ko$0 100 100 100 L.50 lu50 k.$0 Stock Market 0 Stock p r i c e s c o n t i n u e d t o f a l l s e v e r e l y d u r i n g most of J u l y . The d e c l i n e was b e l i e v e d t o b e p a r t l y a f u r t h e r t e c h n i c a l c o r r e c t i o n of t h e e a r l i e r l a r g e r i s e which r e a c h e d a peak i n m i d - J u n e , and p a r t l y a consequence of i n t e r n a t i o n a l t e n s i o n s o v e r B e r l i n and B i z e r t e # On J u l y lU t h e i n d u s t r i a l s h a r e i n d e x was down 12 p e r c e n t f r o m i t s l e v e l on June l 6 e A f u r t h e r d e c l i n e i n t h e t h i r d week of J u l y p r e c e d e d a r e c o v e i y i n t h e f i n a l week* I n August, t h e m a r k e t h a s moved i r r e g u l a r l y on r e l a t i v e l y s m a l l volume, and p r i c e s were down o n l y s l i g h t l y i n t h e week which f o l l o w e d t h e B e r l i n b o r d e r c l o s i n g . I n d u s t r i a l share index 1960 =-• Dec, 1961 - Mar, June June July 30 30 16 30 lU 195 231 285 27U 252 F o r e i g n Exchange 0 There were f u r t h e r s u b s t a n t i a l r e t u r n f l o w s of c a p i t a l i n J u l y c a u s e d by s p e c u l a t i o n over p o s s i b l e readjustments of t h e exchange r a t e s f o r sterling and the Swiss franc«, The July g a i n i n o f f i c i a l reserves was million, but this figure should be adjusted f o r t h e $50 million of g o l d u s e d t o exchange f o r Swiss f r a n c s h e l d by a f o r e i g n c e n t r a l bank* A l l of t h e J u l y r e s e r v e g a i n o c c u r r e d p r i o r t o t h e B r i t i s h measures announced on J u l y 25c I n t h e f i r s t h a l f of August 9 reserves rose by $13 m i l l i o n d e s p i t e t h e c a p i t a l f l o w s from Germany produced by the tension in Berlin. Swiss National Bank reserves (§ m i l l i o n s ) Gold May June July Aug, 31 30 31 15 Foreign Exchange 2,2k7 2,271 2,323 2,323 NOT FOR PUBLICATION 305 327 320 333 Total 2:552 2,596 2,61*2 2,655 NOT FOR PUBLICATION -> - Throughout J u l y , t h e spot d o l l a ^ remained mostly a t t h e Swiss N a t i o n a l Bank i n t e r v e n t i o n r a t e of SF I u 3 l 5 . From time t o t i m e , i t r o s e momentarily b u t t h e n f e l l back. I t r o s e t o ii.320 e a r l y i n August but had again f a l l e n back t o t h e i n t e r v e n t i o n p o i n t i n t h e t h i r d week. Spot s t e r l i n g r o s e a b r u p t l y a f t e r the J u l y 25 measures from i t s low p o i n t f o r t h e y e a r of SF 12.015 t o SF 12.103 i n the f i r s t week of August and r e mained a t or c l o s e t o t h a t l e v e l through t h e t h i r d week. The d i s c o u n t on t h e three-months forward d o l l a r dropped from 1.85 p e r cent i n t h e second week of J u l y t o 1 p e r c e n t i n e a r l y August, but by t h e t h i r d week of August had widened again to 1.13 p e r c e n t . The three-months forward s t e r l i n g d i s c o u n t remained very h i g h , r e a c h i n g 5.62 p e r cent i n J u l y , and i n t h e t h i r d week of August was s t i l l above 5 p e r cent d e s p i t e t h e dramatic improvement i n spot s t e r l i n g . A h i g h l y s i g n i f i c a n t development i n August was t h e r e n e w a l , f o r another twelve months, of t h e "gentlemen's agreement* concluded a y e a r ago between the Swiss N a t i o n a l Bank and commercial banks i n S w i t z e r l a n d . This agreement i s a prime instrument i n the monetary a u t h o r i t i e s 1 attempt t o p r e s e r v e f i n a n c i a l s t a b i l i t y i n Switzerland by discouraging i n f l o w s of f o r e i g n c a p i t a l of t h e *hot money* v a r i e t y . I t s p r i n c i p a l f e a t u r e s a r e : (a) new bank accounts opened by~foreign r e s i d e n t s are s u b j e c t t o a withdrawal n o t i c e of a t l e a s t t h r e e months, earn no i n t e r e s t , and a r e s u b j e c t t o a s e r v i c e charge of J p e r c e n t p e r c a l e n d a r q u a r t e r where t h e account i s of l e s s than s i x months d u r a t i o n s (b) new f o r e i g n funds a r e not allowed t o be i n v e s t e d i n Swiss s e c u r i t i e s . European S e c t i o n . II. Nine Charts on F i n a n c i a l Markets Abroad I n t e r e s t A r b i t r a g e U.S./Canada I n t e r e s t A r b i t r a g e New York/London I n t e r e s t A r b i t r a g e New Y o r k / F r a n k f u r t I n t e r e s t A r b i t r a g e Frankfurt/London S h o r t - t e r m Bond Y i e l d s long-term Yields I n d u s t r i a l Stock I n d i c e s . Major Currencies i n Terms of Spot United S t a t e s . D o l l a r Chart 9 - 3-month Forward Rate--London Quotations Chart Chart Chart Chart Chart Chart Chart Chart 1 2 3 U 5 6 7 8 - NOT FOR PUBLICATION INTEREST ARBITRAGE, UNITED S T A T E S / C A N AD A Thursday figures THREE-MONTH RATE TREASURY DIFFERENTIAL AND BILL RATES FORWARD CANADIAN DOLLAR CANADA + RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER NIT INCENTIVE IN fAVOt OF CANADA + 1959 " I960 1961 INTEREST ARBITRAGE, 3 - MONTH TREASURY NEW YORK BILL RATES / LONDON LONDON HEW YORK _L_L 3 - MONTH FORWARD STERLING Vi 1 RATE r DIFFERENTIAL FORWARD WITH EXCHANGE COVER IN F A V O R J X OF N E W YORK 1X1 195 9 I960 1961 INTEREST ARBITRAGE, Friday figures 3-MONTH TREASURY NEW BILL Y O R K / F R A N K F U R T RATES AND GERMAN 3-MONTH INTERBANK LOAN RATES GERMAN 3-MONTH INTERBANK L O A N RATE GERMAN 3 - M O N T H TREASURY BILLS U.S. TREASURY BILLS J RATE DIFFERENTIAL AND FORWARD DEUTSCHE 1 1 I _i I I MARK \ L O A N RATE F O R W A R D RATE DISCOUNT ( - ) RATE ¥r Note: DIFFERENTIAL WITH "i960 FORWARD EXCHANGE COVER 1961 __ Special forward dollar role ^either flat or premium on spol) available to Girtnon commercial banks. I I I - 0 INTEREST ARBITRAGE, FRANKFURT/LONDON Friday figures 3-MONTH — AND RATE TREASURY LENDING BILLS RATES — DIFFERENTIAL AND FORWARD STERLING i GERMAN TREASURY BILLS / j RATE - DIFFERENTIAL LOAN RATE WITH NET I N C E N T I V E OF U N I T E D K I N G D O M FORWARD \l\ EXCHANGE COVER BILLS O V E R : t/ .V\ IL 1961 SHORT-TERM INTEREST CANADA RATES * g / 1958 1961 ^ 3 month treasury bill rolel lor all countries except Japan (3 month interbank deposit role) and Switzerland (3 month deposit rate) "J" 3 month role lor U S dollar deposits in London LONG-TERM BOND YIELDS A/ INDUSTRIAL STOCK INDICES J.95 8 Index of all tlocki traded on Tokyo exchange MAJOR CURRENCIES IN TERMS OF THE SPOT U. S. DOLLAR PER CENT Above -J-V par 3-MONTH FORWARD RATES - LONDON QUOTATIONS |JGERMAN MARK PREMIUM +
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