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D I V I S I O N OF I N T E R N A T I O N A L F I N A N C E BOARD OF GOVERNORS F E D E R A L RESERVE SYSTEM November 9, 1961. No. \33 jCAPITAL MARKET DEVELOPMENTS ABROAD I. II. I. Canada Nine Charts on Financial Markets Abroad Canada: Money and Capital Markets During October Canada's official foreign exchange holdings rose $18? million during October as a result of official intervention to hold down the exchange rate. Purchases of U.S. dollars by the Exchange Fund materially increased the liquidity of the banking system. As a result, the banks increased their loans by $121 million without reducing the current high level of bank liquidity. This liquidity has given new momentum to the general downward trend in Canadian interest rates which began with the change in monetary policy in June. During October, interest rates declined further, especially in longer maturities. Money market rates declined fractionally, with the 3-month Treasury bill down 10 basis points. Bonds with maturities of 5 years and over were down as much as 33 basis points. These declines took place despite switches from longs to shorts by the Bank of Canada. NonGovernment securities also showed a Recline in yield of about 6 basis points for maturities of about 15 years» In a recent speech, the finance Minister commented on the success of the new accord between the Bank of Canada and the Government in the harmoneous mixture of fiscal and monetary policies. He pointed to the reduced spread between Canadian and U.S. security yields as a sign of the success which the government's program has yielded. Between early Jung and November the yield advantage for Canadian securities over comparable U.S. securities have narrowed by the following amountss 3-month Treasury bill 8-year bond . 20-year bond 35-year bond 50 basis 5>0 basis 20 basis 12 basis points points points points Money market. Short-term interest rates eased only slightly in October, ^he average auction yield on the 3-month bill declined from 2.57 per cent on October 5 to 2.U7 per cent on November 1, while the 6-month bill declined from 2.8U per cent to 2.69 per cent. (See Table and Chart 1„) On November 1, Treasury bill yields were still close to the lows reached ip mid-June, as noted in the following tables NOT FOR PUBLICATION DECONTROLLED AFTER SIX MONTHS. I NOT FOR PUBLICATION 3-month Treas<, bill June 1 15 Aug. 31 Oct. 5 Nov. 2 e 3olii 2-60 2.26 2.57 2.U7 6-month Treas0 bill 3.30 2.75 2o552.8U 2.6? Day-to-day money rates declined through the month but rose 27 basis points during the last week when day-to-day loans went up #37 million. Purchases of foreign exchange by the Exchange Fund swelled chartered bank liquidity and the banks expanded their Treasury bill holdings by $109 million. The Bank of Canada sold $105 million of bills. The yield spread favoring the Canadian over the U.S- 3-month Treasury bill remained about constant through the month at about 20 basis points. The incentive to hold the Canadian bill on a covered basis reached 33 basis points in mid-October. (See Table.) Bond market. Bond yields eased further during October in both the Government and non-Government sector. According to McLeod, Young, Weir, Ltd., the kO bond yield average for non-Government bonds fell 6 basis points to 5»Ul per cent, as noted in the following table: 10 10 10 10 kO Provincials Municipals Public Utilities — Industrials Bond Yield Average June 1 Sept. 1 Oct. 2 Nov. 1 5.62 5.82 5.W 5-60 5.63 5»38 5.60 5.39 5-U3 5-U5 5»U5 5.63 5.37 5-U2 5.U7 5.36 5.56 5.37 5.35 5oUi Government bond yields declined as much as 33 basis points for 5-year maturities, and up to 15 basis points for longer terms. The following table compares some Canadian Government bond yields for maturities from 5 to 35 years; Maturity Sept- 1965 Sept. 1972 Jan. 1975-76 Sept. 1983 Sept. 1996-98 June 1 U-78 5.08 5.19 5.20 5.09 June 15 L.63 L.98 5.1k 5.10 5.08 Oct. U Nov. 1 Uo29 1.87 5.01 5.02 5,oo 3.96 U-75 U.86 a.91 li.96 As a result of these declines, the spread between the yield on comparable uanaaian ami U.C. c c r . - T - i p r<~>11 owl-- v bl<=» compares changes in yield spreads: NOT FOR PUBLICATION NOT FOR PUBLICATION 8-year bond 20-year bond 35-year bond -3 - June 7 Octo U Nov. 1 0.81 1.27 1.3U O.U5 0.91 1*23 0o30 0.78 1.21 By November 1, Canadian bond yields were well below those of early June, before the Government budget was presented and yield spreads harrowed significantly. The UO-bond yield average declined 22 basis points, while Government bond yields were down as much as 15 to 80 basis points „ With rising yields in the U.S. during the June-September period, the wide spreads in favor of Canada on intermediate-term bonds were reduced 30 to 5>0 basis points. Chartered bank expansion and money supply<> The chartered banks continued to expand loans above seasonal requirements and there was no decline in their liquid asset ratio» General bank loans yose $121 million, by 2.2 per cent, making the total seasonally-adjusted loan expansion In7 per cent since the end of June. Despite this expansion, bank liquid assets averaged 18.8 per cent of deposits in October, compared with a 15 per cent minimum requirement« The money supply rose 1/2 per cent in October and is up about 3 per cent over end June levels on a seasonally-adjusted basis* Interest rates reduced on term %qtes» The Bank of Nova Scotia announced an interest rate reduction of 1/U of 1 per cent on some term notes. The new rates are as follows: 2 to 3 year notes, U-l/U per cent 3 to h year notes, U-l/2 per cent h to 5 year notes, h-3/k per cent This is the first interest rate reduction announced by the bank since last July 5. Government cash position. In August, the Federal Government ran a cash deficit (on budgetary and non-budgetary items) of $97 million, compared with a $76.8 deficit in August a year ago. For th§ April-Aujgust period, the first five months of the fiscal year, the cash deficit was $2li6.2 million compared with $78.3 million a year ago. In the last week of October, the Bank of Canada was also required to advance $U5 million to the Government to meet current cash needs. This advance probably reflects the- need for increased Canadian resources for Exchange Fund operations. Foreign exchange. As a result of official efforts to hold the Canadian dollar close to 97 U.S. cents, foreign exchange reserves rose $187 mill ion in October; they declined $61 million between July and September. This increase reflected a growing demand for the Canadian dollar which produced pressure on the exchange rate. In late October, the Finance stated the that the Exchange Fund will be used to keep the discount from rising above 3 per cent" is a 11 „.. misinterpretation of the Gor^rnsisnt1 s intentions,11 Tea ... thct ths. NOT FOR PUBLICATION - u NOT FOR PUBLICATION rate would not be lowered by official actions , combined with the upward pressure earlier in the month, brought an even sharper increase in Canadian dollar purchases toward the end of the month. In the belief that misinterpretation of his speech had contributed to the inflow, the Minister issued a public statement the following day that he would not support the rate should any large outflow of funds result. The rate then declined slightly to 96=7 U.S. cents angl has since remained around that level. The 3-month forward rate on the Canadian dollar moved to a slight premium in October for the first time since early June* This movement probably reflected expectations that the authorities would not continue to off-set the recent large increases in the demand for the Canadian dollar*. Foreign trade» The seasonally-adjusted trade surplus rose in July despite rising imports.• While imports for August rose to a record . level, early estimates indicate exports also expanded beyond seasonal expectations. For the first seven months the trade surplus was $lhlj.02 million compared with a $lh.7 million deficit during the same period last year. The following table shows seasonally-adjusted monthly average trade figures for periods incicateds i960 1961 - I II April May June July Aug. Exports Imports U51.1 I463.6 172.2 523.0 Uo6oii 187.3 528.1 U58.0 L63.8 UUU.6 U.60I US5.1 I162.7 1,76.2 513.7 Trade balance - 6.9 - 0.2 * 27 06 +106.9 - 18.7 + 2lw6 + 51.9 Stock exchange. The Canadian industrial stock index declined some in October for the second straight month. The DBS index of industrials averaged 333.0 during the week ending October 199 about 1 per cent below the last week of September. During the same period, the Standard and Poor index of industrial stocks rose over 1.5 per cento The following table compares Canadian and U.S. industrial price indiciess NY Standard & Poor Average for week ending DBS Industrials Industrials Sept. 29, I960 213.6 55<>69 June 15, 1961 329.7 69.55 Aug. 27 331.8 70.hO Aug. 31 3UUol 71.86 Sept. 28 336.5 70.U7 Oct. 5 332.7 70.71 12 333.8 71.51 19 333.0 71.60 NOT FOR PUBLICATION NOT FOR PUBLICATION The total volume of all stock sold on the Canadian exchanges in October averaged $15»U million per week, compared with $lU.2 million in September and less than $8 million in July-Auguste II. Nine Charts on Financial Markets Abroad Chart 1 - Interest Arbitrage U„S0/Canada Chart 2 - Interest Arbitrage New York/London Chart 3 - Interest Arbitrage New York/Frankfurt Chart k - Interest Arbitrage Frankfurt/London Chart 5> - Short-term Bond Yields Chart' 6 - Long-term Yields Chart 7 - Inc%us trial Stock Indices Chart 8 - Major Currencies in Terms of Spot United States Dollar Chart 9 - 3-month Forward Rate—London Quotations NOT FOR PUBLICATION Selected Canadian Honey Market and Related Data r Spread Canada U.SJ>/ over U.S. i960 - High., Low 1 9 6 1 = High Low 5,1a 1.68 3.3k 2 =26 a,53 2.1c 2.5k 2.17 1.62-0.82 1,10 -0.09 S|?i Canamag nn i ny 3-rno. discount (-L forward premium(+)2' 105,2? 100,33 101.72 96.75 —— — Net incenlive TrO hold Can. bill®/ 1.99 -0.57 0.89 -0.20 0,99 -0.91 0.26 -0.56 0.0 . 0.3k Sept. 28 97.06 97.08 2.25 0.3k 2.59 0.28 0 = 28 0.0 97.08 Oct. _ 5 97.08 2.57 2.29 0.27 0.20 . 97.08 0.07 12 97.09 2.57 2.37 0.20 0.13 0.33 2.29 97.08 97.11 19 2.k9 26 0.20 0.13 0.33 97.08 97 oil 2.50 2.30 0.13 0.33 0.20 2 96.75 . 96.78 2.k7 2.27 a/ Average yield at weekly tender on Thursday. V Composite market yield for the U.S. Treasury bill on Thursday close of business# 5/ In U.S. cents* d/ 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). Selected Government of Canada Security Yields 6-mo. Treas. bills Spread Canada over . &/ u.s«£/ 1960 - High Low 1961 - High Low 5.33 1.99 3o63 2.35 1.37 -0.86 1.15 -0.11 Intermediate bonds (8 yr.) ' Spread Canada over, 2/ u.sjy S o # -1,11 hod9 0.21 Uo75 • I0I6 ho22 0.25 Long-term bonds (20 year; (35 year) Spread Spread Canada over y Canada over. i/ u.s £ ' £T U.S.&/ 5.k2 k.63 5.19 k°80 1.36' 0=85 l.kO 0.78 5.28 k.68 5.23 U.92 Sept. 27 2.89 0,21 k.kl 0.L7 k.95 0.91 5.00 Oct. k 2.8k 0.2k 4.39 0.45 k.96 0.91 5.00 .11 2.83 0,1k UoUO O.oUl Uo96 0.88 5.00 18 2.72 0.0k L.37 O.lil k.90 0.8k k.98 25 2o72 0=0k 4.36 0oU2 L,86 0.8l k.96 Nov. 1 2 069 0,13 Uo22 0,30 k,80 0.78 k.93 a/ Average yield at weekly tender on Thursday. ~ d/ Spread between Canadian auction rate and coeposite market yield of U.S. bill on close of business Thursday. 0/ Government of Canada 2-3/L per cent of June 1967-68, 2/ Spread over U.S. Government 2-1/2 per cent of 1963-68. e/ Government of Canada 3-lA per cent of October 1979* 7/ Spread over U.S. Government 3-lA per cent of 1978-83* g/ Government of Canada 3-3A per cent of September 1996 - March 1998. ty Spread over U.S. Government of 199$* 1.61 0.95 1.59 1.1k 1.2k 1.23 1.21 1.22 1.2k ' 1.21 ' ° 7 ° Canada: Changes In Distribution of Holdings of Canadian Government Direct and Guaranteed Securities Imillions or Canadian dollars, par value) Bank of Canada Treas. bills Bonds 1961-Jano Feb, Mar 0 April MayJune July Aug. Septo Octo Sources -hi - 7 -hi + 9 +17 °lh 469 0 +16 -105 -38 -68 +120 +59 -22 +U3 +21 +21 +UU +1U Chartered banks Treas. Bonds bills +111 + 67 ° 36 - 70 + 63 + 33 + 16 +107 - 58 +109 +15 -96 -25 " - 2 • •- 1' + 5 +16 +32 + 9 -39 General public Savings Treas. bonds bills Bond* - . 37 + 88 + 50. - 52 + 2k + 62 + 11 +lli8 + 72 + L - 2 - 6 - 18 - 37 - 33 - 22 - 23 - 29 -2k + h - U6 -26 + 30 + 6U - 80 - 7 - 95 - 87 + Uo - 3 +23 +39 + 6 -12 +- 1 +37 -37 -35 +U2 -31 Bank of Canada * Weekly Flnanolal Statistics. Selected Canadian Financial Statistics (in millions of Canadian dollars or per cent) 1. Money supplys*/ Currency and deposits .Less: Govt, deposits Equals: privately held Change in period 2. General bank loans?/ Change in period 3. Total Govt. securities: Of which: Treas. bills Bonds Savings bonds ho New security issues^/ Of wliich sold in U0S0 5. Chartered bank liquidity: Cash reserve Cash ratio Liquid assets Liquid asset ratio b/ Sources Government Total Oct. I4ay Jupc 13,876 253 13,623 29 13,866 153 13,713 + 90 13,861 200 13,551 52 11,011 Hi, 368 312 179 13,832 1U,056 + 171 + 22U llt,368 Hi,399 312 ; U73 11,013 lli,087 7U h3 + 5,207 2 5,22L + 17 5,252 + 28 5,269 + 17 5,367 + 98 5,378 + 11 17s780 1,935 12,308 3,537 17,695 1,935 12s258 3,502 17,763 1,885 12,Lob 17,73? 1,885 12,U02 3,L52 17,885 18,061 18,018 1,885 1,885 1,885 12,577 12,776 12,729 3,100 3,ll0li 3,L23 926 0 891 95 725 11 1,086 12 660 0 1,02U 0 6U0 6 1,018 8.1 2,226 17-7 1,027 ' 8.1 2,#2 18O3 1,025 8.1 2,317 18.3 1,039 8.1 2,U15 18.9 1,062 8.1 2,U65 18.8 1,072 8.2 2,173 18.8 1,017 8.1 2,170 17.3 A, E. Ames & Co., Ltdo Sept 0 Augo_ April - 35hlh J5S£- (Includes public and private securities.) 5,199 + 121 INTEREST ARBITRAGE, UNITED S T A T E S / C A N A D A Thursday figure* T H R E E - M O N T H TREASURY BILL RATES UNITED STATES RATE DIFFERENTIAL A N D FORWARD C A N A D I A N DOLLAR RATE DIFFERENTIAL W I T H FORWARD EXCHANGE COVER MET INCENTIVE IN I A V 0 1 OF CANAftA + S list llto D M J nil S INTEREST A R B I T R A G E , N J W YORK / LONDON Fridayfigures 3 - M O N T H T R E A S U R Y BILL 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 FORWARD RATE IN FAVOR Of LONDON RATE D I F F E R E N T I A L W I T H FO R W A R D E X C H A N G E C O V E R IN FAVOR OF N£W YORK 1960 1961 INTEREST ARBITRAGE, Friday figures .3-MONTH GERMAN TREASURY 3-MONTH NEW BILL YORK/FRANKFURT RATES INTERBANK AND1 LOAN RATES —I/-V \/ RATE D I F F E R E N T I A L A N D FORWARD DEUTSCHE MARK \ LOAN RATE RATE D I F F E R E N T I A L WITH FORWARD EXCHANGE M No!#: Special forward dollar role available lo German commercial bankv COVER . $ P INTEREST A R B I T R A G E , FRANKFURT/LONDON 3 - M O N T H TREASURY BILLS — A N D L E N D I N G RATES / \ LOAN BATE GERMAN RATE DIFFERENTIAL AND | FORWARD STERLING \ GERMAN \ INTERIANK \ RATE D I F F E R E N T I A L - WITH FORWARD NET INCENTIVE OF UNITED KINGDOM B i l l S OVER: LOAN RATE EXCHANGE COVER S H O R T - T E R M INTEREST RATES * T 6 5 4 r 2 0 1958 1959 1960 "iTil" 3-month treaiury bill ratei lor all counmei except Japan (3 month inlarbank deposil rale) and Switzerland (3 month depoiit rote) •j" 3 month rale for U S dollar depoiiti in London L O N G - T E R M B O N D YIELDS /\z 1958 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 A. i960 ; 1961 Below par Above par INDUSTRIAL STOCK INDICES Tokyo exchange 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 — V' PREMIUM 4- /'GERMAN MARK PREMIUM + FRENCH F R A N C I9 60 S' , "61
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