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BOARD OF GOVERNORS
DIVISION OF I N T E R N A T I O N A L F I N A N C E
F E D E R A L R E S E R V E SYSTEM
H. 13
No, 50
'
( C A P I T A L MARKET DEVELOPMENTS ABROAD
MAR 1 5
1962
lo Canada
II. Nine Charts on Financial Markets Abroad
F E D i R A I ' V.i-.jLv.VE B A N K
OF R i J K M O N D
I. Canada:
Money and Capital Markets during February
Private sales of Canadian dollars and a continuing decline in the
spot rate which were evident in January were intensified during February.
The spot rate declined from 95<>88 U.S. .cents on December 28 to 95,66 U.S.
cents on January 25 and to 95»22 U.S. cents on March 1, In exchange support
operations, the Canadian authorities reported official reserve losses of
(U.S.) $13U million in January and (U.S.) $175 million in February»
Canadian commercial banks reported substantial return flows
during January of non-Canadian currency deposits lost in December. These
deposits rose from $2.7 billion at the end of I960 to an unprecedented peak "
of $3*9 billion in November 1961 (see Table)„ Since the growth of these
deposits during 1961 was concentrated in the months of May and June and
again in October and November when uncertainty about official intentions
unsettled the foreign-exchange market, the deposit accruals appear to
represent, according to one market report, "the acquisition of very substantial Canadian holdings of U.S. dollars by business firms and speculators/
During 1961, Canadian banks became much more active in so-called
"Euro-dollar" operations to take advantage of the high yields prevailing in
European centers. Since the Canadian banks made no appreciable additions
to their "street loans" to security dealers in New York in 1961, it would
appear that much, and perhaps most, of their non-Canadian dollar deposit
accruals may have been employed in Euro-dollar and other European operations.
After moderating during January, the upward movement in Canadian
short money rates which developed in the closing weeks of 1961 was resumed
in mid-February. The Treasury bill yield moved up from 3.08 per cent on
January L to 3.17 per cent on February 22 and 3.21 per cent on March 1.
This rise coincided with reports that the Canadian business recovery
seems to be maintaining its momentum, although the latest production and
unemployment statistics do not extend beyond December. During February)
the Bank of Canada was a net seller of Treasury bills» During the month,
yields on Government of Canada bonds were unchanged but the average yield
for LO provincial and corporate bonds declined from 5°Ll per cent on
January 31 to 5«3U per cent on February 28,
Money market. After a pause in January, Canadian short-term
interest rates moved moderately upward during February. From a level of
MOT FOR PUBLICATION
DECONTROLLED AFTER Six MOUTHS
NOT FOR PUBLICATION
-
2
-
3.07 per cent on February 1 and 3 *01 per cent on February 8, the average
auction yield on the 3-month Treasury bill rose during the last three weeks
of the month and reached 3.21 per cent on March 1 (see Table)o At this
yield, the Canadian bill rate has returned•to the May (1961) level (see
Chart 1). The 6-month bill rate, relatively unchanged in January, moved
from 3<>26 per cent oh February 1 to 3»Ul per cent on March 1 (see Table).
Although rates for day-to-day money also rose in February — 2oU5 per cent
on January 31 to 2»80 per cent on February 28, the monthly average for.
February (2.62 per cent) was slightly below the average level of 2,69
per cent in January, when the week-to-week trend was downward0
In February, the Canadian chartered banks disposed of $8 million
in Treasury bills (see Table)0 The Bank of Canada reduced its bill
holdings by $h2 million, and $20 million in Treasury bills were also sold
from Government account holdings. These offerings, totaling approximately
$69 million, were absorbed by the general public.
With the U.S. Treasury bill rate unchanged at 2*68-2,69 per cent
on February 1 and on March I, the higher Canadian bill rate produced a
wider spread of 53 basis points in its favor o With little change in the
discount on the forward Canadian dollar, the net incentive to hold the
Canadian bill rose from 0.25 per cent on February 1 to 0.U0 per cent on
March 1 (see Table and Chart 1).
Yields on short-term Canadian finance paper were unchanged during
February. With U.S. rates moving somewhat higher, the spread in favor, of
Canadian paper fell from 31 basis points on January 26 to 13 basis points
on February 23. Yields for 30- to 89-day paper for leading acceptance
houses in Canada and the United States were as follows, on the dates
shown (in per cent per annum):
•Canada
December 29
January 26
February 23
—
3.25
3»00-3o25
3.00-3.25
U.S0
2.63-2.75
2.75-2.88
3.00
Spread
0.56
0.31
0.13
Bond market. Yields on Canadian Government bonds with maturities
of 3 years and over declined only slightly during the month. The following
comparison shows yields on selected maturities on March 1 as well as for
the first and last reporting dates in January.
Maturity
May 196U
January 1975-78
September 1983
January U
January 31
3.76
b.96
5 <>00
3.75
U.98
5»0U
March 1
3,67
U»96
5.00
Yield spreads between comparable Canadian and U.S. Government
bonds showed little change during February. The spread on the intermediateterm issue widened somewhat (see Table).
NOT FOR PUBLICATION
NOT FOR PUBLIC AT ION
- 3 -
Yields on provincial and corporate bonds declined from an
average of 5»Hl per cent on January 31 to 5<>3U per cent on February 28,
according to.McLeod, Young, Weir & C o » estimates<, Recent average bond
yields were (in per cent per annum)i
1961
March 1
10
10
10
10
HO
Provincial
Municipal
Public utilities
Industrials
Bond yield average
5-53 '
5.83
5.U7
5.51
5.59
Sept.' 1
5.38
5.60
5.39
5.U3
5.U5
1962
Jan« 31
5.L3
5.65
5.25
5.31
5.Ui
F e b . 28
5.31
5.Sit
5.23
5.28
5.3k
According to A, E„ Ames & Co 0 , $6?U million of new securities
(exclusive of regular short-term financing) were issued in the period
ending February 26. None of this amount, representing primarily new issues
of Provincial and Municipal bonds, was sold on the U.S. market„
Debt-management program0 The Canadian authorities followed the
successful marketing in January of the $150 million issue of short-term
bonds maturing April 1, 1963 with a similar offering in February„ On
February 12 the Minister of Finance announced an additional issue, amounting
to $150 million, in the form of bonds due April 1, 1963 „ This offering,
for delivery on March 1 at a yield of approximately 3»56 per cent, was
fully subscribed. This short-term offering continues the program of
spacing Government borrowing at more frequent intervals in moderate amounts In his announcement of the latest issue, the Minister of Finance indicated
that he expected to refund maturities totaling $62$ million falling due
between May 1 and September 1 and that, in addition, consideration was
being given to raising $300-U00 million of new cash during this same period*
Fiscal 1962-63 expenditure estimates« The 1962-63 expenditure
estimates presented by Finance Minister Fleming on February 12 suggest a
continuation of the Government's large spending programs«, Total expenditures
under the ordinary budget and the Old Age Security Fund program (including
increases resulting from the anticipated passage of legislation raising old
age pensions by $10 per month) stand at $7,012 million, an increase of Lu2
per cent over 1961-62 spending estimates» Based on the figures presented
by the Finance Minister, the total ordinary budget deficit for 1962-63
at current tax rates may well be in the vicinity of $650 million, or roughly
half the size of the forecasted deficit for 1961-62„ It is now anticipated
that the 1962-63 budget will be presented to Parliament during March,
Bank loans and money supply0 On a seasonally adjusted basis,
it is estimated that money supply declined slightly while general bank
loand registered a further upward movement through February 21, the last
data available. During this period, loans rose by $110 million as compared with an increase of $209 million in January0 Bank liquidity improved
NOT FOR PUBLICATION
NOT FOR PUBLICATION
- U -
slightly* the liquid asset ratio of the chartered banks moving from 17.9
per cent in January to 18oO per cent in February, at which point it was 3
percentage points above the required minimum (see Table)«
Operations of Canadian banks in non-Canadian currencies. During
January, the chartered banks reported the return of the bulk of non-Canadian
currency deposits lost in December<J/ These deposits rose only from $1,8
billion at the end of 1957 to $2.7 billion at the end of I9605 last year,
however, they reached the unprecedented level of $3«9 billion in November
(see Table).
The fact that the deposit increases were concentrated in the
second and fourth quarters when the foreign exchange market was unsettled
by uncertainty about official intentions about exchange operation^ suggests
that bank customers were building up non-Canadian currency deposits as a
hedge against a declining exchange value for the Canadian dollar» On a
monthly basis, these deposits rose by $213 million in May, $21*5 million in
June, nearly $168 million in October and $l£8 million in November»
Yet Canadian banks did not employ these deposit accruals as "call
loans" in the New York market. Estimates of the New York State Banking
Department show recent total loans to security dealers (in millions of
U.S. dollars)s
I960
1961
1962
Dec.
Mar.
June
Sept.
Dec a
Jan.
1,196
I 5 OU3
•1,610
1,63a
1,963
1,288
Foreign agencies
8L9
739
978
88U
859
881
Compare
Canadian a/
Other (residual)
829
710
957
OOO
809
787
9U
U.S. banks
20
30
21
So
%/^Ts^reported^^^CaEa3ian^bai3{S , converted into U 0 S 0 dollars *
A comparison of U.S. short-term liabilities to Canada (reported
in Federal Reserve Bulletin) less official Canadian holdings of U.S. dollars
(as reported by the Exchange Fund) yields (as a residual) a rough estimate
of private (banking and non-banking) Canadian holdings of short-term
U.S. assets. This calculation shows only a small rise in these holdings
during 1961, as these figures show (in billions of U.S. dollars):
I960
Sec.
Mar.
1961
June
Sept.
U»S0 short-term liabilities
2 .It
2.U
2.7
2.7
2.8
Exchange Fund - U.S. dollars
0.9
1.1
lol
1.0
1.6
Other - residual
1.5
l.li
1.6
1.7
1.6
Dec.
1/ These figures include Canadian operations in U.S., European and
Latin American currencies.
NOT FOR PUBLICATION
NOT FOR PUBLICATION
-5
It would appear that Canadian banks greatly extended their
activities in Euro-dollar and other European financial markets» The
drop in their non-Canadian dollar deposits by $U00 million in December and
the rise by $300 million in January seem to reflect the withdrawal of
Euro-dollar deposits by European banks for year-end window-dressing and
their return to the Euro-dollar market in January,
The Canadian banks appear to have employed their non-Canadian
v
'dollar acquisitions during 1961 not in "street loans" in New York but in
European financial centers» They added $500 million to their "deposits
with banks" and $300"million to their "other loans" (see Table). These
categories are thought to cover financial transactions, perhaps largely
in U.S. dollars, in European financial centers,- The growth in their
European dollar operations can be seen in the fact.that the percentage
of their non-Canadian dollar assets held in "call, loans" (presumably in
New York) declined from 32 per cent at the end of 1957 to 21 per cent
in January 1962, The recent growth in Canadian participation in Eurodollar transactions is explained by a British financial journalist as
"anticipation of the depreciation of the Canadian dollar and their holders
are anxious to earn a high yield on their temporary holding."
Foreign trade, In response to rising levels of domestic demand,
imports continued to increase in the final quarter of the year. On a
seasonally adjusted basis, iipports rose from a monthly average of # 9 6
million in the third to #§33 million in the fourth quarter. After rising
sharply earlier in 1961, export sales declined in October and November.
Recent monthly or monthly average trade figures, seasonally adjusted, were
(in millions of dollars)%
1961
Exports
Imports
Trade balance
U66.9
U63.8
+ 3.1
II
III
Oct.
Nov.
Dec.
U73»5
UU3.2
+30.3
5lU>U
U95.5
+18.9
14-98.1
530.7
-32.6
W3»7
532.5
-U8.8
n.a.
535.1
n.a.
Foreign exchange«. The Canadian dollar was generally weak throughout February, remaining below the February 1 level of 95-1/2 UoS. cents
and closing at 95.2 U.S. cents on March 1 (see Table). Reserve losses of
$32 million in November and $23 million in December were followed by
declines of $13U million in January and $175 million in February as the
authorities intervened to cushion the decline in the rate• Now that year-end
dividend payments to nonresidents are probably no longer an important
contributing factor, increased commercial demand for foreign exchange would
seem to explain the continued weakness of the Canadian dollar in February.
Recent changes in official exchange reserves (in millions of U.S. dollars)
were ?
NOT FOR PUBLICATION
NOT FOR PUBLICATION
I960
Dec.
Gold
U.S. dollars
Total
- 6
End of month
1961
Oct.
Nov,
Dec.
1962
Jan.
885.3
9li3.9
931.6
1,179.0
9U1.1
1,137,7
916.2
1,109.6
919.6
972.3
1,928.2
2^110.6
2,078.8
2,055.8
1,921.9
+186.3
-
-
- 133,9
Change during
period
31.8
23.0
-
The forward Canadian dollar remained at a small discount during
February (see Table)» The net incentive to hold Canadian bills (covered
for exchange risk) rose to about U0 basis points on March 1 but this was
still insufficient to encourage any movement of funds to Canada.
Stock exchange. Industrial stock prices rose slightly in
February in a partial recovery from the rather sharp losses recorded
in January. The weekly average for the index of industrial stock prices
on February 22 was 2.2 per cent above January 25, while the New York
Standard & Poor industrial index registered an increase of 2.9 per cent
during the same period (see Chart 6).
Average for
week ending
DBS
Industrials
196l-Dec. 30
1962=Jan. 25
Feb. 1
8
15
22
N.Y. Standard &
Poor Industrials
353.1
336.8
3U1.7
3U5.1
3U6.U
3Ut.2
75.70
72.25
72.70
71.33
71.56
7li.35
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 Arbitrages 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 — M a j o r Currencies
Against U.S. Dollar
Chart 9 - 3-month Forward Exchange Rates
1
2
3
U
5
6
7
8
=
=
-
NOT FOR PUBLICATION
Canada s Treasury Bill Yields and Exchange Rates
3-mo, Treaso bill artibrage calculation
In
3-moo favor
Canada U.S. Differ- Can.$
Can. ,
?*J
£/
ence
W
bill—'
1961-High
Low
3o3U
2.26
1962-Jan. U
11
18
-0.33
25
Febo 1
12
22
Mar, 1
0.89
-0.20
101.72
95.91
0.29
0.13
95.7S
0,05
0.18
0o25
0.09
3.21
2.68
—0 .oU
0.22
o„Uo
0.53
Spot
Can. $
(U.S.
cents)
95.6U
95.75
95.66
95 oU7
95.3li
95.3k
95.30
95.22
.a/
Finance paper£>
90-179
days
30-89 days
3-lA
3-1/1 to 1/2
3 to 3-lA
3-VU
3
. 3
3
3 to 3-l/U
3-1/2
3-1/2
3-1/2
3-1/2
3-lA
3-lA
3-1A
3-1/2
a/ Thursday quotations0
~
~
~
b/ Spread between spot and 3-month forward rate in per cent per annum. Discount
equals (-).
c/ Net of difference in bill yield less discount on 3-month Canadian dollar,
d/ Friday quotations.
Selected Government of Canada Security Yields
6~mo<> Treas. bills
Spread
Canada
ovegy
1961
High
Low
Jan. 2k
31
Feb. 7
lit
21
28
a/
b/
bill
c/
d/
e/
f/
g/
h/
3.63
2.35
1.15
-0.11
3.26
3.26
3=18
3.25
3.37
3.U1
0.33
0.33
0.25
0.22
0.U9
0.55
Intermediate
bonds (8 yr.)
Spread
Canada
over
UoS,a/
J L
U.75
U.17
Long-term
ong
bonds
(20 year)
(35 year)
~
Spread
over.
over
.
Canada
Canada
U.S±/
l.ltO
1.16
o.oU
5.19
lt.80
0.78
0.05
li.91
lt.91
lt.89
lt.90
It.90
It.90
0.78
0.75
0.73
0.78
0.75
0.77
0.07
0.09
0.16
0.17
5.23
4.92
1.59
lolh
U.98
U*95
1.18
1.15
1.15
1.18
1.13
1.13
U.92
U.92
U.92
U.92
Average yield at weekly tender on Thursday.
.
Spread between Canadian auction rate and composite market yield of U.S.
on close of business Thursday.
Government of Canada 2-3A P e r cent of June 1967-68.
Spread over U.S. Government 2-1/2 per cent of 1963-68.
Government of Canada 3 - l / U per cent of October 1979.
Spread over U.S. Government 3-l/U per cent of 1978-83.
Government of Canada 3-3/U per cent of September 1996 - March 1998.
Spread over U.S. Government of 1995.
A
- 8 -
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
1.
Government
Total
Chartered banks
Treas.
bills
Bonds
' - 7
+ 67
- 68
1961-Feb.
-96
+120
Mar.
- 25
-36
- U '7
- 2
+• 9
- 70
April
+ 59
+ 17
+ 63
May
-22
- 1
+ 5
June
+ h3
+ 33
- 7k
+ 16
+ 21
+ 16
July
+ 69
+ 21
+107
+ 32
Augo
0
+ 16
+ 9
Septo
+ UU
- 58,
+109
Octo
-10$
+ lU
- 39
Novo
+ 3
- U2
-123
- 9
+ 21
- U8
Dec 0
+ 32
- 3
+ 88
+ U8
1962-Jan0
- l
.
- 69
. 8
Feb.
- 19
- 12
uu
Sourcei Bank or Canada, Weekly Financial Statistics*
General public
Savings Treas.
bonds
Bonds
bills
+ 88
+ SO
- 52
+ 2k
+ 62
+ 11
+1U8
+ 72
+ k
+ £6
+111
+ 57
k
- 6
- 18
- 37
- 33
- 22
- 23
-t 29
- 2k
+ k
+720
- 2k
- 10
- k
- 26
+ 30
+ 6k
- 80
- 7
-J$
- 87
+ Ho
- 3
+ U8
+ U7
- 20
+ 69
+ 39
+ 6
- 12
+ 1
+ 37
- 37
- 35
+ k2
- 31
- 67
-77
-19
- 3k
Canadian banksg Non-Canadian Currency Assets and Liabilities
Tin billions of Canadian dollars
Assets
Deposits
Banks
Others
End of
>3
,k
,5
.7
1.5
1.7
1.9
2.0
- 2.8
Total
1.8
2.1
2.U
2.7
Deposits
with
banks
oU
»3
oU
•5
3.5
1.0
Call
loans
.6
.6
o7
08 •
,8 -
Securities
Other
loans
Total
.5
o5
.6
o7
-7
.8
. .8
.1.1
1.9
2.1
2.U
2.7
3.6
.8
o7
.9
o7
o7
.8
09
1.1
2.8
3.3
3.5
3.6
oU
.5
End of Quarter
1961s1 ""I"""
II
III
H
.6
.6
.6
.7
2.3
2.8
2.9
2.8
2.8 3.3
3.5
3.5
06
.8
<>9
1.0
<>7
1.0
08
End of month
1951 s Sept.
Oct.
Nov.
Dec.
.6
.7
.7
.7
3.0
3.0
3.2
2.8
3.5
3.7
3.9
3.5
o9
1.0
1.0
1.0
08
.9
09
08
<>9
.8
1.0
.7
.9
.9
1.0
1.1
3.5
3.6
3.9
3.6
.8
3.0
3.8
.9
.8
1.1
1.0
3.8
1962:
Jan.
08
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
T H R E E - M O N T H TREASURY
RATE D I F F E R E N T I A L A N D
B l ' . l RATES
FORWARD
CANADIAN
DOLLAR
f.S.
A /
RATE DIFFERENTIAL W I T H
FORWARD EXCHANGE COVER
HIT INCENTIVE IN FAVOR OF CANADA +
INTEREST
ARBITRAGE,
NEW
Y O R K / L O N O O N
Frida
x 'Jou
3-MONTH
I
I
I
I
TREASURY BILL RATES
NEW YORK
RATE
DIFFERENTIAL
3-MONTH
AND
FORWARD
STERLING
SPREAD I N FAVOR OF L O N D O N
I.
i X -X
FORWARD RATE
V'V
yw
MM
RAT E
1
i
1
I
DIF FERE N T I A L . W I T H
EX<: H A N G E
~FOF(WAR D
I
!
;
COVER!
1
1
'
i
;
!
1
j
-
IN F A V O R OF L O N t
-
—
R - r v
V ^ W
1
AVOR 1
1 1
11
I
|
1 1
D
I
1
M
1 1
J
||
"i960
1 1
1
1
A
i
i
-
i
i
i
i
i
D
i
i
M
i
I
J
IrtT
I ,. , i
S
i
INTEREST
ARBITRAGE
FOR
GERMAN
COMMERCIAL
BANKS
Friday figures
J - M O N T H
,
EURO
Per t e n t
TREASURY
DOLLAR
BILLS,
DEPOSIT
INTERBANK
LENDING
RATE
RATES
GERMAN INTER3AUK 1 0 / H BATE
EURO-DOUAR
RATE
DIFFERENTIAL
RATE DIFFERENTIAL
. . I
NET INCENTIVE:.
AND
WITH
r / M
FORWARD
FORWARD
DEUTSCHE
EXCHANGE
'
COVER
IN FAVOR Of FRANKFURT ( + )
INTERBANK LOAN RATE
MARK
'/
N
AND
per annum
I N T EREST
A R B IT R A G E ,
FRA N K F U R T /
LOND O N
Friday f i g u r e :
-3-MONTH
p,
TREASURY
INTERBANK
1
BILLS
LENDING
I-
AND
RATES
—\f\
\ A
GERMAN INTERBANK
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 — |
RATE
DIFFERENTIAL^WITH FORWARD
1.
1
. 1 . 1
NIT INCENTIVE Of UNITED KINGDOM OVERl
EXCHANGEUCOVER
I
1
S H O R T - T E R M INTEREST RATES *
f
^ V
tUtO-DOtlAB • L O N D O N f
Pi\
A
a
1951
/ i
CANADA
1951
3-month treosury bill roles lor oil countries except Japan (3 month interbank deposit role) ond Switzerland (3-month depoiil role) . |
3-monlh role lor U S dollar deposit! in London
\>
LONG-TERM
BOND
YIELDS
V
GtRHACY
^ / v
/
V
f
4 A ^ I
K . —
r
" * - —
r
1
V
i
/
\ - /
1
1 l I I I' '1 1 II 1 II II 1 !ii i i ii i i ii i1 1 1 1 1 1 1 1 1 1 1
./ V
1 1 1 1 1 1 1
UXJ~
INDUSTRIAL STOCK INDICES"
of oil stocks iroded
Tokyo t*chong<
V*
SPOT
EXCHANGE
RATES
- MAJOR
CURRENCIES
AGAINST
U.S.
DOLLAR
Below per
A b o v i por
1961
n
3-MONTH
AGAIN
FORWARD
SJLU. s;
EXCHANGE
DOLLAR S
RATES
GERMAN MARK
PREMIUM+
-
:
SWISS F R A N C ^ ~ ^ * Z
OUND STERLING
OISCOUNT-
1 1 1 1 ' 1
AGAINST
AGAINST
POUND
POUND
STERLING
STERLING
.
-
LONDON
LONDON
FRENCH FRANC A
DISCOUNT-
1
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@FedFRASER