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DIVISION OF I N T E R N A T I O N A L F I N A N C E BOARD O F G O V E R N O R * F E D E R A L R E S E R V E SYSTEM July 27, 1962 H. 13 No. 69 LIBRARY JUL SO 1962 FEDE:-:,;' OF r.: .1.IOHD r; • / CAPITAL MARKET DEVELOPMENTS ABROAD I. IIo United Kingdom Nine Charts on Financial Markets Abroad United Kingdoms Money and Capital Markets in May and June Credit became more f r e e l y available in B r i t a i n as the clearing banks sought o u t l e t s for the £72 million special deposits which the Bank of England released on May 31. Heavy clearing bank purchases of Government s e c u r i t i e s contributed to a s u b s t a n t i a l decline in yields on Treasury b i l l s and bonds which occurred r e c e n t l y . On June 20 the l i q u i d i t y r a t i o of the clearing banks stood a t 33olt per cent well above the minimum r a t i o of 30 per cent, and bank lo^ns showed a s l i g h t increase. Considerable scope f o r additional bank lencl^ng e x i s t s should the demand f o r loans increase,, ^ " f h e decline i n prices of i n d u s t r i a l stocks on the London stock exchange, which had begun on April 27, ceased on June 26. Prices remained stable through the middle of July, but they began to decline again on July 17 0 However, the stock market has been quiet through June and the e a r l y p a r t of July with s u b s t a n t i a l funds being invested i n the gilt-edged market. Investors apparently f e e l t h a t the r e l a t i v e l y high yields on Government s e c u r i t i e s makes. them a t t r a c t i v e in l i g h t of the current yields on stocks and the poor prospects f o r the growth in p r o f i t s and in c a p i t a l values. With the sharp f a l l s i n stock p r i c e s i n May and e a r l y June, the average y i e l d on i n d u s t r i a l stocks was 6e01 per cent on June 19 (see Table)* On t h a t day the stock yield rose above the bond yield f o r the f i r s t time since 1959o / In the foreign exchange markets, s t e r l i n g was s l i g h t l y stronger i n June than in May, f l u c t u a t i n g around one quarter of 1 per cent above p a r . Reserves increased by £6 million a f t e r adjustments f o r s p e c i a l t r a n s a c t i o n s e . During July, the price of gold in the London market rose to $35°lU*-l/2 per ounce compared with the $35.08 l e v e l prevailing in April and May. The f i n a n c i a l press reported "big European buying" and estimated t h a t around July 20 "sales are thought t o be running i n the region of $25 million d a i l y , " (Financial Times, July 21, 1961, p . 1 . ) However^ on July 25, the gold p r i c e f e l l to 35.12o During the period of heavier a c t i v i t y i n the gold market, the r a t e of i n t e r e s t on U.S. d o l l a r deposits i n London (Euro-dollars) has gone up, despite the declining tendencies i n the i n t e r e s t r a t e s t r u c t u r e - ! ! ! B r i t i s h f i n a n c i a l markets. The average r a t e f o r the 3-month deposit was maintained a t approximately 3»67 per cent from June 1 to July 6 but on July 13 went to 3.9ll per c e n t . On July 20 i t declined t o 3.72 per cent, but i t rose f u r t h e r during the week of July 23. NOT FCR PUBLICATION DECONTROLLED AFTER SIX'MONTHS NOT FOR PUBLICATION Money market. Short--terra r a t e s , -which had been declining since ' 'March c, remained steady during the f i r s t half of June and then rose a t the end of the month. (See Table and Chart 1,) Money was short on June 30 when f i n a n c i a l i n s t i t u t i o n s sought to increase t h e i r cash position f o r the ''half year make-upu and the Bank of England a s s i s t e d the market both by purchasing Treasury b i l l s and by lending to the discount houses e The Treasury b i l l r a t e , a t 3,69 per cent a t the beginning of June, reached 3„8L per cent a t the end of .rZ-nvh, but i t declined only to 3«Bl per cent on July 13o There *73re no covered arbitrage opportunities during the f i r s t half of June5 but a small covered margin i n favor of the United Kingdom developed during the l a s t half of the month» (See Table and Chart 1 , ) I t was eliminated by the f a l l i n the B r i t i s h b i l l r a t e during the f i r s t week of • July e The r a t e s offered on three-months local authority deposits fluctuated between 3*50 and 3„60 per cent during the f i r s t three weeks of June., (See t a b l e , ) As the demand for money increased a t the end of June, the r a t e went up to. 3 =-75 per cent = .The Financial Times reports t h a t there was an inflow of foreign funds into the local a u t h o r i t i e s market during the week ending June 27 but t h a t there were no s i g n i f i c a n t sums of foreign money moving e i t h e r in or out of t h i s market during the r e s t of June or during the f i r s t two weeks of July, Covered a r b i t r a g e opportunities f o r holders of Euro-dollar deposits to = ..it,., into l o c a l - a u t h o r i t y deposits were infrequent and i n s i g n i f i c a n t , The d i f f e r e n t i a l s (in per cent per annum) were as follows: May u .11 18 25 June +O0O6 40.13 -rC_\. , 1 8 15 22 ' -0 = 17 -0,18 -0C-3.17 June 29 July 6 13 20 +0„06 -*0.07 -C.32 -T.07 In the week of July 13,, the sharp r i s e in the r a t e on Euro-dollar deposits •brought t h i s r a t e . s u b s t a n t i a l l y above the l o c a l authority-deposit r a t e 0 B r i t i s h Treasury o f f i c i a l s have been nee ting with representatives of l o c a l a u t h o r i t i e s to seek methods to prevent a r e p e t i t i o n of the embarrassing s i t u a t i o n which took place i n March when substantial short-term foreign funds were channeled into the local a u t h o r i t i e s market j u s t a t the time when the a u t h o r i t i e s desired to reduce the inflow of f o r e i g n short-term capital* The reductions in Bank r a t e led t o a f a l l i n bank deposit r a t e s and i n the Treasury b i l l r a t e / but the local a u t h o r i t i e s were bidding r a t e s up as they urgently required funds a t the end of their- f i n a n c i a l year. However2 i t i s not l i k e l y t h a t t h i s problem w i l l be solved u n t i l arrangements are made for the local=authorities to secure short-term and other funds from sources other than by separate borrowings in the money market 0 „ . . -Stock market. The f a l l i n stock prices was arrested during the l a s t week of June, (See Chart 7°) From April 27 through June 25 c stock p r i c e s • f e l l on every day but two<> The prices declined in t h i s period by 18 per. cent, NOT FOR PUBLICATION NOT FOR PUBLICATION - 3 - However, following a r e v i v a l of buying i n the New York Stock Exchange, p r i c e s in London recovered on June 26. On June 27, the Financial Tiroes Ordinary share index rose by 10 points to 257s and the index f l u c t u a t e d narrowly about t h a t l e v e l u n t i l July 17 o On the following three days the r a t e declined, reaching 2£8 on June 20. The market was f a i r l y quiet during the period of recovery* The sudden and the rapid recovery a t the end of June i s reported to have occurred on a t h i n market. Gilt-edged market. At the end of the f i r s t week in July, there was widespread demand for gilt~edged s e c u r i t i e s . July 6 was described by The Times as the "best day in years" f o r the gilt-edged s e c u r i t i e s . Purchases were i n i t i a t e d i n June by the clearing banks, which invested a large amount of the funds released from Special Deposits in the gilt-edged market (see below). They concentrated t h e i r purchases on the short end of the market and i n maturities from f i v e to 10 y e a r s . As prices _in these ranges moved up, other investors were encouraged t o switch into long maturities and undated bonds. The unexpected gilt-edged a c t i v i t y lowered y i e l d s throughout the range of Treasury s e c u r i t i e s . (See Table and Chart 6 . ) Between June 28 and July 12, changes in y i e l d s on representative bonds were: 2 -year U basis points 13-year UO " " UO-year 20 " " War loan 21 " " Consols u. The Government Broker t r i e d to slow down the price r i s e s of Treasury bonds by lowering the pace of the £ per cent Treasury bond 1986-89 (which i s available as on top b a s i s in o f f i c i a l p o r t f o l i o s ) below those of comparable m a t u r i t i e s . London clearing banks. The June 20 balance sheet of the -London clearing banks reveals t h a t the additional special deposits called up l a s t July and which were released a t the end of June were invested p r i n c i p a l l y i n gilt-edged s e c u r i t i e s . Advances to the nationalized i n d u s t r i e s declined by £20 m i l l i o n . The £UU million increase in other loans shown in the table below r e f l e c t s i n s u b s t a n t i a l part—perhaps £30 t o £U0 million—the debiting of h a l f - y e a r l y i n t e r e s t charges, according to the Economist of June 30, 1962 (p. 1368)o So new loans may have been only from £U t o £lU m i l l i o n . Should the demand for advances increase, the banks are in a favorable p o s i t i o n f o r making additional loans, as the l i q u i d i t y r a t i o stood a t 33.h per cent on June 20. Recent changes in the net deposit l i a b i l i t i e s and selected assets of the London clearing banks are as follows: NOT FOR PUBLICATION NOT FOR PUBLICATION London Clearing Banksi —-. - • Net Deposit L i a b i l i t i e s and Selected Assets (in millions of pounds J " Ch a n g e s July- Oct r = Jan 0 April - June 1962 Sept* DeCo Mar, May June | Total Apr, 1961 1961 1962 — Outstanding June 1962 Net Deposits •=* uh + 2h - 90 - 6 +16 +121 +131 Liquid Assets Cash Call money Treasury b i l l s Other b i l l s ~ 8 " 5 +112 + 29 + 2L + 81 + 2 h - 16 + 33 -287 + 21 + 7 -a +52 -16 +3U +15 -10 + + + 16 - 26 1-123 + 3 ~ 36 • + 71 - 23 +1U + 3 + 7U + 91 1*075 .112 + i -180 + 6 - 75 • - 20 - 3 -+ hk + - 29 Uh 36 3,35L 1U9 Loans.and other investments Gilt-edged Other market investments I Advances s Nationalized industries Other (net) Special deposits with Bank cf England + 76 Selected assets as percentage of gross « deposits (end of period) Total l i q u i d assets • Cash Special deposits =C"-= — — s ' i ! - 6,2 ' '3.0 3 +169 - 1 :^.6 6.: 3,0 25 16 56 13 — - 9 + 3 — 32.6 8 3 3o0 +1 - 72 • - 71 32.6 8,0 2.9 33oU 8.3 2.0 33.U 8 0 2.0 6,381 626 713 917 276 3;.k - e„3 .. ,0 ! Installment credit„ Outstanding installment credit of the finance houses rose f o r . t h e f i r s t time since July 196lo This was due e n t i r e l y to new c r e d i t extended for financing automobile purchases„ Credit advanced by rinanee houses for the purchase of other durables continued to decline in Mayo The outstanding installment credit of shops also f e l l i n May, Changes in c r e d i t outstanding Jsince June 1961 (in millions of pounds) were: C h a n g e s Total June . 1961 Shops Finance houses 306 651 Total 957 1961 OcDo" July-» Dec,, Sept- c jan 0 •=• Mar, 1962 = Mar. Agr, - 3 » 1 +6 -13 -26 - 5 •' - 3 « 2 •- 6 - 1 + 3 k -26 -39 -11 -> 2 " NOT FOR PUBLICATION - 5 NOT FOR PUBLICATION - 5 - Foreign t r a d e . Exports in June showed the l a r g e s t monthly change (seasonally adjusted) t h i s year, and imports were down from May, The seasonally adjusted trade balance f o r June was the lowest monthly d e f i c i t for the year* The r i s e in Imports in May can be attributed to heavy food and animal f e e d s t u f f s requirements from abroad as the r e s u l t of poor crops in B r i t a i n . Seasonally adjusted trade figures (monthly averages in millions of pounds) for recent months were: 1962 Jan. Feb. I960 Mar. A E j l • May June 1961 Imports c . i . f . . Exports f * o . b . Re-exports -380 296 12 -367 307 13 -380 300 12 -362 307 11 -358 312 11 -359 31U 1U -380 316 15 -369 328 Hi Trade balance - 72 - kl - 68 - UU - 35 - 31 - h9 - 27 Foreign exchangee reserves. The gold and foreign exchange„reserves f e l l in June une by £33 million. milli< However, t h i s figure must be adjusted upwards by £36 million to take into account the foreign exchange cost of the aid to Canada and by £3 million to o f f s e t the i n t e r e s t payment on the U.S. loan of 19U6. Recent monthly changes i n reserves (in millions of pounds) are as follows s * 1961 Nov. Dec* Reported figure Adjusted f o r special transactions Jan. Feb. 1962 Mar. A^r* Ifejr June + 9 -85 +33 +5 +10 + 7 +19 -33 +59 -18 +33 +80 +72 +32 +26 +6 Foreign exchange market. The spot r a t e remained above 280.93 cents during the middle of June, but declined somewhat towards the end of the month* (See Table and Charts 8 and 9.) The Economist a t t r i b u t e s t h i s f a l l t o the improvement of the Canadian d o l l a r . British traders have made purchases bf Canadian dollars that they had postponed* On July 10 there was a decline to 280*52 cents caused by a rumor t h a t currencies were to be realligned* The r a t e returned to 280.70 two days l a t e r , and i t has gradually increased to 280.78 cents on July 20. Selected recent daily r a t e s f o r spot s t e r l i n g (in U.S. cents per pound) were: May U 11 18 25 281.28 281.2U 281*29 281,15 June 1 8 15 22 29 280.97 280*80 280*97 280.93 280.86 NOT FCR PUBLICATION July 6 13 20 280*66 280.75 280*78 NOT FOR PUBLICATION Security sterling? f l u c t u a t e d w i t h i n a one-half per cent range during the period under consideration^ from 279<>75 - 280=30, Selected d a i l y r a t e s f o r s e c u r i t y s t e r l i n g ( i n U0S0 c e r t :-: per pound) were: May h 11 18 25 , June 281.25 2#1.25 281,13 281.06 1 8 15 279.75 280.00 280.30 280c19 280.00 22 29 July 6 13 20 279.75 280.12 280.13 Bullion marketo In June and July p r i v a t e demand f o r gold became e x c e p t i o n a l l y strong i n the London gold market« The p r i c e a t the d a i l y London f i x i n g ' c l i m b e d from around $35.08 per ounce on May b t o $35,091 on May 25, $35,106 on June 29 and as follows during Julys July 6 13 20 35:113 35.122 35.^.3 Europe and B r i t i s h Commonwealth Section 0 IIo Chart Chart Chart Chart Chart Chart Chart Chart Nine Charts on F i n a n c i a l Markets Abroa'd » I n t e r e s t Arbitrage^ United States/Canada - I n t e r e s t Arbitrage^ New York/London -• I n t e r e s t Arbitrage f o r German Commercial Banks - I n t e r e s t Arbitrage <, Frankfurt/London - Short-term Bend Yields - Long-term Bond Yields - I n d u s t r i a l Stock Indices - Spot Exchange Rates — Major Currencies Against U050 Dollar Chart 9 - 3-month Forward Exchange Rates 1 2 3 U 5 6 7 8 NOT FOR PUBLICATION - 7 United Kingdom: Treasury B i l l Yields and Exchange Rates 3-mo. Treaaiury b i l l arbitrage calculation U.K. U.S. Differ3-»o*~ In favor U.K. b i l l Spot pound (U.S. cents) Wj. dollar (,3-ma.) Local authority (3-*o.) 1961 - High Low 6.7k k.17 2.7U 2.16 U.U5 1.88 -0.79 -U.36 1.13 -2.12 281.62 278.17 lt.00 3.13 7.50 6.00 April 20 27 May h 11 18 25 June 1 8 15 22 29 July 6 13 20 U.19 it.03 3.97 3.88 3.78 3.72 3.69 3.69 3.66 3.78 3.8U 3.81 3.81 3.88 2.73 2.7k 2.73 2.63 1.U6 1.29 1.2U 1.25 -1.71 -1.U8 -1.32 -1.07 -0.25 -0.19 -0.08 +0.18 281.16 281.25 281.28 281.21V +0.12 -0.01 — +0.08 +0.21 +0.13 +0.05 -0.03 +0.12 281.15 280.97 280.80 280.97 280.93 280.86 280.66 280.75 280.78 3.50 3.50 3.56 3.63 3.56 3.69 3.72 3.69 3.66 3.66 3.69 3.66 3.9k 3.72 5.31 5.00 lt.9lt lt.8l U.70 It. 56 lt.56 lt.56 It.Ut It.32 lt.56 lt.56 U.50 U.5o 2.68 2.69 2.69 2.65 2.71 2.7b 2.90 2.93 2.96 2.91 1.10 -1.0U 1.03 1.00 1.05 0.95 1.0U 0.9U 0.88 0.85 0.97 +0.06 -0.91 -1.01 -1.05 -0.87 -0.83 -0.81 -0.83 -0.88 -0.85 281.29 a / Spread between spot and 3-month forward rate in per cent per annum. Discount equals ( - ) . United Kingdom; Selected Capital Market Yields U.K. Government bond yields * 5-1/2# 3-W i-l/ii 1965-75 2008-12 War Loan Consols Share yieJ4 Yield 5.U8 U.22 1.90 0.86 365.3 287.7 6.22 April 19 6.25 6.15 0.90 5.07 6.31 5.25 6.22 6.20 26 6.27 6.13 0.98 lt.95 5.15 6.20 May 3 5.02 6.23 6.25 6.13 0.96 5.17 6.20 6.20 6.30 10 6.25 0.91 lt.95 5.31 6.22 It. 81, 6.20 6.30 5.28 6.15 0.87 17 6.22 6.28 I1.8I 6.15 6.1U o.6u 2h 5.50 6.26 6.20 lt.76 6.19 0.U8 31 6.33 5.71 6.28 June 7 6.25 6.23 0.38 6.37 5.85 U.55 6.20 6.25 6.32 6.17 0.22 1h lt.5U 5.95 6.22 6.20 It.62 21 6.21 6.36 5.98 0.23 6.22 6.20 6.16 28 6.31 5.86 U.5U 0.30 6.Ui 6.18 July 5 lt.52 6.15 6.2k 5.80 . 0.38 6.00 5.82 6.10 12 U.5o 5.86 0.08 5.9U 5.81 6.05 6.12 19 lt.5o 6.01 5.97 -O.Olt a / Financial TimssT J / Difference between yield on 2-1/2 per cent Consols and share yield • 298.6 305.1 305.5 297.5 296.5 28U.3 273.8 267.lt 262.9 26l.lt 266.9 269.6 266.9 260.2 196U 1961 - High Low 6.65 5.15 6.68 5.95 __ — 6.92 5.95 6.78 5.70 g j? Share prices INTEREST Thursday ARBITRAGE, UNITED STATES / CANADA figures THREE-MONTH TREASURY BILL RATES Per i i.l.i J -Li I. RATE DIFFERENTIAL AND FORWARD CANADIAN DOLLAR A/ J.J.Li J J . i 1.1.. RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER cent pe, ann INTEREST A R B I T R A G E , NEW YORK/LONDON P a r t» n I p « r o^n 3-MONTH TREASURY BILL RATES^ RATE D I F F E R E N T I A L A N D _ j ~ 3 - M O N T H FORWARD STERLING I S P R E A D IN FAVOR OF L O N D O N lYVFORWARD RATE 1 ... 1 ..i RAT E DIF FERE NTIAL. W I T H D E X < G E C O V E R f W A R : H A N ~ F O F - J I IN 1FAVOR 1DF 1 0 N I ) 0 N — r/-v /VV k - % . ...J I N I A V O R () F NEW ^ YORK - if I I 1 1 II 1 1 1 1 1959 I I 1 ! i960 I I 1 1 I I II 1961 I l I l I I l l 1962 1 i 10 INTEREST ARBITRAGE FOR G E R M A N 3-MONTH , EURO TREASURY DOLLAR BILLS* DEPOSIT COMMERCIAL B A N K S INTERBANK EUBO-DOLUB RATE D I F F E R E N T I A L AND RATE D I F F E R E N T I A L WITH NET I N C E N T I V E : LENDING RATE A N D RATES I— FORWARD 1— FORWARD . DEUTSCHE MARK i i EXCHANGE r COVER IN IAV0B OF FBANtFUBT ( + ) INTEREST ARBITRAGE, F R A N K F U R T / L O N D O N Fridoy tip ~ 3 - M O NTH TREASURY BILLS A N D I N T E R B A N K L E N D I N G RATES RATE D I F F E R E N T I A L A N D | 3 - M O N T H FORWARD STERLING \ ! V RATE D I F F E R E N T I A L W I T H ^ GERMAN I N T E R B A N K l O A l T RATE FORWARD EXCHANGE COVER IV/ 1961 SHORT-TERM INTEREST RATES * L'\ t/-V r-Vil7-V "j" J monlli role lor U S ilollur il.poMp. in louilun LONG-TERM BOND YIELDS V k /V v -'V V | 1 • V GERMANY v . . . 1 • V " II I1N I 1 UUU1 1 1 1 1 III1 1 II 1 1 1 11 III1 1 1 1 II II111 1 II 1 1 1 M 1961 1962 INDUSTRIAL STOCK INDICES* CANADA v x r v , v \ 1959 Nole: Jopan: Index ol all Hocki Iraded on Tokyo exchange 1961 1962 SPOT EXCHANGE RATES - MAJOR CURRENCIES AGAINST U.S. DOLLAR. XV CANADIAN DOLLAR doll 1961 3-MONTH FORWARD E X C H A N G E RATES 1 A G A I N S T U. S. D O L L A R S - rtmiuM + - ! - "JL 1•OUNI STEIUNG . DISCOUNT1 1 Against 1 1 1 pound 1 \ 1 sterling 1 , , 1 - l o n d o n 6IIMAM U.S. DOllAI A G A I N S T P O U N D STERL N G - L O N D O N DUTCH SUUDil FIENCH FIANC J* BELGIAN FIANC DISCOUNT- M 1 1 1 J i i i i
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