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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 H. 13 No. 80 October 12, 1962 CAPITAL MARKET/DEVELOPMENTS ABROAD OCT 17 1962 Io Canada II« Nine Charts on Financial Markets Abroad DEBAi. P.-oERVE B A N K OF R I C H M O N D I , Canadas Money and Capital Markets i n September In the Speech from the Throne on September 2? before the new Canadian Parliament, the Government indicated i t s i n t e n t i o n of continuing the present a u s t e r i t y program, Without being s p e c i f i c , the Government further announced that i t " w i l l continue t o take p o s i t i v e constructive measures t o strengthen Canada's balance of i n t e r n a t i o n a l payments s " although pledged to remove the import surcharges included i n the June emergency program "as soon as circumstances permit." Meanwhile, the Canadian d o l l a r continued to show considerable strength during September and the f i r s t half of October® The Bank of Canada continued to make s i z e a b l e additions to f o r e i g n exchange reserves during September, although a t r a t e s somewhat below those experienced during July and August, O f f i c i a l reserve accruals during September amounted to $Tl)t m i l l i o n , following additions of $306 m i l l i o n i n July and $216 m i l l i o n i n August. Assessment of t h i s d e c l i n e in the rate of reserve a c c r u a l s , however, i s made d i f f i c u l t by an undetermined amount of unwinding of forward commitments undertaken by the Bank of Canada during the June c r i s i s . Nonbank investors continued t o make s u b s t a n t i a l purchases of Government bonds i n September, although on a s c a l e much reduced from the high July and August l e v e l s . After net purchases of $315 m i l l i o n during July and $309 m i l l i o n during August, the nonbank s e c t o r added $72 m i l l i o n to i t s holdings of Government bonds during the f i r s t two weeks of September, and an a d d i t i o n a l $110 m i l l i o n during the week ended October 3» Also on a reduced s c a l e , the Bank of Canada continued to be a n e t supplier of bonds to the market, p a r t i a l l y o f f s e t t i n g i t s s a l e s with purchases of Treasury b i l l s . In a move toward increased l i q u i d i t y during the l a s t h a l f of September, the chartered banks c u r t a i l e d the expansion of general loans and added $85 m i l l i o n t o t h e i r holdings of Treasury b i l l s . Changes i n holdings of Treasury S e c u r i t i e s during the period August 29 ° October 3 were as f o l l o w s ( i n m i l l i o n s of Canadian d o l l a r s ) s Net Purchases(•+) or S a l e s ( - ) of Government ~ S e c u r i t i e s , August~29"^Q^t-ober^7~1952 Bank of Canada Chartered Banks Government Accounts General Public Government of Canada S e c u r i t i e s Bills" Bordg Canada Savings Bonds ^ =19 +201 OFFICIAL USE ONLY DECONTROLLED AFTER SIX MONTHS -50 <=, 2 — OFFICIAL USE ONLY Canadian Treasury b i l l y i e l d s rose e a r l y in September with l a r g e r than-usual o f f e r i n g s 5 but. had returned to l a t e August l e v e l s by October The short end of the y i e l d curve f o r Government of Canada bonds continued a d e c l i n e which began a f t e r the f i r s t week i n Augus t s while long-term y i e l d s remained a t the high l e v e l s attained i n mid—Julyo April June July August 12 20 18 1 8 15 23 30 September 6 13 20 2? October h 3 months Treasury b i l l s 3o0ii Lo92 5.51 5.39 5.26 5-05 5.12 U.95 5.07 it.98 5.06 U.99 U.9U 196U 33B 5.12 5.76 5.75 5.72 5.62 5.57 5«iti 5.!»6 5.38 5.i)3 5.26 U.97 ~jsES~ 3.93 5.32 5.58 5.58 5.58 5.57 S.60 5.Uli 5.b3 5.31 5.36 5.22 U.99' Bonds 1987-68 u.13 u.7u 5.11 5.03 5.01 5.01 5.05 5.08 5.09 5.01* 5.08 5.08 4.98 1975-78 It.80 5.07 5.U2 5.Ult 5.U0 5.1*0 5.U0 5.U3 5.U3 5.35 5.38 5.38 5.36 1996-98 li.00 5.oli 5.15 5.19 5.19 5.17 5.20 5.19 5.19 5.17 5.18 5.19 5.20 In the corporate and local-government s e c t o r s of the bond market2 average y i e l d s declined only f r a c t i o n a l l y during September5 as may be seen from the following averages reported by McLeodp Youngs Wier and Company ( i n per cent per annum) s 1961 1962 Sept 0 28 Sept, 30 Mar0 30 Aug. 31 10 Provincial 5,20 '"^9" 10 Municipal 5,98 5o8? 5.63 5ol8 10 Public u t i l i t i e s 5 062 5 061 5.3? 10 Industrials 5o66 5.U2 S0I8 5,67 UO Bond y i e l d average 5.L7 5.25 5o78 toll Money marketo Short-term i n t e r e s t r a t e s experienced only very s l i g h t mixed movements during September., Rates on Canadian Treasury b i l l s moved s l i g h t l y upward with a larger-'-than-usual o f f e r i n g e a r l y i n Septembera but by the end of the month had returned t-:- late-August l e v e l s 0 The rate on 3-month Treasury b i l l s ' rose from 4„95 per cent on August 30 to s l i g h t l y over 5 per cent the week f o l l o w i n g s but returned to per sent by October I4.0 After increasing s l i g h t l y during September5 the rate on 6-month Treasury b i l l s on October k was once again a t 5 <>51 per cent 0 the same as i t had been on August 29o The Bank of Canada,, on balance s continued to be a net buyer of Treasury b i l l s during September5 although on a scale much smaller than during August (see Table)<, During the f i r s t half of the month«, the Bank of Canada continued t o o f f s e t large net bond s a l e s with purchases of Treasury b i l l s 0 During the l a s t two weeks of the month5 however <, as the Bank of Canada began OFFICIAL USE ONLY OFFICIAL (BE ONLY to acquire bonds, i t became a net s e l l e r of modest amounts of Treasury b i l l s . The chartered banks ended September with n e t additions of $U5 m i l l i o n i n Treasury b i l l s , as n e t purchases made during the l a s t h a l f of the month ($85 m i l l i o n ) more than o f f s e t e a r l i e r s a l e s . The uncovered spread i n favor of the Canadian Treasury b i l l against the U.S. b i l l remained very nearly constant a t about 2 - l / u per cent (see Table and Chart 1) . The f u l l y - c o v e r e d arbitrage incentive i n favor of the Canadian b i l l diminished from 1/2 to l/U per cent as the discount on forward cover widened a t midmonth; as t h i s discount narrowed once again,, the covered advantage i n favor of the Canadian b i l l increased once again, and stood a t U3 basis points on October U. After disappearing during the l a s t half of August, a f u l l y covered i n c e n t i v e favoring Canadian finance paper reappeared e a r l y i n September and f l u c t u a t e d with the cost of forward cover, as may be seen i n the following comparative r a t e s on prime 30- to 89-day paper ( i n per cent per annum) s August 2U September 7 Hi 21 28 5.00 U. S. 2.88-3.13 Spread 90-Day Forward Exchange 5.00 5.00 5o00 2o75-3oOO 2.50-3,00 2.50"3o00 2.12 2.25 2,25 -1<>69 -1.62 -2o02 +0.13 +0.63 +0.23 -1.75 +0.50 Canada 5.00 2.50-3o00 2.00 2.25 -2.02 Net Incentive -0.02 Bond marketo The general l e v e l of bond y i e l d s inJJanada changed only s l i g h t l y during September „ At the beginning of October, the y i e l d s on long-term Government of Canada bonds remained unchanged a t the high l e v e l s attained i n mid-July„ The short end of the y i e l d curve on Government s e c u r i t i e s , however, continued a gradual decline which began a f t e r the f i r s t week of August. The nonbank s e c t o r continued to provide an a c t i v e demand f o r Government bonds during e a r l y September, After two weeks with only very small s h i f t s i n holdings, the nonbank sector again added to i t s holdings $110 m i l l i o n (during the week ended October 3) as the Government issued s u b s t a n t i a l q u a n t i t i e s of new s e c u r i t i e s o Yields i n the corporate and local-government market continued to move very s l i g h t l y downward during of tiie month, McLeod, Young, Wei;? and Company reported which ranged from 5<>6l per cent on public u t i l i t i e s to municipals (see Table). s e c t o r s of the bond September. By the end y i e l d s i n these s e c t o r s §<>87 per cent on Canadian Finance Minister George Nowlan announced on September 13 that the 1962 i s s u e of Canada Savings Bonds (to be dated Nov® l ) w i l l carry a y i e l d of $ . 1 1 per cent i f held Ik years to maturity„ During the i n i t i a l three y e a r s , the new bonds w i l l carry an i n t e r e s t rate of U - l / 2 per cento The rate w i l l r i s e to 5 per cent f o r the second three-year period, and w i l l remain a t 5 - 1 / 2 per cent during the f i n a l e i g h t y e a r s . OFFICIAL USE ONLY OFFICIAL USE ONLY - h - Borrowings i n the United Stateso The high structure of Canadian bond y i e l d s continues to i n t e r e s t provincial and municipal governments i n the p o s s i b i l i t y of U0S0 f i n a n c i n g . In addition to the $250 m i l l i o n Government of Canada loan concluded i n the U.S. during September9 A. E. Ames & Co. reports $9.9 m i l l i o n i n new provincial and municipal i s s u e s payable i n U«S. funds. Reported borrowing i n the U.S. during September included i s s u e s by the New Brunswick E l e c t r i c Power Commission ($8 million,, guaranteed by the Province of New Brunswick)<> the City of Sherbrooke, Quebec ( $ 1 . 1 m i l l i o n ) , and Halton Countys Ontario. The t o t a l of new Canadian i s s u e s payable i n U.S. funds sold during the f i r s t nine months of 1962 9 as reported by Ames, amounted to $Ul2 m i l l i o n as compared with SlUl m i l l i o n during the same period of 1961„ Bank loans and bank l i q u i d i t y 0 Chartered bank cash reserves remained very near the 8 per cent l e g a l minimum during September. The banks moved toward increased l i q u i d i t y as they c u r t a i l e d general lending and picked up Treasury b i l l s during the second h a l f of the month. The d e c l i n e of $3U m i l l i o n i n general loans during the three weeks following September 5 c o n s t i t u t e the l o n g e s t "pause" i n the rapid expansion of these loans during 1962. Meanwhile, the chartered banks made net purchases of $85 m i l l i o n i n Treasury b i l l s during the three weeks following September 12, causing the l i q u i d a s s e t r a t i o to climb s t e a d i l y . By October 3 5 the l i q u i d a s s e t r a t i o was 17.12 per cent, i t s h i g h e s t l e v e l since May, and w e l l above the 15 per cent agreed minimum. (See Table, page 5«) Foreign exchange. throughout September and the i n substantial q u a n t i t i e s of the Canadian d o l l a r has been The Canadian d o l l a r remained continually strong f i r s t half of October. The Bank of Canada has taken reserves from the market while the market rate on continually above par (at about 92.9 U.S. c e n t s ) . I t i s d i f f i c u l t to determine the r a t e a t which the short-term forward commitments made by the Government of Canada during the exchange c r i s i s l a s t June have begun to mature and are being e i t h e r met or 8 5 rolled over". At the o f f i c i a l l e v e l , the Government announced i n l a t e September a renewal f o r another 90 days of the $250 m i l l i o n swap with the U.S. Federal Reserve System. After the comp l e t i o n of arrangements for the $2^0 m i l l i o n loan from private U.S. sources during September, the Government of Canada cancelled an equivalent portion of i t s $U00 m i l l i o n unused l i n e of c r e d i t with the Export-Import Bank of Washington. To the extent t h a t the Bank of Canada has been meeting maturing forward o b l i g a t i o n s undertaken i n the market during the June c r i s i s , however, the a c q u i s i t i o n of reserves from the market may be higher than indicated i n the following o f f i c i a l t o t a l s of Canada's gold and f o r e i g n exchange reserves ( i n m i l l i o n s of U.S. d o l l a r s )s - March May June 2U June July August September Gold 963.7 913.0 n.a o 669.0 673,8 683.0 noao U.S. d o l l a r s 716.7 579.8 n.a. 1*139.7 l,Wi0.6 1,62:7.6 . r..a, OFFICIAL USE ONLY Total • 1,709.k 1,1)92,8 1,100,0 1,808.7 2„lllt.U 2„330,6 Change during period -37.3 -102.0 T392.8 +708.7 +305.7 +216.2 *114 .0 «, 5 - OFFICIAL USE ONLY Canadian Chartered Bankss Cash Reserves & Other Assets (In millions of dollars or per cent) Average of Wednesdays 8 March April May June July August Average f o r week ending: June 13 20 27 July U 11 18 25 Augo 1 15 22 29 Sept, 5 12 19 26 Oct. 3 17 b/ ~ Treasury Bills^A 18 .Ok 17.12 17.13 16.05 15.53 15.56 5,905 6,033 6,261 6,519 6,61*9 6,709 1,181 1,075" 1,01*8 1,009 908 987 2,708 2,679 2,719 2,1*57 2,212 1,932 16.2 6,350 6,1*32 6,519 6,623 6,685 6,662 6,61*9 6„68l* 6,708 6,677 6,679 6,709 6,752 6,755 6,738 6,718 1,05k 2,61*6 2,521 2,157 2,1*37 2,31*7 Cash Reserves Cash Ratio Liquid iAssets 1,101 1,113 i , m 1,165 1,159 1,151 8.1 8.1 8.1 8.18 8.20 8.12 2,451 2,351 2,358 2,286 2,195 2,201* 1,150 8 e l 2,313 2,268 2,265 1,170 1,196 1,132 I3IU3 - l,Ui7 1,185 b/l,lU6 " 1,159 1,1U7 i,iU5 . General Loans' Canadian Government Bonds a / (Par value) Liquid Asset Ratio • 1,156 1,108 8.2 80U 8.03 8.09 8 o i l 8.39 b/8.09 " 8.18 8.10 8.08 8.16 8.10 1,108 8.10 1,112 8.13 1,109 1,100 2,218 2,226 2,179 2,181 2,183 2,195 2,250 2,197 2,183 8 o i l 2,200 8.1k 2,316 2,211 15.9 15-9 15.69 15.75 15.1*1 15.1*3 b/l5.W* ~ 15 .ho 15 . h i 15.50 15.89 16.06 15.96 16.09 16.19 17.12 1,023 1.009 1.010 995 91*7 908 972 955 91*2 960 987 969 91*7 961 989 1,032 2,280 2,212 2,107 2,038 1,991 1,956 1,932 1.930 1.931 1,906 1,892 1,905 Monthly data are f o r the l a s t Wednesday of the month. Weekly f i g u r e s are holdings as of date indicated. Data are not averages, but reported l e v e l s as of August I j other data are weekly averages. Source« Bank of Canada, Weekly Financial S t a t i s t i c s and S t a t i s t i c a l Summary* June 1962. Stock market. The Canadian DBS i n d u s t r i a l s index declined 2 . 7 per cent during the second and third weeks of September, and recovered over h a l f of that decline during the week f o l l o w i n g . During the week of September 28, while Canadian industrial stock prices were experiencing partial recovery from declines e a r l i e r in the month, the New York Standard and Poor's i n d u s t r i a l index broke sharply and registered a decline of over U per cent. OFFICIAL USE ONLY OFFICIAL USE ONLY Average for week ending DBS Industrials a / Nolo Standard and Poor Industrials 1962: 28 113=8 55.85 12 19 26 113.3 115.0 112o3 lll+oU 58.93 60.12 59.U 55.26 August 2 9 16 23 30 118.1 119.5 123.2 122,6 120.2 60.73 60,22 61.23 62,37 61.71 September 6 13 20 27 120 o 3 119.3 117.1 118,9 61.03 61.L5 6l«U0 58.87 5 ;i.a. 58.82 June July October a / This s e r i e s i s the recently=published DBS index of 76 i n d u s t r i a l s (195)6=100), and replaces the older DBS index of 66 i n d u s t r i a l s (1935-1939® 100) previously reported i n Capital Markets Developments Abroad s e r i e s f o r Canadao Europe and Britivh Commonwealth Section,, IIo Chart Chart Chart Chart Chart Chart Chart Chart Nine Charts on Financial Markets Abroad I n t e r e s t Arbitrage 9 United States/Canada I n t e r e s t Arbitrage s New York/London I n t e r e s t Arbitrage for German Commercial Banks I n t e r e s t Arbitrage s Frankfurt/London Short—term I n t e r e s t Rates Long-term Bond Yields Industrial Stock Indices — Spot Exchange Rates =- Major Currencies Against. U0S0 Dollar Chart 9 - 3-month Forward Exchange Rates 1 2 3 U 5 6 7 8 - OFFICIAL USE ONLY - 7 - Canada g Treasury B i l l Yields and Exchange Rates 3-rco. Treas. b i l l arbitrage c a l c u l a t i o n " In 3-mo, favor U.S., DifferCan, Canada ence bill £/ sJ 1962-High Low 5.51 3,01 2.98 2.6U 2.# 0.22 0ol3 -2.31 0.8U -0.11 Spot Can,$ (U.S, cents) Finance ]paper 90-179 days 30-89 days 95.75 91.73 — — 1962-June 7 2.6k 0.98 3.62 3-3/8—1/2 0.U3 -0.55 3-5/8—3/U 91.73 — July 19 +0.56 -2.02 2.58 92.72 2.93 5.51 Aug, 23 2.82 2.30 +0.35 2.12 92.83 -1.95 5 5-iA""~i/2 2.80 -2.22 -0.07 2.15 5 —1/8 30 92.83 U.95 5-lA—5/8 2.28 Septo 6 +0.53 92.86 5 —1/8 2.79 5.07 -1.75 5-1A—5/8 +0.58 2.78 2.20 -1.62 92.86 Uo98 13 5-1A—5/8 5 20 +0.29 5-.06 -2.02 2o7S> 92.88 2.31 5-lA—5/8 5 +0.28 2.76 92 8U 2.23 27 1 . 9 5 k.9'9 5-iA—1/2 5 0 Oct, +0.U3 2.18 - 2.76 92.91 U.9U -1.75 a / Thursday q u o t a t i o n s ! ~™ b / Spread between spot and 3-month forward r a t e i n per cent per annum» Discount equals ( - ) 0 jc/ Net of d i f f e r e n c e i n b i l l y i e l d l e s s discount on 3-month Canadian d o l l a r . d / Friday quotations. h Selected Government of Canada Security Yields 6=moo Treas 0 b i l l s Spread Canada over a? UoS.5/ Intermediate bonds (8 y r . ) Spread Canada over U.S^/ SJ Long-term bonds (20 year) (35 year) Spread Spread over . Canada over Canada n.s J / U.S. 5 / £/ $T 1962-High Low 5.7k 3.18 2.8U 0.19 5.20 l*.ol* 1.29 0.03 5.1*8 lt.73 1.1*5 0.73 5.19 M l 1.10 0.82 1962-June 6 July 19 ' Aug, 22 29 Sept. 5 12 19 26 Oct. 3 3.83 5.7U 5.31 5.13 5.27 5.18 5.26 5.20 5.13 1.10 2.59 2.35 2.19 2.29 2.25 2.32 2.29 2.23 I1.31 5.11 5.05 5.08 5.09 5.01* 5.08 5.08 U.98 0.61* 1.16 1.31 1.33 1.31 1.27 1.31 1.33 1.33 U.95 5.1*8 5.39 5.39 5.39 5.31 5.36 5.36 5.30 1.10 l.M* 1.1*7 1.1*7 1.1*6 1.39 1.1*1* 1.1*1* 1.1*2 U.9U 5.15 5.20 5.19 5.19 5.17 5.18 5.19 5.20 0.98 1.03 1.19 1.20 1.19 1.20 1.21 1.2U 1.29 a/ b/ close c/ d/ e/ f/ j;/ h/ Average y i e l d a t weekly tender on Thursday,, Spread between Canadian auction rate and composite market y i e l d of U.S. b i l l on of business Thursday0 Government of Canada 2 - 3 A per cent of June 1967-68 0 Spread over U,S. Government 2=1/2 per cent of 1963=68 , Government of Canada 3 - l A per cent of October 1979° Spread over U. S. Government 3 = l A per cent of 1978=83= Government of Canada 3 - 3 A per cent of September 1996 - March 1998. Spread over Ue S. Government of 1995. INTEREST Thursday ARBITRAGE, THREE-MONTH RATE UNITED STATES / CAN ADA figures TREASURY DIFFERENTIAL AND BILL RATES FORWARD p.r c m CANADIAN DOLLAR EXCHANGE COVER per a n n u m S P R E A D IN F A V O R O F C A N A D A + RATE DIFFERENTIAL WITH FORWARD NET I N C E N T I V E IN F A V O R OF C A N A D A + J.JD 1959 1960 1961 1962 INTEREST ARBITRAGE, 3-MONTH NEW TREASURY BILL Y O R K / L O N D O N RATES 4 — \'/V| RATE - DIFFERENTIAL 3 - M O NTH AND FORWARD 1 j STERLING 1 1 ' EURO DOLLAR RATE-LONDON I RAT E DIF F E R E N T I A L. W I T H ~FOF(WAR D EX(: H A N G E - COVER .. 1 1 M 1 1 1 1 J S I | I | 1 1 D 1959 M J 1960 S 1 1 ! 1 1 D M 1 1 I 1 J $ 1961 T I I 1 D M I 1 j 1962 1 I $ 1 I D INTEREST ARBITRAGE FOR GERMAN COMMERCIAL BANKS F r i d a. y f i g u r • Pi 3-MONTH . TREASURY EURO-DOLLAR BILLS, INTERBANK LENDING RATE AND RAJEsJ DEPOSJT r r v G E R M A N I N T E R I A N K LOAN RATE |V A. RATE DIFFERENTIAL AND FORWARD DEUTSCHE MARK F O R W A R D RATE "RATE DIFFERENTIAL WITH FORWARD \ \ 5 I N T I R I A N K LOAN RATI J ^ V J 1 \j^J \ L 1 1/ M , \ - COVER L L r\ L _ EXCHANGE 1 • 1 — IN F A V O R O F F R A N K F U R T ( + ) NIT INCENTIVE: 1 " ; * ^ -/ i r^s T R E A S U R Y BILLS 1 T T I960 T T 1 V 1 I I IT I I D w INTEREST Fridoy ARBITRAGE, FRANKFURT/ L O N D O N figures ~3-MONTH Per TREASURY INTERBANK LENDING BILLS AND RATES \ A GERMAN INTERBANK RATE DIFFERENTIAL A N D | - 3 - M O N T H FORWARD STERLING S P R E A D IN F A V O R OF U N I T E D K I N G D O M BILLS O V E R : F O R W A R D RATE RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER GERMAN TREASURY V BILLS cant per annum SHORT-TERM INTEREST RATES V +, "\ t \ CANADA / 19.60 •typ 3 month Ireoiufy bill rotei for oil countnei except Japon (3 month interbank depout rate) and Switzerland (3-month deposit rate) 3 month rote lor U S dollar depoiiii in London LONG-TERM BOND YIELDS -UUJ-J \ CANADA VVA kWJJ I I I INDUSTRIAL STOCK INDICES' __ 1958=100 450 1959 * Nolo Jopon: Index of all slockt traded on Tokyo exchange. SPOT E X C H A N G E RATES - M A J O R CURRENCIES AGAINST j U.K. U.S. DOLLAR STERLING Abo v_e p or A b ov e par ITALIAN 1961 LIRA :lfc 3-MONTH FORWARD EXCHANGE RATES 1 GERMAN MARK U , S.^ D O L L A R S AGAINST 1 PREMIUM + " 1 X z SWISS f R A I t c W r i i | I •OUND STERl ING DISCOUHT1 1 ^GAINST AGAINST 1 1 POUND POUND 1 1 1 STERLING STERL N G 1 1 1 - LONDON - LONDON 1 1 1 1 1 i i i i i i
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