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-DIVISION OF I N T E R N A T I O N A L -—BOARD OF G O V E R N O R # F E D E R A L RESERVE SYSTEM H. 13 No. 36 December 1, 1961 ^CAPITAL MARKET DEVELOPMENTS ABROAD LIEPJ&BY DEC o . 1331 I. Switzerland II. Japan III. Eight Charts on Financial Markets Abroad FEDZr.U, XT I OFX. . '' Switzerland: Money and Capital Markets during October The gold and foreign exchange reserves of the Swiss National Bank showed a monthly decline in October for the first time since last April, and dropped further in the first half of November. The reduction between October lh and November 15 came to $60 million, and was primarily caused by shortterm placements of funds abroad. These investments were related to the recent activities of the U.S. Treasury on the forward dollar market in Switzerland, in which the Treasury has contracted to buy forward dollars- at attractive rates to stimulate a flow of funds from Switzerland to the United States. To obtain Swiss francs necessary to cover its commitments, the Treasury in October sold in Switzerland the equivalent of $lt6.3 million of Swiss francdenominated certificates of indebtedness. As a consequence,at least in part of this intervention, the-discount on the three-month forward dollar in Switzerland was reduced from 1.1 per cent per annum near the end of September to 0.3 per cent in mid-November. . During the same period, the spot dollar in Zurich remained continuously above the official support level, after having been at the intervention point most of the time during the three preceding months. Concurrently, the discount on three-months forward sterling fell from U.8 per cent per annum at the beginning of October to 2.9 per cent in mid-November. The highly liquid state of the short-term money market was unchanged in October. In early November, preparations for year-end "window dressing11 by the banks resulted in a small increase in rates paid on three-month deposits. After falling in August and September,.long-term bond yields were stable in October and rose in early November. The Swiss stock market continued to reflect primarily the international political outlook, and prices advanced somewhat in October. New issue activity remained high in September and early October„ Attracted by the low borrowing costs in Switzerland, one British firm floated a long-term loan in Switzerland in November, and two other British companies are expected to follow suit in the next few weeks. Money Market. October saw no significant changes in the short-term money market, which continued to be exceedingly liquid. Although the greater part of the liquidity was concentrated with the large banks, the liquidity position of the non-bank credit institutions was also very strong. In the NOT FOR PUBLICATION DECONTROLLED AFTER SIX MOUTHS NOT FOR PUBLICATION first two weeks of November* operations| as a result , the reportedly rose from 1 3/h 2 3/8 per cent by the middle \ -2- , banks began their year-end "window dressing" interest rates offered on 3-month deposits 2 per cent towards the end of October to 2 of November0 ^ Rate on 3-month Interbank deposits with large call loan banks in Zurich rate in Zurich Aug. Sept. Sept. Oct. 30 15 30 IS 1 1/2 - 2 1 3/ii 1 3/li - 2 1 3/h - 2 1 1 1 1 Bond Market, After having fallen from mid-July to the end of September, long-term bond yields were very stable throughout October, and the yield to maturity on the Swiss Confederation 3% bond of 1967-lk fluctuated between 2„9U and 2.96 per cent. In the first-half of November the price of this issue weakened, and the yield rose to 3.07 per cent on November 17= (See Chart 5.) Yields on medium-term deposit certificates issued by cantonal banks showed a further small rise in the first half of October. These yields have been moving up gradually since July, but over the same period there has been no change in the yields on the deposit certificates issued by five large banksc Gov't bond yield New mortgage rate July Sept e Oct. Oct. Nov. Nov. iu 29 13 27 10 17 3.12 2.9U Zc9k 2.96 3.00 3.07 3.76 3.7 6 3.76 n o a* n.a. n0ac Yields on deposit certificates 12 cantonal banks 5 large banks July Aug, Sept. Oct. 31 31 30 15 3.29 3.30 3.32 3.33 3.22 3.25 3.25 3.25 Statistics have been released which show a remarkable growth in Swiss investment trusts in the postwar yearsc From the end of 19U6 to the end of 1959 the number of trust certificates outstanding rose from 2.1 million to 13.0 million and the value of the trusts' assets increased from $57 million to $818 million equivalent. During I960, the number of certificates increased NOT FOR PUBLICATION NOT FOR PUBLICATION - 3 - further by 10 per cent to 1U.3 million while-the value of the assets rose another 16 per cent to $9^4-5 million. It the end of I960, 68 per cent of the value of trust assets was represented by securities, mostly foreign, and the remainder by real estate. A measure of the trusts' role as a channel for savings is seen by the fact that at the end of 1960 their assets equalled about one-fourth of all savings deposits in Switzerland, or one-fourth of total Swiss bonds in circulation, or around one half of bank deposit certificates outstanding, A major reason for the growth of the trusts has been the influx of foreign money. Stock Market> Prices of industrial shares underwent wide fluctuations in the early part of October, the index rising nearly 5 per cent in the first week of the month and falling by 3.1+ per cent in the second. (See Chart 6.) This behavior was ascribed to changing sentiment over the international situation and, during the second week, to profit taking. Commentators pointed out that ever since the start of the current Berlin crisis, Swiss stock prices have been more affected by the international political outlook than by economic factors. Since the end of August, the market has staged some recovery from the very large drop in prices that took place after the middle of June. On October 13, the industrial share index was 7 per cent higher than on August 25, although still nearly 13 per cent under the record high set on June 16. In the three weeks from October 13 to November 3, there was a further small increase in the general level of industrial stock prices. Industrial share index June 16 Aug. 25 Sept. 29 Oct. 6 Oct. 13 285 232 2l|6 258 2U9 New Issues. New issue activity picked up further in October, and in at least the first half of the month continued to run at a high level. New money raised by public security issues amounted to $38 million in the period October 1-16 compared to $1*1 million in the whole of September of this year and $62 million in October i960. The new issues in September brought the total for January-September 1961 to $U31 million. The nine-month total already exceeds the $382 million raised in all of last year, and exceeds the $267 million raised in January-September i960 by more than 60 per cent«, As the figures below bring out, the increase this year reflects in particular a rise in foreign loan flotations from $76 million in JanuarySeptember i960 to $180 million in the first three quarters of 1961, The demand for foreign securities has been intensified this year by the exceedingly heavy inflows of foreign funds, coupled with the "gentlemen's agreement11 under which new foreign funds are not permitted to be invested in Swiss securities and earn no -interest when deposited in bank accounts. On the supply side, there is the attraction of relatively low borrowing costs in Switzerland and the desire of the Swiss authorities to promote capital export in order to ^ NOT FOR PUBLICATION NOT FOR PUBLICATION - 5 - Foreign borrowings in October-November Amount (mil. $) October Tiroler Wasserkraftwerke A.G. (Austria) Falck S.p.A. (Italy) November Electric and Musical Industries (UK) Term Coupon Issue Yield to rate price Maturity 9.3 11.6 1967-77 1969-76 5 iu5 100 100 5 . U.5 9.3 1966-76 U.5 100 ln5 Foreign Exchange. In October, the gold and foreign exchange reserves of the Swiss National Bank declined for the first time since last April. Following a rise of $20 million in the first half of the month., reserves declined by $30 million in the second half. This reduction resulted primarily from short-term foreign investments for the account of the Swiss Confederation. Further short-term investments on behalf of the Confederation were mainly responsible for another drop in reserves of $28 million in the first week of November. In the second week of November, reserves fell again by $2 million. Swiss National Bank reserves ($ millions) Gold Foreign Exchange Total Sept. Oct. Oct. Nov. Nov. 31 Ik 31 7 15 2,173 2,526 2,526 2,506 2,506 275 2k2 212 20k 202 • 2,718 2,768 2,738 2,709 2,707 The investments for the Confederation were related to the recent actions of the U.S. Treasury in the forward exchange market in Switzerland. In recent months, the U.S. Treasury has been buying forward dollars from certain Swiss investors who were prepared to make covered short-term investments abroad if the cost of forward cover were not too high. The purpose of the program is to promote directly a movement of funds from Switzerland to the United States by buying forward dollars at rates attractive to these investors, and to induce further monetary movements of this type by bringing down the discount on the dollar in the forward exchange market. On maturity of the forward contracts the Treasury requires Swiss francs. For this purpose, in October the Treasury placed in Switzerland $U6.3 million equivalent of Swiss franc-denominated certificates of indebtedness. The certificates have a maturity of three months and yield 1.25 per cent per annum. In October and the first half of November, the spot dollar remained above the Swiss National Bank intervention point of SF L.315. Fluctuations NOT FOR PUBLICATION NOT FOR PUBLICATION - 6 - in the rate were confined to a narrow range of SF U.319 - U*32?5> and on November 1,7 the rate was around Lu32£. Spot sterling opened the month of October at SF 12.18, the highest since May I960, and between then and midNovember oscillated narrowly around SF 12.165. In the forward markets, the discount on the three-month dollar was reduced from about 1.1 per cent per annum in the last week of September to around 0.7 per cent in the first week of October, fell further to 0,3 per cent in the closing days of October, and stood at 0.3 per cent in mid-November. On three-month forward sterling, the discount was reduced from U.8 per cent per annum at the beginning of October to 2.9 per cent in mid-November. The large reduction in the discount on the forward dollar is at least partly a consequence of the activities of the U.S. Treasury in the Swiss forward market. • . — It was reported in mid-October that the large volume of Swiss funds that had earlier been repatriated from Germany because of the Berlin crisis had in part been reinvested in Swiss securities, and in part had been deposited in Canada, London, and New York. European Section. NOT FOR PUBLICATION -7 - II._ Japans Money and Capital Markets During October Pressure on the Japanese balance of payments continued in October as international reserves fell $10U million to $1,5>06 million, off $$29 million from the end-of-April peak. The capital outflow, which began in August, continued in October when net capital outpayments, as measured on an exchange transactions basis, totaled $30 million. These outflows included reductions in acceptance credits from U.S. banks and in Euro-dollar deposits borrowed byJapanese banks in European markets. (In April 1961, Japanese borrowings of Euro-dollars were estimated at $31h million by a Japanese research publication.) Current account outpayments were $76 million in October as the trade balance worsened significantly. To ease the reserve position, Japan signed an agreement with three American banks on November 2li for total credits of $200 million0 The credits will be extended for a period of 360 days at a hd? per cent rate of interest. In October Japan received $32 million in long-term credits from the U.S. ExportImport Bank.and another $11 million in November. On November 29 the I.B.R.D. approved a long-term $L0 million loan to the Japan Highway Public Corporation. Negotiations are underway with the U.S. Export-Import Bank for credits totaling $125 million to finance the import of various agricultural commodities. Japan has not approached the I.M.F. for a drawing and it appears" unlikely that this step will be taken this year. There are signs that the rate of credit expansion has slowed and in October Treasury and central bank operations increased banking liquidity. The increased advance import deposit requirements instituted in September may be curbing import demand as there was a strengthening of the yen in the forward market in November. The stock market, after a brief recovery, has remained depressed. Money Market. In October there was a net increase in bank liquidity owing to substantial net Treasury outpayments to the public and an increase in central bank credit. Foreign exchange operations withdrew ¥ h3 billion from circulation, reducing net Treasury outpayments to ¥ 7h billion«, Bank of Japan loans and discounts rose ¥ 2h. billion, which was considerably less than in previous months. These expansionary factors were only partly offset by an expansion in bank note issue of ¥ 16 billion. Interest Rates. The average interest rate for all commercial banks continued to move up in September, reaching 8.00 per cent, compared to the June low of 7.88 per cent. The continued rise reflects the increase in the Bank of Japan's discount rate in July and September this year which lead to upward adjustments in commercial bank lending rates. - Average yields on bank, public corporation and government debentures were unchanged in September from the August levels. The yield on corporate debentures dropped from 7»512 per cent in August to 7.U90 per cent in September, •' thus continuing a downtrend from the July peak this year. NOT FOR PUBLICATION NOT FOR PUBLICATION - 8 - The highest Tokyo call-loan rate for those loans callable at a dayfs notice rose from 13.87 per cent in August and September to 16.U3 per cent in October. ^ Average Monthly Interest Rates on Bank Loans and Discounts March June September December 1958 1959 1960 1961 8.63 8.61 8.11 8.27 8.18 8.08 8.06 8.11 8.21 8.22 8.Ill 8.08 7.92 7.88 8.00 Bank Loans and Discounts. Bank credit expanded at a slower rate in September than a year earlier, thus continuing, the slowdown first evident in July and August. Total bank loans, discounts and security holdings rose 1.8 per cent in September compared to 2.U per cent a year earlier. Deposits rose 308 per cent as against U«3 per cent in September 1962. With the increased monetary restraints imposed late in September, it is likely that bank credit will continue to expand less rapidly. During the third quarter period, both bank credit and deposits expanded less than in the third quarter of I960, The proportion of bank loans and discounts extended for equipment purchases in September remained" at 17 per cent, unchanged from the August level. Commercial Banks s Quarterly changes in Deposits and Principal Assets (In billions of yen) MAIN ASSETS Per Per Per Per cent cent Bills cent cent Deposits change Loans change Discounted change Securities change 1959 I II III IV. +201 - 22 +276 +U75 3.1 -0.3 U.1 6.8 1960 I II III IV +2U9 I II III 1961 +1U3 + 83 +136 +207 3-6 2.0 3.2 U-7 + 21 + 86 +1U9 +169 1.2 U.9 8.1 8.5 + + + + +506 +607 3.U 1.3 6.5 7.3 +176 +167', +2 UU +3U7 3.8 3-5 U.9 6.7 + 5I1 + 87 +172 +185 2.5 3.9 7.5 7.5 +502 +169 +359 5.7 1.8 3.8 +326 +206 +216 5.9 3.5. 3.6 + 18 +133 +206 1.8 U.9 7.3 + 96 51 62 58 66 5.2 6.1 5.3 5.8 + 78 + 75 + 35 +127 6.5 5.8 2.6 9.1 +103 +10U + U3 6.8 6.U 2.5 Bond Market. New issues of industrial debentures dropped from ¥ 26 billion in August to ¥ 16 billion in September, possibly reflecting the tight NOT FCR PUBLICATION - 9 - NOT FOR PUBLICATION money conditions and a government request in July that businesses cut back on their capital investments, The volume of other new issues rose between August and September, however, leaving the total volume of new issues relatively, unchanged. New issues of bank debentures were ¥ 62 billion in September, up ¥5 billion from the August level, and new issues of public corporate debentures were ¥ 19 billion in September, up ¥ 2 billion from August, Total new issues in September were ¥ 97 billion, down only ¥ 3 billion from August, 1 Stocky Market, Following the sharp 29 per cent decline in the stock price average between July 18 and October 23, stocks gradually recovered 10 per cent in the following two weekso From the year's low of ¥ 1,300 on October 23, the stock average rose to ¥ l,li29 on November 8, In the last three weeks of November, however, prices again turned down and by November 29 the average reached ¥ 1,303, close to the year's low, (See Chart 6 -) Dow Jones Average of 225 Stocks Tokyo Stock Exchange September 27 October U 11 18 25 ¥ 1,500 1,U20 1,399 1,356 1,318 November 1 8 15 22 29 ¥.1,360 1,129 1,389 1,376 1,303 I960 High ¥ 1,357 Low ¥ 869 1961 High ¥ 1,830 Low ¥ 1,300 Foreign Trade, Following a slight improvement in September, the trade deficit, seasonally adjusted, worsened substantially in October, Exports continued to remain stagnant and imports rose substantially, increasing the trade gap from $156 million in September to $219 million in October, According to preliminary estimates, the unadjusted deficit on current account in October was $76 million and the net capital outflow was $30 million compared to $28 million in September, The continuing net capital outflow is attributable in part to a decline in outstanding trade acceptances and the level of Euro-dollar holdings. The monthly averages of seasonally adjusted trade figures (in millions of dollars).are detailed below. 1960 1961 I II III July August September October Exports Imports • Trade Balance 337 3# - 38 3Wi 351 3# U20 I166 511 - 76 -115 -152 358 363 356 #7 U77 513 512 556 -119 -180 -156 -219 NOT FCR PUBLICATION — 10 — NOT FOR PUBLICATION Foreign Exchange. During October and the first half of November the yen-dollar spot rate continued to remain at the official support point„ The three-month forward rate of the yen against the dollar, however, strengthened slightly in mid-October and also in the second week of November. The forward discount of the yen against the dollar fell from 1«LL per cent per annum on October 18 to .89 per cent per annum on November lh« The strengthening of the yen against the dollar in the forward market was reportedly due in part to the monetary and import restrictions instituted in September which have reduced demand for foreign exchange. Customer1s T. T. Exchange Rates of Bank of Tokyo in Tokyo Yen-dollar spot middle rate 3-month forward middle rate September 29 361.10 362.10 Ichh October 6 13 20 27 361.10 361.10 361.10 361.10 302.UO 362.UO 362.30 362.30 l.Ui l.hh 1.33 1.33 November . 3 10 15 361.10 361.10 361.10 362.30 362.00 361.90 1-33 1.00 089 Date Forward discount in per cent per annum Far Eastern Section. III. Eight Charts on Financial Markets Abroad 1 - Interest Arbitrage U.S./Canada 2 -Interest Arbitrage New York/London 3 - Interest Arbitrage New York/Frankfurt h - Short-term Bond Yields 5> - Long-term Yields 6 - Industrial Stock Indices 7 - Major Currencies in Terms of Spot United States Dollar Chart 8 - 3-month Forward Rate—London Quotations Chart Chart Chart Chart Chart Chart Chart NOT FOR PUBLICATION INTEREST ARBITRAGE, U N I T E D S T A T E S / C A N A D A iThursday figures T H R E E - M O N T H TREASURY 1 I I L RATES RATE DIFFERENTIAL A N D F O R W A R D C A N A D I A N DOLLAR S H I A D IN f A V O I Of CANADA + ATv v v RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E COVER NIT INCENTIVE IN FAVOI Of CANADA + ±_1. m 1159 1160 19*1 J 1162 INTEREST ARBITRAGE/ NEW Y O R K / Fridoy LONDON ligum 3 - M O N T H TREASURY BILL RATES LONDON' 7T1 NEW YOB*' RATE DIFFERENTIAL A N D 3 - M O N T H FORWARD STERLING SPREAD IN FAV06 OF LONDON RATE DIFFERENTIAL W I T H FORWARD E X C H A N G E COVER IN FAVOK OF 10ND0H. J B FAVOI OF NEW * 0 1 1 1959 rcHori 3 1 INTEREST 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 Frldoy l i g u r * : *3- MQLN.FH TREASURY BILL RATES ANC^ G E R M A N 3 - M O N T H I N T E R B A N K L O A N RATES ] GERMAN 3-MONTH; RATE D I F F E R E N T I A L A N D F O R W A R D DEUTSCHE M A R K 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 E X C H A N G E COVER.! NET I N C E N T I V E 1 : I N F A V O R OF F R A N K F U R T ; ( + ) X/ X" Note: no x " M60. av or? Speciol forward dollar rofej available to German commercial bank:. an*I EL1U1, K- i¥; . S H O R T - T E R M INTEREST RATES * E U 8 0 - D 0 U A 8 . IQWDON f lAPi* A A ,Xv" A / J V ,/ h f />J\/\Jy : \ : \ V IK \ 1 1 A! CANADA - he* ^ w / y v-yv (TZEKLAND I MI 1 I1 1.i M i 1 II II II II M 1 1 1 1 1 1 11 11 11 11 11 1 1M 1I1I1I1I I I111 1958 1959 1960 1961 3-month treasury bill roles for all couniries except Japan (3-month interbank deposit rate) and Switzerland (3-month deposit rate) "j", 3 month rale for U S dollar deposits in London, 1962 L O N G - T E R M B O N D YIELDS ./ V 1958 1959 19 60 1961 1962 I N D U S T R I A L STOCK I N D I C E S * /v \ v JAPAN / . 1 - • U.S. CANADA 4 1 1 M 1 I- 1 1 11 i i i i i i 1959 1960 ii i i i m i n n 1961 ii i I II I I I 1962 I II l J^ vv M A J O R CURRENCIES I N TERMS OF THE SPOT U . S . DOLLAR I960 1961 1962 3 - M O N T H FORWARD RATES - LONDON QUOTATIONS / r\ K PREMIUM 4 - /'GERMAN MARK PREMIUM 4- FRENCH FRANC /
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