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, \ DIVION or INTlWW»T10H»i.-FIMAWCK T" j " e13 , , No. 46: L l : •OARD OF dOVIRMORI OF THE j February 9> 1962 . ^CAPITAL MARKET DEVELOPMENTS ABROAD I» Canada IIo Nine Charts on Financial Markets Abroad Io Canada: Money and Capital Markets During January The sharp rise in Canadian short-term interest rates registered in December moderated in January, while yields on intermediate- and longterm bonds showed only slight changes• The Treasury bill rate reached 3.08 per cent on January U and, after fluctuating narrowly, stood at 3.07 per cent on February 1. Despite fairly sizeable purchases of both ^Treasury bills and other securities by the chartered banks, the average liquid asset ratio declined further, from 18.7 per cent of deposits in December to 17.9 per cent in January. In the bond market, yields rose fractionally during .January although prices for short bonds within the 1965-70 range were maintained during the first half of the month as a result of buying by the chartered banks and other investors„ Two short Government issues were offered during the month. Market reports state that provincial bonds have been sought after despite a steady flow of new issues and that prices have moved up in the corporate sector for outstanding issues since there has been an absence of new offerings in recent weeks„ Despite the favorable development of Canadian exports, the Canadian dollar weakened further, declining from 95°8 on January 2 to 95>«I? on February 1, Year-end dividend transfers were the principal cause of the loss,of $23 million in reserves in December, following a decline of $32 million in official reserves in the previous month„ Money market0 Although the December rise in Canadian short-term interest rates moderated in January, tight money market conditions continued to prevailo After reaching 3*08 on January 4, the average auction yield on the 3-month Treasury bill fluctuated within narrow limits and stood at 3o07 on February 1 (see Table)„ The bill rate is thus still slightly more than one-hajLf per cent higher /than the level preceding the rise which began in November (see Table and Chart 1)» The 6~month bill rate moved from 3»2U per cent on January 4 to 3„26 per cent on February 1 (see Table). Although weekly average closing rates for day-to-day money declined from 3»00 per cent on January 3 to 2„li5> per cent on January 21, the monthly average (2„69 per cent) remained higher than the average level of 2.37 per cent in December o Q During the four weeks ending February 1, the chartered banks bought $48 million of Treasury bills, reversing the pattern of purchases, NOT FOR PUBLICATION DECONTROLLED AFTER SIX MONTHS <=» 2 •= NOT FOR PUBLICATION in roughly comparable amountsv9 during the two preceding months0 The banks also continued to purchase government bondss absorbing sales by the general public as well as a portion of a new issue of short-term securities. The Bank of Canada reduced its bill holdings by $69 million, after no net changes during December» Although the chartered banks reduced the volume of outstanding day-to-day. loans during the month$ authorized investment dealers evidently experienced no need for temporary borrowing accommodations by the Bank of Canada, and there were no "purchase and resale" agreements recorded after the last repayment of such transactions recorded on the January 3 reporting date* For the month<> the spread favoring the Canadian bill widened very slightly as a result of a somewhat lower U.S<, bill rate at the end of the montho The net incentive to hold the Canadian bill was reduced from 0o29 to 0.25 per cent during Januarys although there was an increase in the discount on the forward Canadian dollar in early January (see Table and Chart 1)o After rising rapidly during Decembers yields on Canadian shortterm finance paper stabilized0 With U0S0 rates moving higher during the months the yield spread in favor of Canadian paper fell from 56 basis points on December 29 to 31 basis points on January 260 Yields for 30- to 89-day paper for leading acceptance houses in Canada and the United States were as follows5 on the dates shown (in per cent per annum)s Canada December 1 29 January 26 2o75 3.25 ' 3o00 - 3*25_ UoSo Spread 2063 2.63-2.75 2.75 - 2.88 0.12 0.56 0.31 Bond market 0 Yields on Canadian Government bonds with maturities of 3 years and over changed little during January (see Table). The following comparison shows yields on selected maturities for the first and last reporting dates in January. Maturity Mayl96L Jan. 1975-78* Sept. 1983 Jan. h 3.76 1.96 5.00 Jan. 31 3„75 k.98 5o0U During Januarys the chartered banks purchased government bondss although less than the unusually large volume acquired in December. For the four weeks ending February 1 5 the banks purchased $57 million in bonds while the general public sold $19 million in bonds (see Table). Although the Bank made some switches from maturities of over two years to shorter • bonds in order to moderate the yield rise in short maturities. there was no net change in its aggregate bond holdings for the month. Total outstanding Government bonds rose by $72 million. NOT FOR PUBLICATION NOT FOR PUBLICATION - 3 - Yield spreads between comparable Canadian and U.S. Government bonds showed little change during January (see Table). The recent spreads in favor of Canadian issues for several maturities of selected comparable Canadian and U.S. Government bonds were (in per cent per annum): Nov. 29 8-year bond 20-year bond 30=35 year bond OolU 0.78 1„13 Jan. 3 Jan. 31 0.09 0.78 / 1.11 — 0.75 1.1$ According to A. E. Ames & Co„, $796 million of new securities were issued in the period ending January 29, about half of which represented the roll-over of Treasury bills. None of the remainder, which consisted for the most part of new issues of Provincial and Municipal bonds, were reportedly sold on the U.S. market. Debt-management program. The $1^0 million issue of short-term bonds, dated on January 15 and maturing April 1, 1963, was successfully marketed for cash, according to an announcement by the Ministry of Finance. A simultaneous issue of $100 million of 6-year U-l/U per cent bonds, priced to yield about lu33> per cent was acquired, by previous agreement, by the Bank of Canada, in exchange for two lots of $50 million each of issues, maturing in May and June of this year. As a result of this exchange operation, the May and June maturities will each be $50 million smaller, while the $150 million cash issue will reduce borrowing needs in the current fiscal year by an equal amount. These debt operations reflect the Government's policy of offering frequent issues in fairly modest amounts in order to effect a better spacing of maturities and to avoid disturbances which larger issues might produce in Canadian markets. These intermittent issues have also concentrated on short-term maturities in order to free the'" long-term sector for corporate and local government borrowing. The Bank ? of Canada has facilitated this program by advance purchases' of maturing issues and by exchanging these maturities for new refunding issues. These bank holdings have been used for the purpose of stabilizing prices of new issues during marketing periodso Bank loans and money supply. January witnessed further upward movements in general bank loans and the money supply seasonally adjusted. Loans rose by $114.2 million in January9 or by 2.5 per cent, as compared with an increase of 1.8 per cent in December. Despite the rise in loans and a reduction in the liquid asset ratio from 18.7 per cent in December to 17.9 per cent in January, bank liquidity was almost 3 percentage points over the required minimum (see Table). Despite the expansion of bank loans, the effects of the customary post-Christmas return flow of cash to the banking system held the expansion in the money supply during January to less than one-half of 1 per cent ' (see Table)„ NOT FOR PUBLICATION ~ NOT FOR PUBLICATION - k - Foreign trade0 In October, the last month for which seasonallyadjusted data are available, imports continued the rise recorded in the third quarter, in response to rising levels of domestic demand= While exports had risen by 11.1 per cent in the third quarter, however9 they dropped in October by.706 per cent below the September peak level, and U.l per cent below the third-quarter monthly average0 i960 1961 - I II III Exports 451.1 466 <>9 466.9 519.1 Imports T50T 463.8 Wi3.2 U97.3 August September October L93.0 539.1 498.1 513.7 507.8 530.7 Trade balance + 3.1 +23.2 +2108 -20.7 +31.3 -32.6 Foreign exchange0 The Canadian dollar continued to weaken slightly in January„ The exchange rate declined from 95°8 U 0 S 0 cents on January 2 to 9506 U.S. cents on the 15th, but moved rather erratically from day to day during the rest of the month; toward the close of January the rate fell below 95-1/2 cents for the first time but remained at 95*5 U0S0 cents on February 1. The $32 million reserve loss in November was followed by a decline of $23 million in reserves in December as customary year=>end dividend transfers to nonresidents were effected,, A continuation of these payments9 combined with increased commercial demand for foreign exchange, is believed to explain the further depreciation of the Canadian dollar in January0 U0S0 Change durEnd of month Gold dollars Total ing period I960 - Deco 1961 - Septo Oct, Novo Dec. 885.3 926.6 931.6 9Ulol 9b6.2 943.9 997.7 1,179.0 1,137.7 1A09.6 : 1.928.2 1^924.3 2,110.6 2,078.8 2 <,055.8 -60.9 +186.3 - 31.8 -23.0 Wlth a further slight widening of the spread favoring Canadian short-term yieldss the small discount on the 3-month forward Canadian * dollar which developed in early January increased somewhat0 On balance, the net incentive to hold Canadian bills» covered for exchange risk9 changed very little between the beginning and end of January, and on February 1 was still below levels at which funds are induced to move<> Stock exchange» Industrial stock prices declined rather markedly in January and more than offset the moderate rise registered in NOT FOR PUBLICATION NOT" FOR PUBLICATION - 5 - Decembero The weekly average for the index of industrial stock prices on January 25 was U„6 per cent below the end of December, matching the decline (also by h,6 per cent) in the New York Standard & Poor industrial index during the same period (see Chart 6). ; Average for week ending DBS industrials 1961 - June 15 Dec. 30 1962 - Jan. h 11 18 25 329.7 353.1 355.6 319.3 3U0.9 336.8 • N.Y. Standard & Poor Industrials 69.55 75.70 71.65 73.19 72.70 72:25 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 U 5 6 7 8 - NOT FOR PUBLICATION / - 6 - Selected Canadian Honey Market and Related Pat* Canada P.s^/ Spread over U.S. 5 g^ 1961 - High Low 3-3U 2.26 2.66 2.17 0.68 -0.13 101.72 95.91 Dec. 28' Jan. U 11 18 ' 25 Feb. 1 2.99 3.08 3.0U 3.09 3.10 3.07 2»66 2.72 2.78 2.71 2.66 2.69 0.33 0.36 0.26 0.38 Oo UU 0.38 95.88 95.75 95.6U 95.75 95.66 95.U7 3-aoe forward — 95.89 95.73 95.61 95.67 95.59 95.UU Net Incentive to hold Can. bill®/ discount ( - 1 premium(+)2f o.U5 -o.|6 0.89 -0.20 0.07 -0.07 =*o .13 -0.33 -0.26 -0.13 0.U0 0.29 0.13 0.05 0.18 0.25 a/ Average yield at weekly tender on Thursday. yield for the U.S. Treasury bill on Thursday close of business* c/ In U.S. cents, 7 / Spread between spot rate and 3-month forward Canadian dollar on Thursday closing, expressed as per cent per annum. e/^Spread over U.S. Treasury bill (column 3), plus 3-month forward discount or premium (column 6). r b/ Composite market f/ Selected Government of Canada Security Yields 6-mo. Treas. bills Spread Ca gr Intermediate bonds (8 yr.) Spread u T l / u?s!I/ Long-term bonds (20 year) (35 year} Spread Spread C * T u T j / 1961 - High Low 3.63 2.35 1.15 -0.11 U.75 . U.17 1.16 0.0U 5-19 U.80 1.U0 • 0.78 Dec. 27 . Jan. 3 10 17 . 2U 31 3blU 3.2U 3.20 3.26 3.26 3.26 0.23 0.28 0.19 0.39 0.33 0.33 U.17 U=l6 U.17 U.17 U.19 Uel8 0.0U 0.09 0.03 — 0.05 — U089 1.89 U.90 U.91 U.91 U.91 0.78 0.78 0.76 0.77 0.78 0.75 a/ b/ bill o/ a/ e/ 2y ~' C t T "2.23 U.92 1.59 l.lU U.95 U.93 U.95 U.95 U.98 U.95 1.13 loll 1.12 l.lU .1.18 1*15 Average yield at weekly tenc.r on Thursday. Spread between Canadian auction rate and composite market yield of U.S. on close of business Thursday. Government of Canada 2 - 3 A per cent of June 1 9 6 7 - 6 8 . Spread over U.S. Government 2 - 1 / 2 per cent of 1 9 6 3 - 6 8 . Government of Canada 3-l/U per cent of October 1979* Spread over U.S. Government 3 - l A p e r cent of 1 9 7 8 - 8 3 . Government of Canada 3 - 3 A par cent of September 1996 - March 1998. Spread over U.S. Government of 1995* n T £ / Canada: Changes in Distribution of Holdings of Canadian Government Direct and Guaranteed Securities (millions of Canadian dollars, par value) Bank of Canada Treas. Bonds bills 1961-Jano Feb, Mar. April May June July Aug, Sept, Oct. Nov, Dec. 1962-Jan, sources Bank Government Total Chartered banks -Treas. bills Bonds +111 -la + 15 - 38 - 68 + 67 - 96 - 7 +120 - 25 - hi - 36 + 9 - 2 + 59 - 70 + 17 - 22 + 63 - 1 + U3 + 5 + 33 - 7U + 21 + 69 + 16 + 16 + 21 0 + 32 +107 + 16 ,+ 9 + bh - 58 =105 + lU +109 -39 + 3 ~ Ii2 - 9 -125 + 21 + 32 - 18 - 3 « 1 + 88 + U8 - 69 or Canada, Wtekly Financial Statistic!• - 37 + 88 + 50 - 52 + 2h + 62 + 11 +1U8 + 72 + h + 56 +111 + 57 General public Savings Treas. bonds bills Bonds - 2 - 6 . -18 - 37 - 33 - 22 - 23 - 29 - 2U + u +720 - 2h - 10 + + -;+ + + - + 23 + 39 +• 6 -12 + 1 + 37 - 37 - 35 + U2 - 31 - 67 - 77 - 19 U6 26 30 6U 80 7 95 87 UO 3 I4.8 U7 20 Selected Canadian Financial Statistics (in millions of Canadian dollars or per cent) 1. Money, supplyg f/ Currency and deposits Less 5 Govt, deposits Equals s Privately held Change in period Aug. Sept. Oct. Nov. Dec, Jan. lll,368 312 14,056 + 22k 1USU86 U73 Hi,013 U3 1U,399 312 . 11,087 + 7U Hi,695 U52 lli,2U3 + 156 Hi,915 63U lli, 381 + 138 Hi,990 558 Hi,132 + 51 2. General bank loans^/ Change in period 5,367 + 98 5,378 + 11 5,199 + 121 5,620 + 121 5,720 + 100 5,862 + lli2 3- Total Govt, securities s£/ 17,885 Of whichs Treas0 bills 1,885 Bonds 12,577 Savings bonds 3,U23 18,061 1,885 12,776 3,LOO 18,061 1,885 12,729 3,U0U l8,581i 1,885 12,590 Up 109 18,6U8 1,885 12,676 U,087 18,720 1,885 127758 li,078 600 0 1,021: 0 6U0 0 1,159 7 911 0 796 0 5o Chartered bank liquidity:—/ Cash reserve 1,039 Cash ratio 8.1 Liquidity assets 2sUl5 Liquid asset ratio 18,9 1,062 8.1 2,U65 18.8 1,072 8,1 2,173 18.8 1,071 8.1 2,516 19.0 1,082 8.1 2,50li 18.7 l,lHi 8.1 2,U53 17 o9 Uo New security issues^/ Of which sold in U 0 S 0 a/ Seasonally adjusted (average of Wednesdays)0 " ~ ! T>/ Sources A= E„ Ames & C9<>, Ltd. (Includes public and private securities.) £/ Last Wednesday of month„ d/ Commulative average through last Wednesday of month. INTEREST A R B I T R A G E , U N I T E D S T A T E S / C A N A D A Thursday figures "ZZ — T H R E E - M O N T H T R E A S U R Y B I L L RATES RATE D I F F E R E N T I A L A N D F O R W A R D C A N A D I A N D O L L A R SPREAD IN FAVOR OF CANADA + 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 IN FAVOR OF CANADA + I. 1 1.1.1 . I..I .L 1959 1960 1961 1962 INTEREST A R B I T R A G E , N E W Y O R K / L O N D O N 3 - M O N T H TREASURY BILL RATES V / V \ itURO DOLLAR RATE-LONDON RATE D I F F E R E N T I A L A N D | ~ 3 - M O NTH F O R W A R D STERLING SPREAD IN FAVOR OF LONDON 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 IN FAVOR OF NEW YORK . I N T E R E S T AR.B-ITRAGE FOR G E R M A N C O M M E R U A L B A N K S iF r i d a y if i g u r e s Pe'r t e n l 3 - M O N T H TREASURY BULLS, I N T E R B A N K L E N D I N G RATE A N D . EURO D O L L A R D E P O S I T RATES LONDON /Vn 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 I I I SFftEAB IN f AVOR Of FRANKFURT: \ V A V' \ A » *, f O t W A » D l A I i 1 DISCOUNT ( ) 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 i+r NET INCENTIVE: J**" A INTERBANK 1 0 A M I A T I 1960 1961 p er annus. Y> INTEREST A R B I T R A G E , F R A N K F U R T / L O N D O N F r i do y Jig u m ~ 3 - M V N T T r T R E A S U R Y BILLS A N D I N T E R B A N K L E N D I N G RATES — 1 -4 i/\ H— \ A GERMAN INTERBANK RATE DIFFERENTIAL A N D |. - 3 - M O N T H F O R W A R D STERLING 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 T H A N G E ' COVER 'Ar I960 19 61 1962 V SHORT-TERM INTEREST RATES /"S"V/ ' I \ ^ [ U a O - D O L U B • lOHPOW t CANADA 3-month treasury bill rales for oil couninei e*cepi Japan. (3 month interbank deposit rate) and Switzerland (3 month deposit role) \ "j" 3 month rote lor U. S. dollar deposits in London L O N G - T E R M B O N D YIELDS 1958 1959 1960 1961 1962 I N D U S T R I A L STOCK INDICES* SPOT E X C H A N G E RATES - M A J O R CURRENCIES A G A I N S T SWISS FRANC U.K. STERLING U.S. DOLLAR 3 - M O N T H F O R W A R D E X C H A N G E RATES A G A I N S T U. S. D O L L A R S A G A I N S T P O U N D STERLING - L O N D O N ^ A G A I N S T P O U N D STERLjTlG - L O N D O N FRENCH FRANC J j
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