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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
B O A R D OF • O V e R N O H S
F E D E R A L RESERVE SYSTEM
H .13
No. ,27*cf: 5
September 29,
5835
lp6l
••{c yPITAL MARKET DEVELOPMENTS ABROAD
Io
lie
Ic
Germany
Nine Charts on Financial Markets Abroad
Germany:
Money and Capital Markets During August
After remaining tight for almost two months the German money
market eased noticeably just before the middle of August and remained very
liquid until early in September when it tightened again, mainly because of a
September 10 tax deadline. Reduced reserve requirements, lower private exports of funds, and increased public expenditures helped to supply the
money market with funds c
In additionvfco twice _reducing reserve requirement s s the Federal Bank also contributed to the easing tendencies by releasing the "Blessing loan" and channeling special funds temporarily to the
money market»
Except for some selling by foreign holders, the bond market was
relatively inactive during August. Industrial bond prices ended the month
at about the end-of-July level, but prices of public authority and mortgage
bonds declined further c
Long-term yields are now in the neighborhood of 6
per cent, after- having declined for about a year to around;
per cent in June,
Political tension continued to be a dominant influence on the
German stock market as well as on the bond market. Following the closing
of the crossing points between East and West Berlin on August llj., German
shares declined sharply and a week later the market suffered its most
severe setback since last-March* In the face of the international situation the German banks preferred to keep their liquidity high and abstained
from market support operations c There has been . some improvement in market
prices in September.
Money Market. After mid-August the German money market was unusually liquidc
On several occasions during the latter half of the month
call money rates fell as low as 1 3 A P e r cent, or more than one per cent
below the rediscount rate. One-month money was as low as 2 3/k per cent
in the latter half of the month and generally below 3 per cent throughout
the month. The main factors contributing to the ease were the August 1 0
reduction (retroactive to August 1) j>f the minimum reserve requirements
for the banks, an increase in public expenditures, and a decrease in private
money exports r
~
Please change the September 11 issue from No. 23 to No, 21;.
NOT FOR PUBLICATION
DECONTROLLED AFTER SIX MOUTHS
NOT FOR PUBLICATION
-
2
-
1
Private money exports were influenced by the Federal Bank s
action of August 11 abolishing the arrangement under which the Bank had
provided the German commercial banks with free forward cover for their
dollar holdingso The banks are now charged l/U of one per cent per annum
on forward dollar swaps with the Federal Bank* The Federal Bank apparently
decided that private money exports needed no further encouragement9 especially in view of the withdrawal of foreign funds from Germany9 which were
stimulated by the Berlin situation0 The Federal Bank also saw the need to
ease the market in anticipation of the large tax payments coming due on
September 10.
In the latter part of August the Federal Bank took further action
to bring about an easing in the market. On August 2k it agreed to permit
the German commercial banks to liquidate their DM 1 billion ($2^0 million)
"Blessing loan," Under its original terms this loan* taken up in the form
of Treasury bonds in August I960, was not to be liquidated prior to expiration of a two-year period,, the commercial banks having agreed to hold
the bonds off the market until maturity in August 1962e In its desire to
increase money market liquidity the Federal Bank last month not only agreed
to the immediate disposal of these bonds by the banks; it also offered a
special inducement to the banks to cash them in. The banks had paid a price
of 89 which yielded 5> 1/2 per cento The Federal Bank offered to take the
bonds back at a price of 97 although the price on the basis of their
maturity of one year would be only 9h 1/2, The banks were thus enabled
to realize an interest of 8 per cent on their loan for the one year elapsede
Moreovers sales to the Bundesbank rather than in the market would bring
about an increase in bank liquiditys at the same time keeping out of the
market a highly liquid instrument yielding 5 l/2 per cent as against the
rate of around 2 1/2 per cent on comparable money-market securitiese
A further aid to the money market in August was the Federal Bank's
action in making available to the money market approximately DM 100 million
($2$ million) of the DM U?0 million proceeds from the Volkswagen share
sale; These funds, which eventually are to be used for foreign aid, were lying
idle in.the account of the Kreditanstalt fuer Wiederaufbau(Reconstruction
Loan Corporation)e According to press reports the DM 100 million were
channeled to the money market by the end of August, The amount thus made
available is equivalent to one-fourth of the amount provided by the August
10 reduction in reserve requirements^ which released about DM 1|00 million
to the banking system.
In the first week of September the money market tightened
moderately and rates rose markedly as had been expected in view of the
September 10 tax deadlinee The rise brought short-term almost to the levels
of early August c The Federal Bank reacted by announcing on September 7
another reduction in the minimum reserve requirementss thus releasing another
DM L00 million to the commercial banks. Rates eased after the September 10
tax payment s although rates on call and one~month money remained above
mid-August levels.
NOT FOR PUBLICATION
NOT FOR PUBLICATION
-3
Frankfurt Inter-bank Money Rates
One-month
loans
Three-month
loans
2.75 - 3.13
2.75 -3.13
2.88 - 3.00
3.00
2.88 - 3.00
2.88 - 3.002.75 - 2.88
2.75 - 2.88
2.88 - 3.00
2.63 - 3.00
2.75 - 3.00
2.88 - 3.25
3.00 - 3.25
3.00 - 3.13
3.13
3.00 - 3.13
3.00 - 3.13
2.88 - 3.00
2.88 - 3.00
2.88 - 3.00
2.75 - 3.00
2.88 - 3.13
Day-to-day money
Lowest rate Highest rate
1961
May (monthly range)
11
June
July ^
"
Aug.(weekly range) 1-6
n
ii
tt
Sept.
11
7-13
1U-20
21-27
28-31
1-10
11-17
18-21*
2.38
1.75
2.38
3.00
2.13
1.75
1.75
1.75
2.75
2.25
2.25
3.13
3.13
3.13
3.13
2.88
2.25
2.00
1.88
3.00
2.63
2.75
There was no change during August in the rates at which the Federal
Bank is prepared to sell Treasury bills and short-term bonds in the open
market; and as of September 28, they still remained at the levels set on
May 5.
60-90 days
6-month
Treasury bills Treasury bonds
From
Dec.
1961
Jan7
Mar.
Apr.
May
20, I960
3.75
U.00
20
23
26
5
3.75
2.50
2.38
2.25
3.50
2.75
2.63
2.50
Throughout August and during the first three weeks of September
the margin,of advantage between the Frankfurt money market and* London Eurodollar, call rates continued to shift back and forth but the spread on either
side remained small, almost. continuously below 1/2 a percentage point.
The spread between the Frankfurt thrAe-month loan rate and the London threemonth rate on Euro-dollars rose slightly toward the end of August but continued to be quite small. There has not been a significant spread between
these rates since mid-June. Nevertheless, German banks continued to hold
most of their foreign assets in the three-month Euro-dollar accounts as they
thereby availed themselves of the privilege of offsetting their foreign
assets against their foreign liabilities for purposes of determining required reserves. (The reserve ratios against foreign liabilities have for
some time been at the maximum legal rates.) However, the tendency of some
foreigners to reduce their DM balances in view of the Berlin situation,
and the strengthening of the dollar and sterling against the mark, are said
to be operating to reduce the opportunities of the German commercial banks
to profit from this reserve-requirement advantage in keeping balances
abroad. The private banks reportedly have generally exhausted this possibility of reducing their minimum reserve requirements, and there are
NOT FOR PUBLICATION
NOT FOR PUBLICATION
- L -
reports that German banks have recently been repatriating funds, thus
helping to ease the domestic money market.
__
German money-market rates vs. London Euro-dollar rates
Rate
for U.S.
dollar
Day-to-day deposits
at
call
money in
Frankfurt in London
July 7
Hi
21
28
Aug. it
11
18
25
Sept.l
8
15
22
2.63
3.07
2.9U
2M
3.07
2.38
2.07
1.82
2.9k
2.75
2.31
2.56
2.75
2.63
2.63
2.75
2.75
2.75
2.50
2.38
2.50
2.50
2.50
2.50
Incentive
in favor
of London 3 months
Euro-dollar money in
call rate Frankfurt
0.12
-O.Wt
-0.31
0.31
-0.32
0.37
0.U3
0.56
—OoltU
-0.25
0.19
-0.06
3.13
. 3.13
3.07
3.07
3.13
3.07
3.07
2.911
3.00
2.911
2.9k
3.00
Rate for
U.S. dollar
deposits on
3 months
basis
in London
3,31
3.25
3.25
3.31
3.25
3.25
3.19
3.19
3.19
3.19
3.25
3.25
-
Incentive
in favor
of London
Euro-dollar
3-month rate
0.18
0.12
0.18
0.2k
0.12
0.18
0.12
0.25
0.19
0.25
0.31
0.25
In early August the spread between Treasury bill yields in the
United States and Germany on a net incentive basis favored the U0S0 bill .
but only negligibly. With the Bundesbank's imposition on August lit of the
charge of 0.25 per cent per annum on its forward dollar swap operations
with German commercial banks the spread shifted to favor the German Treasury
bill on a net incentive basis, but again only negligibly. After having
been reduced on August 11 to 0.63 in favor of the German 3-months' interbank
loan rate on a net incentive basis, the spread between- this rate and the
U.S. Treasury bill rate increased again to about its July magnitude,
between 0,85 and 0.90, and increased further on September 22 to 1,00 per
cent per annum in favor of the German inter-bank loan rate*
NOT FOR PUBLICATION
NOT FOR PUBLICATION
German Inter-bank loan rate
vs. U.S. bill rate
Net
covered
German
Spread incentive
3 mos. U.S. over in favor
inter-bank bill U.S. of German
loan rate rate bill
rateV
1961
July 7
lk
21
28
Aug. k
11
18
25
Sept, 1
8
15
22
3.13
3.13
3.07
3.07
3,13
3.07
3.07
2.9k
3,00
2.9U
2.91
3.00
2.30 0,83
2.20
93
2.16
91
2.2U
83
81*
2.29
2.Wi 63
60
2.2*7
60
203h
65
2.35
2.31 0.63
2.27 0.67
2.25 0.75
0.83
0.93
0.91
0.83
0.82*
0.63
0.85
0.85
0.90
0.88
0.92
1.00
- 5 -
Bundesbank's Treasury bill
selling rate vs. U.S. bill rate
Net
covered
German Spread incentive
over
in favor
3 mos.
of German
U.S.
bill
rate 1/
-bill
rate
2.25
2.25
2.25
2.25
2.25
2.25
2.25
2.25
2.25
2.25
2.25
2.25
-0.05
0.05
0.09
0.01
-o.ol*
-0*19
-0.22
-0.09
-0.10
-0.05
0.05
0.09
0.01
-o.o2*
-0.19
0.03
0.16
o.i5
-0.06
-0.02
0.19
0.23
0.25
1/ To encourage capital outflow the Bundesbank provided forward dollars
flat to German banks until August 12*. After that date a charge of 0.25
per cent per annum was imposed on such dollar swap operations.
Foreign Trade. Seasonally adjusted West German trade figures
for the periods indicated are as shown below.
Trade
Exports
Imports
balance
(in millions of U.S. dollars)
i960
1961 - I
- II
April
May
June
July
11,37k
3,Hi
3,231
1,181
1,003
1,050
1,108
10,129
2,556"
2,807
971
932
90k
955
/
1,215
585
1*22*
210
•71
12*6
153
- Foreign Exchange. On the foreign exchange market the strengthening of all major currencies against the mark continued during August but
was not markedly accelerated as a result of the tensions over Berlin. Spot
dollars were quoted on August 29 at DM 3.9975, just fractionally below
parity, and towards the end of the month the discount on three-months*
forward dollars was below one per cent as against 1.5 per cent early in
August. During August, expectations of the continued strengthening of the
NOT FDR PUBLICATION
NOT FDR PUBLICATION
-
6
-
dollar against the mark led to a shift in the terms of payment which
operated to realize the expectations indicated. In September the rate on
the spot dollar eased somewhat but remained around DM 3.99 as of the 21st.
DM-Dollar middle rate
July 31
Augo 3
9
"
« lit
« 15
tt 29
Sept.IS
"
21^
par (DM it.00 ~ $1)
3.9832
3.981A
3.9938
3.9930
3.99#
3.9972
3.9878
3.9882
The discount on three-months' forward sterling declined moderate
during August and almost negligibly further in September, and remained sufficiently high to make a covered movement of German banks funds into U.K.
Treasury bills unprofitable, despite high bill rates in London,
Bond Marketo The bond market continued at a low level of activi
during August and September0 Bond prices generally fluctuated within a
narrow range throughout August. Issues of public authorities weakened in
price during the month3 the 195>9 German Railways •$% Loan was selling at
93 3/4 while the 1959 Equalization of Burdens issue at 5 1/2 per cent was
selling at 97 1/2 per cent, down from 97 and 98 1/2 per cent respectively a
month earlier. After weakening in mid-August, prices of industrial bonds
improved slightly at the end of the month but generally rose only to endof-July levels. The bond market improved slightly in early September as
commercial banks reportedly used some of their liquid funds to support bond
priceso
Throughout August and September, mortgage bond activity continuec
at very low levels6 Mortgage rates continued to rise during August and the
early part of September= First mortgages are now being issued at 6 and 65
per cent with an issue price of around
while in June,, before long-term
rates began their upward movement, mortgages issued at Sz per cent were
also being sold at 95# Mortgage banks have experienced increasing difficulty in selling bonds on the market. On the other hand, the demand for
mortgage money has slackened as interested borrowers are postponing taking
up mortgage credits in the hope of lower rates on long-term capital later
this year.
German banking circles believe that the bond market will
improve substantially once political tensions subside and the money market
becomes more liquid in response to the Federal Bank's continuing relaxation
of monetary restrictions= Moreover, it has been pointed out that domestic
savings are rising, especially in institutions which traditionally invr-s+
in the bond market.
NOT FOR PUBLICATION
NOT FOR PUBLICATION
-7-
Yield of Fixed-interest-bearing securities (per cent)
Mortgage
bonds
July
Oct.
Dec.
Jan.
Feb.
Mar.
Apr.
May
June
July
6.5
6.U
6.2
6.2
6.2
6.1
5.9
5.8
5.8
5.8
Loans of
public
Industrial
authorities
bonds
6.5
6.1
6.1
5.8
5.7
5.8
5.7
5.6
5.6
5.8
6.7
6.3
6.1
6.1
6.0
5.9
5.7
5.6
5.6
5.7
Stock Market, The German stock market in recent weeks has been
called a political market. International tension over the Berlin situation
has generally been blamed for the decline in German share prices during
August, almost to the exclusion of other causes0 The market had improved
somewhat early in August but on August lit, the day following the sealing
off of East Berlin, stock prices, especially prices of internationallyknown German chemical and electrical shares, declined by up to 10 per cent.
The decline persisted and a week later, on August 23 and 21*,
German exchanges suffered their sharpest setbacks since March of this year.
Stock prices fell generally to a level slightly more than 30 per cent below
the September i960 peak. While political tensions were a major cause of
the decline, the banks1 desire to increase liquidity to prepare for a
possibly serious crisis was a contributory factor. The banks refrained
from the price-supporting operations they generally engage in, preferring
to put money out on call even though the call rate had fallen to around
1 3/U to 1 7/8 per cent as against 3 per cent at the beginning of the month.
There was some movement out of German shares into U.S„ shares resulting
from the comparative firmness of the New York stock exchange at that time.
The then-forthcoming Bundestag elections of September 17 also contributed
to the uneasiness of the German exchanges. The German markets improved
just prior to the elections but weakened slightly afterward. As of
September 22, stock prices were at their levels of September 1, still
about 9 per cent below their levels of a month earlier®
If the application of a banking consortium headed by the Dresdner
Bank is approved by the Frankfurt stock exchange, an American stock, International Telephone and Telegraph, will be listed officially on a German exchange for the first time since 1932, when trading in foreign shares on
German stock exchanges ceased. Shares of fifteen other U.S. corporations
are now traded on the German curb markets. Of the 67 foreign shares now
NOT FDR PUBLICATION
NOT FOR PUBLICATION
traded in Germany, only 17 are officially listed (Fiat, Montecatini,
Philips, Unilever among them), the other %0 being traded "unofficially
Frankfurt Allgemeine Zeitung Index of Industrial Share Prices
~
(Dec. 31, 195U = 100)
l?6l June 16
July 13
a
28
Aug, U
11
18
2S
Sept. 1
8
15
22
"
-
U77.88
hllO.85
398.85
U2-2.05
- U25.39
129.65:
i4.22.UO
^ 38k.S8
388.29
377.83
397.UO
___ 389.Oil
European Section.
II. Nine Charts on Financial Markets Abroad
Chart 1 - Interest Arbitrage U.S./Canada
Chart 2 - Interest Arbitrage New York/London
Chart 3 - Interest Arbitrage New York/Frankfurt
Chart. It - Interest Arbitrage Frankfurt/London
Chart 5 - Short-term Interest Rates
Chart 6 Long-term Bond Yields
Chart 7 - Industrial Stock Indices
Chart 8 - Major Currencies in Terms of
Spot United States Dollar
Chart 9 - 3-month Forward Rate—London Quotations
INTEREST ARBITRAGE, UNITED S T A T E S / C A N A D A
Thursday figures
.
j
THREE-MONTH TREASURY BILL RATES
>
RATE DIFFERENTIAL A N D FORWARD C A N A D I A N DOLLAR
SPREAD I N FAVOR Of CANADA +
RATE DIFFERENTIAL W I T H FORWARD EXCHANGE COVER
Hfl IHCfNTJVI IN fAVOI Of ChUH +
$
1959
i960
P
M
i
1961
6
I N T EREST A R B I T R A G E , N E W Y O R K /
LONDON
3 - M O N T H TREASURY BILL RATES
J
v»v
RATE D I F F E R E N T I A L A N D
3 - M O N T H F O R W A R D STERLING
ronwm mti
RATE DIFFERENTIAL W I T H
F O R W A R D E X C H A N G E COVER
IN FAVOR or LONDON
INTEREST A R B I T R A G E , NEW Y O R K / F R A N K F U R T
3-MONTH
GERMAN
RATE
TREASURY
3-MONTH
BILL
RATES
INTERBANK
DIFFERENTIAL
AND
AND'
LOAN
FORWARD
RATES
DEUTSCHE
MARK
\ L O A N RATE
RATE
DIFFERENTIAL
M
WITH
J
FORWARD
EXCHANGE
$
I960.
Note: 5 peciol forward dollar role available to German commercial bonkv
COVER
J
1961
At 11 *E1L A R B IT RAG E, FRANKFURT/LONDON
Friday figi
3 - M O N T H T R E A S U R Y BILLS
A N D L E N D I N G RATES
GERMAN INTERBANK
1 0 A * BATE
™v
TREASURY BILLS
TREASURY BIUS
RATE D I F F E R E N T I A L
AND
FORWARD
STERLING
UNITED KINGDOM BILLS OVER:
3-MONTH FORWARD STERLING
RATE D I F F E R E N T I A L W I T H
FORWARD
.TREASURY BILLS
EXCHANGE
COVER
S H O R T - T E R M INTEREST RATES
3 month Ireaiury bill role* for all
"j" 3-month rate for U S dollar depc
deposit role) ond Switzerland (3-month deposi
L O N G - T E R M BOND YIELDS
SWITZERLAND
1958
I N D U S T R I A L STOCK I N D I C E S
• f oil stocks
Tokyo exchonge.
MAJOR
CURRENCIES IN
V\
T E R M S O F THE S P O T
U . S. D O L L A R
FEE cint^
Above par
3-MONTH
FORWARD
RATES -
LONDON
QUOTATIONS
PREMIUM +
U. S. DOLLAR
PREMIUM +
DUTCH GUILDER
FRENCH FRANC ,
\
BELGIUM FRANC
j r\
k
@FedFRASER