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DIVISION O F I N T E R N A T I O N A L F I N A N C E B O A R D OF OOVKRNORS : OF T H E H.13 No. 8 May 22, 1961 i CAPITAI MA RKFTJ)EVELOPMENTS ABROAD I. II. III. v I. Germany Netherlands Nine Charts on Financial Markets Abroad Germany s Money and Capital Markets During April f Easy conditions prevailed i n the German money market during A pril. A continued inflow of funds from abroad—much of i t a t t r i b u t a b l e to foreign borrowing on 'the part of German i n d u s t r i a l i s t s and exporters seeking to cover ! t h e i r foreign exchange risks—and further easing measures of the German Federal Bank contributed t o market l i q u i d i t y . During April and e a r l y May, the Bank further reduced commercial bank reserve requirements, rescinded i t s action of June, i960 which had prohibited commercial banks from crediting t h e i r shortterm f o r e i g n a s s e t s against minimum reserves required for non-resident d e p o s i t s , and twice reduced by 1 / 8 per cent i t s s e l l i n g r a t e s for Treasury b i l l s and shortterm bonds (April 26 and May $) bringing the rate on 3-months Treasury b i l l s down t o 2 - l / U per c e n t . On May the Federal Bank reduced discount rate from 3 - 1 / 2 t o 3 per cent i n an e f f o r t to reduce the continuing flow of funds i n t o Germany. The action i n i t s e l f w i l l probably not appreciably l e s s e n the i n f l u x , at l e a s t i n the short-run, but should bring about a more rapid decline In long-term i n t e r e s t rates and increase pressure upon other German lending r a t e s . A continuing favorable trade surplus, the a t t r a c t i v e n e s s of German bond y i e l d s , and speculation on a further DM appreciation encouraged f u r t h e r inflows of f o r e i g n exchange. The d o l l a r remained near or at the lower i n t e r vention point during April and e a r l y May. The bond market remained strong during A p r i l . This strength has continued i n t o May. Bond p r i c e s have r i s e n further by modest amounts and bond y i e l d s have further declined. Mortgage bonds at 5 - 1 / 2 per cent were being withdrawn from the market while applications at the Ministry of Economics f o r 0 per , cent bonds were heavy. The f i r s t f l o t a t i o n of a Japanese bond i n almost h a l f a century i s expected i n June, a DM 1*00 m i l l i o n i s s u e of the Osaka Municipal and Prefectures Governments. The stock market, which had remained steady during A p r i l , rose rapidly a f t e r the May 5 change i n the discount r a t e . A l l c l a s s e s of stocks remained i n good demand with chemicals, engineering and automotive stocks e s p e c i a l l y strong. Volkswagen shares which were traded i n ^regulated f r e e trade," i . e . not on the exchange, reached a high of almost DM 800 by mid-April but declined to around EM 700 by e a r l y May. Foreign demand f o r the shares was very strong, NOT FOR PUBLICATION DECONTROLLED AFTER SIX MOUTHS e s p e c i a l l y i n New York and Zurich, and quotations as high as $201 were r e ported i n mid-April i n New York. Money Market. During April easy conditions continued t o p r e v a i l i n the German money market. The inflow of foreign funds remained heavy and the German Federal Bank, continuing i t s e f f o r t to h a l t the heavy i n f l u x , pressed further i n i t s campaign t o get both short-term and long-term i n t e r e s t r a t e s down. On April 6, f o r t h e fourth time t h i s year, the Bank reduced minimum reserve requirements ( r e t r o a c t i v e t o April 1) by 5 per c e n t , r e l e a s i n g -^approximately DM 1+00 m i l l i o n ($100 m i l l i o n ) of r e s e r v e s . On April 20, as a measure to encourage private banks to hold a s s e t s abroad, the Federal Bank allowed the commercial banks as of May 1 to c r e d i t t h e i r short-term foreign a s s e t s against the minimum reserve requirement f o r non-resident d e p o s i t s . There are r e l i a b l e reports that the a c t i o n stimulated exports of money to Canada and t o t h e Euro-dollar market i n London during the f i r s t days of May. If t h i s outflow reaches s i g n i f i c a n t proportions, some tightening i n the money market l a t e r i n May i s probable. Within Germany, t h i s relaxation l e d t o an actual easing i n the market because the commercial banks 1 foreign holdings were large enough t o bring about a . r e l e a s e of reserves 0 The Bank further reduced the r a t e s at which i t i s prepared to s e l l Treasury b i l l s and short-term bonds i n the open market by 1 / 8 per cent on April 26 and again on May 5. These two cuts brought the rate for 3-months Treasury b i l l s down to 2-l/U p'er cent. From Jan. Mar. Apr. May 60-90 days Treasury b i l l s 6-month Treasury bonds 3.25 2.50 2.38 2.25 3.50 2.75 2.63 2.50 20 23 26 5 On May 5 , the Bundesbank reduced i t s rate from 3 - 1 / 2 to 3 per c e n t , as a major s t e p i n i t s campaign to lower German i n t e r e s t rates t o the " i n t e r national l e v e l . n However, the immediate impact of t h i s reduction upon the money market may be minor s i n c e short-term r a t e s have been below the discount r a t e for sometime. Frankfurt Inter-bank Money Rates 1961 February (monthly range) March (monthly range) April(weekly range) 1-7 8-15 16-23 2U-30 May (weekly- range) 1-7 8-15 Day-to-day money Lowest r a t e Highest rate 2.63 2.50 3.25 3.13 2.75 2.50 2.88 2.88 U.13 L.25 3.50 3.25 3.13 2.63 3.13 3.00 one-month loans Three-month loans 2.75 - U.13 3.88 - U.38 3.25 3.25 3.38 3.38 3.25 - U.00 3.38 - Uo00 2.88 - 3.25 3.13 - 3.38 2.75 - 2.88 2.88 - 3.-13 2.88 - 3.00 2.75 - 3.00 3.00 - 3.25 2.88 - 3 . 1 3 - 3 Collection of the second tranche of the Industry loan f o r f o r e i g n aid, whi jh was s h i f t e d from April 15 t o May 15, may exert a t i g h t e n i n g i n f l u e n c e on the money market i n May. About DM 300 m i l l i o n i s to be c o l l e c t e d instead of DM 700 m i l l i o n o r i g i n a l l y scheduled because the German firms have s t a t e d t h e i r i n a b i l i t y t o r a i s e more than DM 1 , 2 b i l l i o n of the o r i g i n a l commitment of DM 1.5 b i l l i o n . There was l i t t l e change i n the spread between short-term y i e l d s i n the United S t a t e s and Germany during April and early May. (See charts 3 and it). On May 5* there was an i n c e n t i v e of about 0.82 per cent on the b a s i s of the Frankfurt inter-bank loan r a t e and of about 0.07 per cent on the b a s i s of the Bundesbank's selling price for Treasury bills. Bundesbank1s Treasury Inter-bank loan rates bill selling rate German Net Spread Net 3 mos. U,S» Spread i n c e n t i v e 3 mose over incentive inter-bank bill over on covered bill U.S. on covered loan rate rate U.S.1 basis 1 / rate bill basis 1/ '» 28 May 5 3.50 3.25 3.38 3.38 3.38 2.9U 3.00 2.32 2.12 2.30 2.30 2.23 2.27 2.18 1.18 0.83 1.08 1.08 1.15 0.67 0.82 1,18 0,83 1.08 1.08 1.15 0.67 0.82 2.50 2,50 2.50 2.50 2.50 2.38 2.25 0.18 0.08 0.20 0.20 0.27 0.11 0.07 0.18 0.08 0.20 0.20 0.27 0.11 0.07 1 / To encourage c a p i t a l outflow the Bundesbank provides forward d o l l a r s f l a t to German banks. Foreign Exchange. The inflow of foreign exchange into Germany continued i n April but there were a l s o s u b s t a n t i a l outflows a f t e r mid-April when a small i n t e r e s t d i f f e r e n t i a l (including the c o s t of forward cover) moved i n favor of London f o r German banks. (See Chart U). Because they could not obtain the swap r a t e s available t o banks, non-bank investors could not move funds. The d i f f e r e n t i a l might not have been s u f f i c i e n t to induce a s i g n i f i c a n t outflow had the Federal Bank not permitted the banks to c r e d i t t h e i r short-term foreign a s s e t s t o reduce required reserves held on non-resident d e p o s i t s . However, foreign exchange inflows continued because of speculation on further revaluation of the D-mark and the trade surplus, and exchange markets remained u n s e t t l e d . The German Industries Federation made a p l e a t o the Bundesbank t o intervene on foreign currency markets to h a l t "the d i s q u i e t and upheaval" caused by the D-mark revaluation but the Federal Bank refused. At the i n s i s t e n c e of f o r e i g n buyers, German exporters are invoicing i n foreign currencies and they wanted the Bundesbank to act to reduce the d i s counts on foreign currencies because t h e s e discounts "were several times as high as before the revaluation. 1 1 As an a l t e r n a t i v e means of covering these r i s k s , German firms are borrowing h e a v i l y i n f o r e i g n markets and i n Euro-dollars, and s e l l i n g the currencies to the Bundesbank for D-marks for domestic financing 0 Thus, for the f i r s t time i n at l e a s t twenty years German industry i s taking up f o r e i g n c r e d i t s abroad on a systematic and considerable s c a l e . Borrowers are firms of international reputation whose borrowings s i n c e the March 6 revaluation of the mark may exceed a $300 m i l l i o n equivalent, One of the three major successors t o the I . G, Farben A„ G„, the Farbwerke Hoechst, i s a t y p i c a l borrower, having r e c e n t l y made a $25 m i l l i o n loan i n a foreign country as a hedge against r a t e changes. Disruption of the forward market has made t h i s the only means of obtaining cover for large amounts0 The maturity of most of these c r e d i t s abroad i s reported to average between s i x and twelve monthso I t i s a new foreign exchange s i t u a t i o n which German bankers b e l i e v e i s l i k e l y t o p e r s i s t f o r some time. R e f l e c t i n g the current s i t u a t i o n , the d o l l a r remained near or a t the lower intervention point during a l l of April and i n t o the early part of May, DM-Dollar middle rate par(DM Ho00 = $1) March * April » it M May « 15 30 $ ili 21 28 5 12 3o9700 3c9700 3.9701 3.9701 3.9700 3.9701 3.9700 3.9700 Bond Market o The improvement i n the bond market continued i n t o April and early May as the Federal Bank accelerated i t s e f f o r t s t o get German i n t e r e s t r a t e s downc The promise of lower i n t e r e s t r a t e s l e d to a r i s e i n p r i c e s of outstanding i s s u e s . Also feeding the price r i s e was heavy foreign investment i n German bonds, e i t h e r because German y i e l d s s t i l l remained well above y i e l d s on foreign bonds or because German bonds represented an e x c e l l e n t haven f o r funds s t i l l being attracted i n t o Germany by hopes of a further revaluat i o n of the mark. As a r e s u l t , i n t e r e s t r a t e s i n the German c a p i t a l market have reached l e v e l s much lower than had been expected. Some observers are beginning t o talk of a "new phase1* i n the bond market. Loans of recent months were issued at 5=1/2 to 6 per c e n t | during A p r i l , £ per cent i s s u e s began to appear. Even mortgage bond r a t e s are d e c l i n i n g : mortgage banks have applied t o the Federal Ministry for Economic A f f a i r s f o r permission to i s s u e 5> per cent mortgage bonds. The mortgage banks, which had ceased the s a l e of 6 per cent mortgage bonds in l a t e March when quotations f o r these bonds had r i s e n above par, a l s o ceased the s a l e of 5 - 1 / 2 per cent mortgage bonds i n mid-April c At the time, these bonds were s e l l i n g at a price of 99. New 5 per cent i s s u e s are e x pected to s e l l at 96 or s l i g h t l y higher. ° 5 , However, the o v e r a l l d e c l i n e i n bond y i e l d s during April was modest. Prices of public and i n d u s t r i a l i s s u e s rose gen erally from one-half t o one point during the month. Principal gains i n p r i c e s were r e g i s t e r e d by some of the government i s s u e s , e s p e c i a l l y those with t a x exemption features which showed gains of up t o 1 - 1 / 2 p o i n t s . In a s p e c i a l study of the German c a p i t a l market, the Federal Ministry f o r Ecorfomic A f f a i r e has expressed i t s concern over the recent price increases f o r f i x e d - i n t e r e s t - b e a r i n g s e c u r i t i e s which i t ascribes t o large purchases by the banks. The Ministry advocates new i s s u e s on terms a t t r a c t i v e t o the private i n v e s t o r . Some suggested f e a t u r e s of a more a t t r a c t i v e bond ares shorter currency periods, renunciation of the r i g h t of the debtor t o redeem bonds before maturity, payment of a premium i n the case of premature repayment, and systematic redemption of an i s s u e . Yields of Fixed-interest-bearing s e c u r i t i e s (per cent) ^ Mortgage bonds J an . Apr. July Oct. Dec. Jan. Feb. Mar. 6.0 6.2 6,5 6.U 6.2 6.2 6.2 6.1 Industrial bonds 6.5 6.0 6.5 6,1 6.1 5.8 5.7 5.8 , Loans of public a u t h o r i t i e s 6.5 6.U 6.7 6.3 6.2 6.1 6.0 5.9 In April representatives of the Deutsche Bank negotiated with repr e s e n t a t i v e s of the Osaka Municipal and Prefectures governments the i s s u e of a loan on the German market. The i s s u e , amounting to around DM 1*00 m i l l i o n ($100 m i l l i o n ) , i s expected to be f l o a t e d sometime i n June and represents the l a r g e s t foreign public loan issued i n Germany since the war. I t w i l l be the f i r s t Japanese i s s u e on the German market i n almost h5 y e a r s . Terms and maturity of the loan have not y e t been announced. Stock Market. Share-prices remained remarkably steady during the month of Aprile This tendency continued i n t o May u n t i l the lowering Of discount rate on May 5 brought about a strong r i s e i n the market during the second ° week of May. The trend toward lower i n t e r e s t r a t e s and the announcements during the month of additional dividend payments modestly above t h e i r I960 l e v e l s contributed toward the maintenance of market strength. The market did not r e a c t adversely to p o l i t i c a l disturbances during the month, but p o l i t i c a l f a c t o r s are accepted as the primary reason why s t o c k s have not y e t f u l l y regained t h e i r pre-revaluation l e v e l s . Market sources s t i l l expect a good r i s e i n 1961 although a r e p e t i t i o n of the I960 b u l l market i s not f o r e s e e n . The payment during May of already announced increased dividends and t h e i r reinvestment i n the market are given as a major basis for a further r i s e - 6 - i n s t o c k s . German investors are reported t o have ceased further s h i f t s from stocks i n t o bonds. Almost a l l stocks shared i n the. general price r i s e . Chemicals and engineering stocks ( e s p e c i a l l y Demag, the major mechanical engineering stock) were very strong, and automotive stocks gained several points on the strength of the e x c e l l e n t March production and export r e s u l t s announced i n April, O f f i c i a l trading i n the Volkswagen shares began on April 7 with demand much heavier than had been a n t i c i p a t e d . The shares were bought and sold i n the "regulated f r e e trade' 1 which means that t h e i r prices were o f f i c i a l l y reported on the exchange but that a l l trading i n the shares took place outside the exchange. By mid-April the p r i c e of a share was only s l i g h t l y below DM 800 as against opening day quotations of EM 700-75)0 (average Government s e l l i n g p r i c e 3!?0, nominal p r i c e 100). Foreign demand, p a r t i c u l a r l y from the United States and Switzerland, was e s p e c i a l l y strong. The Government has not y e t issued shares t o the Volkswagen employees although the Constitutional Court i s expected t o deny charges that the Government's p r e f e r e n t i a l treatment of low-income groups i s u n c o n s t i t u t i o n a l . Major public a t t e n t i o n has been given t o t h e Court proceedings and to the rapidly r i s i n g p r i c e s of the shares. The Government has been c r i t i c i z e d f o r not permitting the banks t o purchase the stock p r i o r t o the opening of o f f i c i a l trading so that the banks might "stabilize 1 1 the market p r i c e of t h e shares. A Parliamentary question has been introduced asking the Government whether i t intends t o s t a b i l i z e the share p r i c e s . However, no Government a c t i o n i s expected as p r i c e s tended to drop t o around DM 720 by l a t e April and t o around DM 700 in e a r l y May. One New York brokerage house had quoted a p r i c e of around $198 to $201 i n mid-April3 t h i s quotation declined t o $181 by the f i r s t week of May. The shares are not r e g i s t e r e d outside of Germany and are t e c h n i c a l l y unquotable. Frankfurter Allgemeine Zeitung Index of Industrial Share Prices (Dec. 31, 195k = 100) " 1961 Dec. 31, 1958 Dec. 31, 1959 Aug. 8, i960 Dec. 30, i960 189.05 366.28 596.63 453.29 Feb. 28 Mar. 30 Apr. 7 Hi 21 28 May 5 12 1,32.96 ltl7.29 1,23.51 1,25.20 1*23.71, 1,26.88 l,3l».01 10,7.97 -7 - Part I I . Netherlands; F i r s t Foreign F l o t a t i o n s i n c e Reopening of Patch Capital Market f o r Foreign Issues After announcing on April 18 that the Netherlands c a p i t a l market would be reopened t o foreign c a p i t a l i s s u e s (see Capital Market Developments Abroad No. 7 , May 15, 1 9 6 1 ) , the Dutch have l o s t no time i n arranging f o r the f i r s t f l o t a t i o n , a 50 m i l l i o n guilder ($13«8 m i l l i o n ) bond i s s u e of the I n t e r national Bank f o r Reconstruction and Development 6 The bonds, with a U - l / 2 per cent coupon and a maturity of 20 y e a r s , were o f f e r e d f o r public subscript i o n during the week of May 15. Maturing i n 1981, the loan i s non-callable u n t i l June 15, 19725 beginning then the i s s u e w i l l be r e t i r e d at par i n ten equal annual i n s t a l l m e n t s . The bonds w i l l a l s o be subject t o redemption i n whole or i n part at 101 1 / 2 form June 15, 1972 through June lU, 1976 and at 101 t h e r e a f t e r . I t i s the f i r s t f o r e i g n loan f l o a t e d on the Dutch c a p i t a l market s i n c e 1955* and the third International Bank guilder loan (two Bank loans were made i n 195k and 1955) • As i n the case of the e a r l i e r Bank loans, a syndicate of 13 Dutch banks headed by the Netherlands Trading S o c i e t y , Amsterdam w i l l handle the underwriting. European Section, III. Nine Charts on Financial Markets Abroad Chart Chart Chart Chart Chart Chart Chart Chart 1 2 3 U 5 6 7 8 - I n t e r e s t Arbitrage UCS„/Canada I n t e r e s t Arbitrage New York/London I n t e r e s t Arbitrage New York/Frankfurt I n t e r e s t Arbitrage Frankfurt/London Short-term I n t e r e s t Rates Long-term Bond Yields I n d u s t r i a l Stock Indices Major Currencies i n Terms of Spot United S t a t e s Dollar Chart 9 - 3-month Forward Rate—-London Quotations i INTEREST A R B I T R A G E , Thursday figures THREE-MONTH UNITED S T A T E S / C A N A D A TREASURY RATE D I F F E R E N T I A L A N D BILL R A T E S FORWARD CANADIAN DOLLAR Vv /V v\ RATE D I F F E R E N T I A L W I T H 1959 FORWARD EXCHANGE COVER 1961 INTEREST 3 - ARBITRAGE, MONTH TREASURY NEW YORK BILL RATES NEW RATE DIFFERENTIAL 3 - M O N T H / YORK L O N D O N V AND FORWARD STERLING V\ RATE DIFFERENTIAL FORWARD M WITH EXCHANGE J S COVER D M J 1960 $ D M J 1961 S INTEREST ARBITRAGE, NEW YORK/FRANKFURT Friday f i g u r e s 3-MONTH GERMAN TREASURY 3-MONTH BILL RATES INTERBANK I N T E R B A N K L O A N RATE RATE DIFFERENTIAL AND AND LOAN RATES l/'X FORWARD DEUTSCHE MARK 1 I O A N RATE RATE Note DIFFERENTIAL WITH FORWARD EXCHANGE COVER Special forward dollar rcte i oitlier I la I or premium on ipoO available I o German c o m mer < io I bonks. 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 Friday — P e r figu.es 3-MONTH AND TREASURY LENDING BILLS RATES GERMAN RATE DIFFERENTIAL S P R E A D IN FAVOR AND FORWARD OF UNITED K I N G D O M INTERBANK RATE - NEI DIFFERENTIAL INCENTIVE OF WITH UNITED KINGDOM | FORWARD BILLS OVER: ^ fc , | \ GERMAN INTERBANK M STERLING BILLS O V E R : EXCHANGE COVER c e n l P e r o n n u m S H O R T - T E R M INTEREST RATES * V" /V CANADA J - 1961 Note: 3 month treasury bill rales lor all countries except Japan (3 month interbank deposit rol.tj and Switzerland (3 month d« pout rate). LONG-TERM BOND YIELDS SWITZEIIAND n . INDUSTRIAL STOCK , INDICES * s * 195 8 = 1 0 0 <00 SWITZillAND y .150 195 8 * Nolo: Jopon Index ol oil ilocki iruded an lokyo u.chui.«i- \> MAJOR C U R R E N C I E S I N T E R M S O F THE S P O T U . S . D O L L A R PERCENT Above par \ ~ Above 7\ 1960 1961 par 3 - M O N T H F O R W A R D RATES - L O N D O N Q U O T A T I O N S PREMIUM + PREMIUM + FRENCH FRAHC /
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