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DIVISION OF INTERNATIO^^irjNANCK BOARD OF OOVKRNORS OF THE FEDERAL RESERVE SYSTEI j / H. 13 No. 241 •> March 30, 1966. / CAPITAL MARKET DEVELOPMENTS ABROAD I. II. III. I. Germany: Germany Ten Charts on Financial Markets Abroad Latest Figures Plotted in H.13 Chart Series, 1966 Money and Capital Markets Developments, September 1965-February 1966 The Bundesbank continued to maintain its restrictive credit policy, and German financial markets remained tight during the September-February period. Some easing of rates occurred after October, however, particularly in short maturities as the re-emergence of an external payments surplus and the drawing down of Treasury balances at the Bundesbank helped to ease liquidity pressures on the banks. (See Table 1.) On the bond market, however, conditions remained basically unchanged from what they had been since July. There was some easing of yields in the first two months of 1966, but the bond market remains intrinsically weak. During the fourth quarter, the effects of the Bundesbank's policies were noticeable for the first time in the reduced voltimeof bank credit below year-ago levels. Previously, the effects.of tighter credit were confined chiefly to the bond market. Table 1. Germany: Selected Financial Indicators (per cent per annum, monthly average except where otherwise indicated) Sept. 1965 Oct. Nov. Dec. 1966 Jan. Feb. Call-money 90-day money 4.77 5.19 4.85 6.43 4.29 6. 29 4.67 6.25 4. 12 4.99 4.49 5.24 90-day Treasury bill 1/ 670 Public authority bond yield 3.88 7.62 3.88 7.74 3.88 7.73 3.88 7.91 4.00 7.59 4.00 7.54 1/ End of period. Source: Bundesbank, Monthly Report; Frankfurter Allgemeine Zeitung. OFFICIAL USE ONLY (Decontrolled after six months) OFFICIAL USE ONLY At the beginning of January, a new form of money-market paper was introduced by one of the big German banks. The Dresdner Bank began to offer short-term notes of six and twelve month maturity to other banks at rates more attractive than those offered by the Bundesbank on open market paper of identical maturity. Since notes of the variety offered by the Dresdner Bank are not subject to minimum reserve requirements, this method of raising bank funds would appear particularly attractive. On January 7, shortly after the new paper was introduced, the Bundesbank raised its selling and buying rates on the entire range of open market paper by 1/8 to 1/2 per cent. When the Dresdner Bank then raised its rates, the Bundesbank followed by increasing its rates on February 23 and again on March 3 by a total of 1/4 per cent but only on maturities of 6 months to 2 years. The increases in money market rates were evidently intended to discourage the growth of the new paper and to maintain pressure on liquidity. The Bundesbank recently announced two other measures to absorb the recent additions to bank liquidity. Banks were informed that short-term loans to foreigners which involved roll-over commitments could no longer be used as an offset to foreign liabilities in the calculation of minimum reserve requirements. Furthermore, as of May 1, 1966 rediscount facilities of commercial banks are to be reduced by DM 1.3 billion, the remaining half of the 25 per cent reduction which was originally to have taken place in October 1964. A number of the recent Bundesbank measures also appear to be aimed at encouraging banks to h-dld their liquid assets in Germany rather than abroad. The first step was the discontinuation in January of the special swap facility which the Bundesbank \had. previously made available to commercial banks for investment in U.S. TreasurySkills. Higher rates on German money market paper should also encourage banks to keep their funds in Germany. It appears that, with the balance of payments deficit, the Bundesbank may now prefer banks to hold more of their funds at home. The German balance of payments showed a deficit in the fourth quarter of 1965 as it had in the two preceding quarters, but it was substantially smaller than the deficits of either the second or third quarters. The improved payments balance reflected seasonal strength in the services account and a more basic improvement in the trade account. The private capital account, on the other hand, dwindled from a substantial surplus position to a small deficit. This shift, however, appears to have been entirely the result of special year-end movements which were largely reversed in January. Assuming that capital will continue to flow into Germany, the expected improvement in the German trade account during 1966 may well lead to an end of the recent deficits in Germany's balance of payments. OFFICIAL USE ONLY OFFICIAL USE ONLY Money market remains tight Conditions on the German money market have remained relatively tight since last September. Beginning in November, however, market conditions were generally somewhat less strained than they had been early in the fall. The easier tone of the market reflected the aid to the banking system from large government disbursements in the fourth quarter and from the external payments surpluses in October, November and again in January. Following the easing of money market rates in November, rates for inter-bank loans rose again in December as the usual year-end pressures emerged. (See Table 2.) But the Bundesbank's reduction by 9 per cent of commercial banks' minimum reserve requirements for the month of December helped to reduce the extent of rate increases in December and declines in January below the fluctuations of earlier years. The higher normal reserve requirements which took effect again on January 1, 1966 drained away the additions to bank liquidity. As a result, money market rates eased even less than expected in January and then tightened substantially in February. (See Table 2.) Table 2. 1965 1966 Germany; Money Market Rates in Frankfurt, September 1965-February 1966 1/ (in per cent per annum) Call Money 3-month Loans September 4o 77 5.19 October 4.85 6.43 November 4.29 6.29 December 4.67 6.25 January 4. 12 4. 99 February 4.49 5. 24 1/ Average of daily rates quoted each month by Frankfurt banks for inter-bank loans. Source: Frankfurter Allgemeine Zeitung. OFFICIAL USE ONLY OFFICIAL USE ONLY - 4 - New money market, instrument introduced In January, a new form of money market paper was introduced on the German market by one of the big three German banks, The Dresdner Bank offered short-term registered notes (minimum denominations of DM 1 million, maturities of 6 and 12 months) to other German banks, These securities are not subject to minimum reserve requirements and. as registered notes, are not subject to the government licensing provision. They are sold on a discount basis. The Dresdner Bank has initiated trading in the securities by offering to repurchase its notes at 1/8 per cent above its selling rate. These notes were first offered at rates of 4-1/2 per cent on 6-month notes and 4-3/4 per cent on 12-month notes, or 1/8 and 1/4 per cent above the rates offered by the Bundesbank at that time on short-term paper of identical maturity,, To attract new bank funds in this period of liquidity squeeze, the Dresdner Bank exploited a structural inadequacy of the money market. The German money market has been marked by its limited selection of short-term paper. Thus far, there has been only Federal and Laender Treasury Bills and Treasury bonds of one month to two year maturi t ies» These bills are traded only between the banks and the central bank, not among banks themselves, and the Bundesbank's offering rates have been below market rates for some time. On January 7, the Bundesbank responded to the introduction of the Dresdner Bank paper by raising the rates on its entire range of open-market paper by 1/8 to 1/2 per cent. When the Dresdner Bank raised its rates on January 19, the Bundesbank increased its own rates on February 23 and again on March 3 by a total of 1/4 per cent but only on the. longer maturities (6 months to 2 years). As of March 3, the Bundesbank rate for 6-month paper (5-1/8 per cent) was 1/4 per cent higher than that offered by the Dresdner Bank, but maturities of one-year were both at a 5-1/4 per cent yield. Thus far, the Dresdner Bank has sold only a limited volume of the paper, but this may be due to the non-eligibility of the paper at the Bundesbank (as security against advances or for rediscounting) rather than to the higher Bundesbanke s rates. The Bundesbank's higher open-market rates should make investment in Treasury bills more attractive and, thus, tie up some of the additional liquidity received by the banking system in recent months, The rise in longer-term rates may furthermore discourage the banks from selling longer-term notes before maturity; to this extent, it may intensify the tightening of the money market during the passage of the March tax date. The larger rise in yields on longer maturities had encouraged the banks to buy them and then sell them off before maturity with a larger profit than they would have had from buying shorter Treasury paper. The latest increase in open-market rates (which, as usual was accompanied by an increase in repurchase rates) was probably designed to encourage banks to hold the notes to maturity by reducing the chances for profit. OFFICIAL USE ONLY OFFICIAL USE ONLY - 5 - Bundesbank continues to pursue restrictive policy The Bundesbank's action :".n raising the rates on money market paper was intended to discourage the growth of the new Dresdner Bank paper and to maintain pressure on bank liquidity, In its January Monthly Report, the Bundesbank once again emphasized the importance of continuing the restrictive credit policy until wages and prices had been stabilized and Germany's current account: had regained equilibrium.The Bundesbank also took other measures during the period under review to absorb recent additions to bank liquidity and to curb existing demand pressures. First, the Bundesbank announced that the second half of the 25 per cent reduction in bank rediscount quotas will come into effect on May lo This measure will reduce bank rediscount facilities by a total of DM lo3 billion. Originally, the full 25 per cent reduction was to have gone into effect last October; but when discount rate was raised in August, the Bundesbank limited the cut to only 12-1/2 per cent because of the strained atmosphere in financial markets at that time. With the liquidity situation now easier, the second 12-1/2 per cent can be absorbed. The reduction in quotas is intended not simply as a temporary tightening measure but as a longterm oriented readjustment of bank rediscount quotas. Secondly, the Bundesbank announced at. the end of February, that shortterm loans to foreigners on which banks had accepted roll-over commitments could no longer be used as an offset to foreign liabilities in the calculation of minimum reserve requirements. Since a number of banks are believed to have entered into short-term leans with non-residents with commitments to prolong them, this action will at least temporarily increase these banks' minimum reserve liabilities. Several of these recent Bundesbank measures appear to have been designed to encourage German banks to hold more of their liquid funds in domestic, rather than foreign assets. The discontinuation at the beginning of January of the special swap facility which the Bundesbank had previously made available to commercial banks for investment in U.S. Treasury bills appears to have been a first step in that direction. Given the balance of payments deficit and the current high level cf interest rates abroad, the Bundesbank may very likely feel it unnecessary to promote outflows of short-term funds. Bond market remains uneasy Conditions in the German bond market stabilized during January and February after a shake-out in December when the average yield on public authority bonds rose as high as 8= 02 per cent. However, the market outlook remains uncertain, OFFICIAL USE ONLY OFFICIAL USE ONLY - 6 - The consolidation of the market in January and February followed a shake-out in December. Postponements of new bond issues by public authorities during October and November and a growing impatience for funds on the part of some public authorities led to heavy demand pressures. Even though a Rheinland-Pfalz issue had not been completely placed late in November, the Federal Government and the Land Governments of Baden-Wuerttemberg and Niedersachsen announced loans totaling DM 325 million in December. Investor confidence in the determination of the public authorities to keep interest rates from rising was shaken. At the same time, the higher U.S. discount rate increased fears that interest rates in Germany would be forced upward. Bond prices fell with heavy sales. The average yield on public authority bonds rose from 7.74 per cent at the end of November to 7.81 per cent on December 6. Two of the loans were withdrawn in an attempt to steady the market, but selling pressure continued and the average yield on public authority bonds reached a peak of 8.02 per cent on December 27. At this point, the banks made large year-end support purchases of bonds in order to limit the depreciation in the current market value of their security holdings in their year-end balance sheets. With these purchases, the average yield on public authority bonds fell 44 basis points from December 27 to December 31. Bond prices were maintained at the new levels after the turn of the year thanks to the continued limiting by the public authorities of their borrowings. Traditionally, a large volume of new issues is brought to the market in January in order to take advantage of liquid funds produced by year-end redemptions and interest payments. In January of this year, however, public authority loans were held to only DM 410 million (nominal value) compared with DM 783 million of new public authority offerings in January 1965. Market conditions continue,however* to reflect underlying uncertainties. A number of new issues announced at the end of January threatened to upset the confidence of the market again. A loan of the Land North-Rhine Westphalia, originally scheduled for the first week of February, was consequently postponed. Developments in long-term financial markets The weakness of the bond market restrained domestic borrowers, particularly public authorities and industry. In the fourth quarter of 1965, domestic borrowers placed an average of DM 969 million per month on the bond market, compared to an average of DM 1,175 during the same period of 1964. (See Table 3.) January placements were also held considerably below those of January 1965. The only segment of the market seemingly not affected by the over-all weakness was foreign borrowing. Foreign borrowers placed a monthly average of DM 171 million in the fourth quarter of 1965 compared to an average of only DM 20 million a year earlier. Because of the 25 per cent coupon tax, the German bond market is, in effect, sharply divided into two distinct sections: domestic and foreign borrowers. Investment funds for foreign bonds in Germany reportedly OFFICIAL USE ONLY OFFICIAL USE ONLY come primarily from foreign sources; German investors buying foreign bonds reportedly do so primarily for the purpose of portfolio diversification, rather than for dividend income. There may also be some feeling in Germany that foreign bonds are currently better price risks. The result, in any case, has been that the market for foreign bonds has continued to function smoothly while the domestic market has weakened. This fact has led three major German firms to form financial subsidiaries in Luxembourg and to use them to float foreign bond issues on the German bond market. The weakness of the bond market has reportedly led to a growing use of the Schuldscheindarlehnen,an instrument which corresponds closely to the practice of direct placement in the United States. The cost of interest involved in borrowing in this manner is reportedly higher than that on bonds; but savings on issuing costs of bonds may help to offset the interest differential. At this time, in any case, a major advantage is the fact that Schuldscheindarlehnen are not subject to government licensing provisions and therefore may be contracted without consultation with the Bundesbank. The necessity of awaiting a turn on the bond market--an important consideration for public authorities--is therefore eliminated. The Land Hesse took up a Schuldscheindarlehnen of DM 70 million with the Dresdner Bank in February at an effective cost of about 8.1 per cent. Since such transactions need not be reported to the Bundesbank, there are no statistics on the volume of outstanding loans. However, one of the recommendations of the Troeger Committee Report on financial reform was that Schuldscheindarlehnen be subject in the future to the same licensing provisions as are public authority loans. Table 3. Germany: Gross Placements in Securities Markets 1964-1965-^ (millions of DM, month or monthly average) 1964 1 9 6 5 1966 IV I_ II III IV Jan. "Occasional" borrowers bonds: -Industrial -55 86 90 16 Public authorities 315 303 380 290 402 199 Foreign issuers 20 193 43 60 37 171 Other bonds 2/ 333 181 833 144 329 141 Total Mortgage and communal bonds Total gross bond placements 3/ Gross share placements Total security placements at issue value 534 915 694 1069 618 791 661 853 570 628 522 858 1195 1768 1264 1697 1140 1649 133 239 349 472 260 399 1328 2007 1613 2169 1400 2048 1/ Market value 2/ Mostly bonds of specialized credit institutions. 3/ Includes medium-term notes (Kassenobligationen). Source: Deutsche Bundesbank. OFFICIAL USE ONLY OFFICIAL USE ONLY - 8 - Credit expansion slows Until recently, the effects of Bundesbank policy were chiefly to be found in the bond market. However, the gradual tightening of bank liquidity appears finally to have begun to influence credit expansion. The expansion of new bank loans to non-bank customers in the fourth quarter of 1965 fell below the volume of loans extended a year earlier--the first yearto-year decline since the Bundesbank initiated its restrictive policy in March 1964. New loans in the fourth quarter of 1965 totaled only DM 8.9 billion compared with DM 9.3 billion a year earlier. (See Table 4.) The slower expansion of credit resulted entirely from a slower growth of long-term loans, particularly those to the private sector. Loan demand, however, remained strong and shorter-term ""bank loans expanded more strongly than in the previous year because borrowers fell back on shorterterm loans to cover their borrowing requirements where long-term funds were not available. Medium-term credits rose strongly to both the public and private sectors. Short-term credit also expanded in the fourth quarter;' the expansion took place entirely in December, however, when the private sector borrowed heavily, evidently to meet year-end payments. The pattern of credit expansion in the fourth quarter sugge-.ts that the withdrawal of liquidity from the banking system has made the banks reluctant to commit new funds for long periods but that they are still able to supply shorter-term credits in substantial volume, particularly in the shortest maturity ranges. Table 4, Credit Expansion: Net Lending to Domestic Non-bank Customers Quarterly, 1964-1965 (in DM millions) 2/ Total lending to non-banks (excl. securities) 1965 1964 5,943 4,772 9,106 7,926 7,822 6,968 8,896 9,323 1,250 859 3,429 2,413 334 514 2,017 1,942 137 48 1,260 1,121 1,632 740 878 602 4,417 4,392 5,856 5,714 6,001 6,779 Short-term 1965 1964 Medium-term 1965 1964 - Long-term 1965 1964 j>/ Preliminary Source: Bundesbank, 4,556 3:961 Monthly Report, Table III.A,1. OFFICIAL USE ONLY OFFICIAL USE ONLY - 9 - Stock market rallies in new year The German stock market rallied in the first two months of 1966 after four months of continuous decline. Between the beginning of September and the end of December, the FAZ general stock index fell 8.3 per cent from a level of 180.10 to 166.34. The recovery of the market in the first two months of 1966, however, brought the index back up to 179.94 by the end of February, The recent market strengthening probably reflects the relatively high dividends paid by German companies in 1965 which attracted investors to the market once again. The average dividend yield on listed stocks rose from 37o in 1964 to 4% in 1965, according to Bundesbank calculations. Special factors explain the large volume of new stock issues in the fourth quarter of 1965. (See Table 3.) A number of foreign parent companies converted long-term loans to their German subsidiaries into equity capital through the purchase of shares, in some cases apparently in reaction to the U.S. voluntary credit restraint, program. Trade balance improves Germany's trade balance improved substantially in the fourth quarter of 1965 as exports rose more rapidly than imports, reversing the pattern of the last year. (See Table 5.) Exports expanded 2.3 per cent from the third to the fourth quarter while imports grew only about 1 per cent. The growth of exports was particularly strong in December, and may have reflected an import surge in the Netherlands prior to the imposition of new excise taxes on consumer goods at the beginning of 1966. The export expansion may also reflect the recovery of demand in Italy and France. Although exports in January did not grow beyond December levels, a/Small trade surplus was nonetheless maintained. The growth of experts appears to be accompanied by a slowing in the rise of imports to Gerfnany. This shift is expected to produce an improvement in Germany's trade balance for 1966. Balance of payments deficit shrinks in fourth quarter Germany's balance of payments deficit shrank substantially in the fourth quarter even though large outflows of private non-bank capital produced a large deficit in December. The overall deficit was only DM 704 million, or about half the third quarter figure and substantially smaller than that of the second quarter. (See Table 6.) Germany's payments accounts closed with a deficit of DM 1,830 million for the year. OFFICIAL USE ONLY OFFICIAL USE ONLY - 10 - Table 5. Germany: Foreign Merchandise Trade (seasonally adjusted month or monthly averages, in DM billions) Exports f.o.b. Imports c.i.f. Trade balance 1964 III IV 5.29 5.52 5.04 5.37 .25 . 15 1965 I II 5.91 5.76 5.52 5.72 .39 .04 III IV 5.97 6. 11 6.08 6. 13 -.11 -.02 Oct. Nov. 5.78 6.06 5.97 6.16 -. 18 -.10 Dec. 6.49 6.25 .24 Jan. 6.35 6.29 .06 1966 Sources: Bundesbank, Monthly Report. Both seasonal factors and more basic improvements in other factors produced the fourth-quarter gains. The better trade performance and the seasonal strength of the services account brought about the reduced deficit. The gains on Germany's goods and services account were sufficient to offset a sizeable outflow of private capital which was concentrated in December. These outflows largely comprised short-term loan repayments of German-based firms to improve their accounts at the year end. Although figures are not available at this writing, the Bundesbank reports that firms reborrowed abroad in January, causing a substantial inflow of private short-term capital to reappear. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 6. Goods and Services Trade balance Services Total 2. Official Payments Donations Long-term capital Short-term capital Total 3. Private Capital Long-term Short-term 2/ Errors and omissions 11 - Germany: Balance of Payments, 1965 (in millions of DM) II I 1. - IV III Oct. Nov. Dec. - 1096 3 - 47 - 785 -433 - 946 605 223 66 80 -108 287 647 - 240 1093 - 832 -1379 828 146 179 407 -1349 - 172 138 -1778 - 334 - 49 -1359 - 735 620 -1372 - 508 412 -405 - 83 60 -437 -217 236 - 519 - 206 115 -1383 -2161 -1474 -1459 -428 -418 - 610 547 12 1330 442 303 673 312 228 - 613 - 57 126 623 262 421 -205 66 - 359 - 777 73 692 478 -1070 - 704 410 239 -1273 413 273 1041 - Total 1727 1865 1418 Surplus or Deficit (-) 1437 -1128 -1435 - 1J Preliminary. 2/ Includes commercial bank capital other than net foreign exchange assets. Source: Basic data from Bundesbank and International Financial Statistics rearranged by author. Larger year-end movements in reserves The movements in Germany's balance of payments position were financed by changes in official and commercial bank foreign-exchange reserves. As is customary at year-end, reserve movements were dominated by commercial bank flows arising from window-dressing activity. But for December and January together, German reserves rose $11 million as a result of a $161 million improvement in the foreign-exchange position of the commercial banks and a $150 million decline in Bundesbank reserves (related to the repositioning of commercial banks in January). Bundesbank reserves decline a further $49 million in February, partly as a result of support operations in the foreign exchange market to ease a decline in the rate for the DM. (See Tables 7 and 8.) OFFICIAL USE ONLY OFFICIAL USE ONLY Table 7. Bundesbank gold and foreign exchange 135 Gold Foreign exchange -•602 Total B. C. Drawing rights on IMF Commercial banks net foreign exchange Total A through C 12 - Germany: Changes in Reserve Position (in millions of U.S. dollars) II A. - 1 < ) 6 5 IV Nov. -111 Dec. 1 9 6 6 Jan.f / Feb. 12 -102 20 29 2 JL7 467 - 90 49 19 179 2 15 10 1 -260 -219 41 -296 457 9 289 -348 -155 70 -298 309 -40 - - 4 6 -162 - 4 -45 2 -162 -49 14 _e/ Estimated Source: Bundesbank and International Financial StatisticsTable 8. Germany. Exchange Rate and Forward Rate (in U.S. cents per DM and per cent per annum) Upper limit Lower limit Par value Spot Ratei/ Sept. Oct. Nov. Dec. Dec. 17 24 31 25.188 24.875 25.00 Forward Rate 24.934 24.968 24.997 24.992 +0.05% -0.47% -0.34% -0.19% 25.004 24.987 24.962 -0.38% -0.30% +0. 30% Spot RatelZ 1966 Jan. 7 14 21 28 24.940 24.930 24.921 24.903 +0. 27% +0.35% +0.28% +0. 20% Feb. 4 11 18 25 24.905 24.895 24.903 24.907 +0.24% +0.35% +0.20% 4-0.07% 1/ Noon buying rate in New York. Source: Federal Reserve Eocrd, Prepared by; Rosemary A. Darlington, Economist, Europe and British Commonwealth Section. OFF1CIAL USE ONLY Forward Rate NEW YORK, LONDON, MONTREAL* YIELDS FOR U.S. DOLLAR INVESTORS O N 3 - M O N T H FUNDS DOLLAR DEPOSIT RATES. NEW Y O R K . L O N D O N Wednesday iigurn EURO DOLLAR DEPOSIT U.S. CERTIFICATE OF DEPOSIT I EURO DOLLAR OVER U.S. CERTIFICATE OF DEPOSIT 0 FINANCE CO. PAPER RATES ( c o v e r e d ) : QUOTED IN NEW YORK Friday figvrei Per cent per annum 6 CANADIAN FINANCE COMPANY 5 U.K. HIRE PURCHASE Ins 4 U.S. FINANCE COMPANY Mar. Jua. 1964 Sept. Dec. Mar. fun. 1965 Sept. flee. Mar. Jwa. 1966 Sept. See. L O N D O N : YIELDS FOR U . S . DOLLAR E U R O - D O L L A R D E P O S I T RATES INVESTORS ON 3-MOIMH /> FUNDS 90 DAY 180 DAY ~30 HIRE P U R C H A S E A N D Friday figurti LOCAL DAY AUTHORITY CALL D E P O S I T RATES ( c o v e r e d ) EURO D O L L A R D E P O S I T HIRE PURCHASE T DIFFERENTIAL 1 FAVOR HIRE PURCHASE FAVOR E U R O D O L L A R LOCAL AUTHORITY DEPOSIT EURO D O L L A R D E P O S I T DIFFERENTIAL FAVOR LOCAL AUTHORITY FAVOR E U R O D O L L A R 1964 1965 1966 [INTEREST A R B I T R A G E : FR A N K F U R T / L O N D O N , Z U R I C H / I O N D O N FRANKFURT INTERBANK L O A N RATE VS. L O N D O N E U R O - D O L L A R T A T E ( C O V E R E D ) fit cent per oenu* I N TERMS O F D M _ INTERBANK LOAN RATE EURODOLLAR r T DIFFERENTIAL FAVOR FRANKFURT FAVOR EURODOLLAR Z U R I C H D E P O S I T RATE V S . L O N D O N EURO D O L L A R RATE ( C O V E R E D ) I N TERMS OF S W I S S F R A N C S EURO-DOLLAR SWISS DEPOSIT RATE DIFFERENTIAL FAVOR ZURICH FAVOR EURODOLLAR S PRICE OF G O L D I N L O N D O N us deiia, 35.2 35.0 1964 1965 1966 INTEREST ARBITRAGE, UNITED S T A T E S / C A N A D A 3-MONTH T R E A S U R Y BILL RATES CAN. FIN. CO. (PAPER CANADA ! UNITED STATES BILL RATE D I F F E R E N T I A L AND FORWARD C A N A D I A N DOLLAR SPREAD IN FAVOR OF CANADA PREMIUM DISCOUNT FORWARD RATE ! I o z VERED o 3 -N I RATE ! 1 I DIFFERENTIALS I PRIME FINANCE PAPER ! i 1 V I ; I 1 1 FAVOR CAN ADA 1 j\A wv 1 ! I : I TREASURY BILLS I INCENTIVES) I /w/ i |1 / - I (NET ! 1 FAVOR 1U.S. FA VI )R CAN ADA ~ Vj F AVOR I I . S . I I I I J I I s 11 I I 1963 I I J I | 1964 I I I 1 ! 1 II 1 1 J 1965 s 1 I |1 1 1 1 11 1 11 1 J 1966 s 1 INTEREST A R B I T R A G E , N E W Y O R K / L O N D O N Fridoy figures 3 - M O N T H TREASURY BILL RATES U.K. LOCAL AUTHORITY DEPOSITS NEW YORK I f ^ RATE D I F F E R E N T I A L A N D 3 - M O N T H FORWARD STERLING I 1 1 S P R E A D I N FAVOR OF L O N D O N FORWARD RATE 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 ) IN FAVOR OF L O N D O N I N F A V O R OF NEW YORK I I I I I I I 1 I I I I I I I I SHORT-TERM INTEREST RATES * SWITZERLAND discounts ) 3 month ( 3-month deposit deposits in London LONG-TERM BOND YIELDS Weekly ligurei GERMANY U.S. CANADA NETHERLANDS U.S. SWITZERLAND 1962 1963 1964 1965 1966 SPOT EXCHANGE RATES - MAJOR CURRENCIES AGAINST U.S. DOLLAR SWISS FRANC U.K. STERLING I I I I 1 1 BELGIAN FRANC 1 ! FRENCH FRANC - ! v D UTCH GU ILDER I i •i i ! \ i i V I - \ /\ / N i i 1 1 I 1 1 1 1 1 1 I \ 1 1 1 0 M 1 1 1 1 1 1 S D CANADIAN DOLLAR ITALIAN LIRA JAPANESE YEN M J S 1964 D M 1 1965 S 1966 3 - M O N T H FORWARD EXCHANGE RATES Friday figures AGAINST U . S. DOLLARS Pw ceel per oeeve GERMAN MARK sl/v. SWISS FRANC POUND STERLING " DISCOUNTA G A I N ST P O U N D STERLING - L O N D O N i\\ SWISS FRANC - G E R M A N MARK U. S. DOLLAR T V DISCOUNTAGAINST POUND STERLING - L O N D O N PREMIUM* A DUTCH GUILDER BELGIANFRANC - 4 V FRENCH FRANC S M 1964 D M J 1965 S D M J 1966 s D I N D U S T R I A L STOCK I N D I C E S 300 SWITZERLAND 250 GERMANY U.K. 200 150 100 300 250 JAPAN 200 CANADA U.S. 150 100 1963 1964 1965 1966 H. 13 NO.^41 (all figures per cent per annum) Chart 4 Chart 1 Upper panel (Wednesday, March 23 ) Euro-$ deposit 5.69 U.S. certif. of deposit 5.20 Lower panel (Friday, ) (Friday, March 25 U.S. Canada Hire-purchase paper, U.K. Treasury bills: 5.13 5.89 5.52 Canada U.S. ) +0.43 -0.04 Net incentive (Canada +) +0.39 5. 75 Canadian finance paper (Friday, March 25 Treasury bills: Euiro-$ deposits: 5.69 5.88 90-day 180-day Hire-purchase paper (March 18) Local-authority deposit (March 18) . Chart 3 Upper panel (Period: March 16-23 ) Interbank loan (mid point) 5.62 Eupo-$ deposit (average) 5.65 Lower panel (Date: February 15 > Zutich 3-mo. deposit 3.88 5.76 5.36 ) 5.45 4.46 U.K. U.S. Spread favor U.K. +0.99 Forward pound -0.92 Net incentive (U.K. +) -0.07 Chart 6 35.149 ) (Friday, March 25 Treasury bills: U.S. 4.46 U.K. 5.45 ) Germany Canada Euro-$. deposit (London) Zurich 3-mo. deposit (Date: February 15 Japan composite rate (Date: December 31 4 . 0 0 (Mar. 11) 4.89 2-69 ) ) 3.88 7.607 Chart 7 U.S. Gov't. (Wed. , Mar. 23) For description and sources of data see special annex to H. 13, Number 239, . March 16, 1966. 4.89 4.46 Chart 5 March 25 Price of gold (Friday, March 18 ) Forward Canadian $ Chart 2 Call . 5.25 7-day 5.38 30-day 5.69 March 25 Spread favor Canada Finance co. paper: (Friday, March 30, 1966. 4.60 U.K. War Loan (Thurs., Mar. 24) 6. 79 German Fed. (Fri., March 18 ) 7. 81 Swiss Confed. (Fri.» March 18 ) 3. 90 Canadian Gov't. (Wed., Mar. 23) 5. 66 Netherlands Gov't, perpetual 3% (Fri., March 18 ) 5.83
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