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DIVISION OF INTERNATIONAL FINANCE BOARD OF a O V I R N O U \, F E D E R A L RESERVE SYSTEM H. 13 September 8, 1965 No,. 212 \ CAPITAL MARKET DEVELOPMENTS ABROAD I. II. III. I. Canada; Canada Nine Charts on Financial Markets Abroad Latest Figures Plotted in H.13 Chart Series, 1965 Money and Capital Markets, July-August 1965 Canadian financial markets continued to reflect tight credit conditions during the period under review. (See Table 1.) During August, government bond yields rose from 3 to 11 basis points while money..market rates oscillated around their high, end-July levels. In the foreign exchange market, the spot Canadian dollar showed further improvement, partly in response to regular commercial and seasonal tourist demand and partly as a result of the announcement of substantial wheat sales to the Soviet Union. Table 1. Canada; Selected Financial Market Indicators, July-August 1965 July 29 A. Interest rates Day-to-day loans a/ 30-day Prime commercial paper b/ 90-day Prime finance paper c/ 91-day Treasury bills d/ Government bonds e/ 4.50 % 1966 5.00 % 1968 4.25 % 1972 4.50 % 1983 5.25 % 1990 B. Stock index f/ C. Canadian dollar Spot (U.S. cents) 3-month forward premium a/ b/ c/ d/ e/ f_/ 19 26 Sept. 2 3. S 3.83 3.98 3.98 3.83 4.05 4. 69 4. 69 4. 69 4.69 4. 75 4. 75 4. 75 4.88 3. 93 3.97 3. 97 4.05 4.81 4.88 4.08 4.81 5.12 4.09 4.81 5.12 4.08 4.81 5.12 4.08 4.81 5.00 4.09 4.81 4.97 4. 98 5.11 5.20 5.31 5. 27 5.36 5.24 5.37 4.92 5.06 5.28 5.36 5. 38 4.72 4.91 5.20 5.33 5.38 3.48 3.47 4.41 4.61 4.89 4.95 5. 12 5.19 5.15 5.23 5.13 5. 20 3.78 4.63 5.04 5.23 5. 27 5.25 4.67 4. 71 4.98 5.00 5.25 5.27 5. 30 5. 30 5. 27 5. 26 193.9 192.0 189.8 187.9 192.4 194.0 197.0 195.3 n.a. 92.31 92.25 92.19 92.51 92.59 92.79 92. 78 92.90 92.94 +.27 +.27 +.14 -.14 -.27 Average of daily closing rates for week ending Wednesday, Friday data; mid-range. Friday data. Average tender. Wednesday data; mid-market yield at close. From Financial Post, (1958=100). August 12 OFFICIAL USE ONLY (Decontrolled after six months) +.20 .07 -.07 -.40 OFFICIAL USE ONLY - 2 - The continued strength of the Canadian business expansion, which will be given an additional boost by the $450 million wheat sale to the Soviet Union, is forcing the authorities to augment the mildly restrictionist financial policy initiated last April. During the period under review, Canadian officials helped to push up long-term yields when they announced a $450 million Treasury offering on August 16 which was priced below the market. Yields on local government, public utility and industrial bonds also advanced from end- June to end- ..Yjly „ (See Table 3„) Conditions also tigntened in short-term credit markets. Treasury bill and finance paper yields advanced further in the period under review. (See Table 1.) Uncertainties created by the failure of the Atlantic Acceptance Corporation continued to dominate short-term credit markets. This Corporation, a medium-sized sales finance house3 defaulted on a $5 million note on June 14 and went into receivership on June 17. The authorities were concerned to prevent the spread of an air of crisis growing out of this failure. To this end, the chartered banks were encouraged to accomodate the finance companies: as a result, their loans to them rose by $120 million from June 16 to August 11. Further, the authorities in the Province of Ontario announced in late July a guarantee of up to $3 million to maintain the solvency of a small trust company which had experienced serious losses in its holdings of obligations of the defaulted corporation. With the rise in Canadian Treasury bill yields, a differential in favor of Canadian over United States bills developed but was offset by a decline in the premium on the forward Canadian dollar: as a result, the net incentive in favor of Canadian bills was actually less in July and August than it had been in June. (See Chart 2.) However, the further advances in Canadian finance paper in August widened the differential over comparable United States paper which reached a peak of 94 basis points on August 12 (see Table 9). By September 2, the gao had r.arrowed to 47 basis points. The pressures which developed in short-term credit markets in Canada in part reflected the withdrawal of Onited States resident funds from that market. No statistics are available on the volume of such withdrawals. In August, however, for the first time, che Bank of Canada released statistics on the United States dollar deposits of Canadian chartered banks; these figures relate to the time deposits of U.S. residents with these banks, not to purchases of Canadian short-term obligations. Between January and June, United States residents reduced their deposits in Canadian banks by $742 million (from $1,948 to 51.-06 million); other foreigners increased their deposits by $173 million, and Canadian residents reduced theirs by $231 million. (See Table 6«) To finar.ee the withdrawals, Canadian banks reduced their U.S. dollar assets in the United States by $248 million and their claims on "other" foreign centers by S541 milliwn= OFFICIAL USE ONLY Money market stays tight. During August, money market rates remained at or above their high end-July levels. (See Table 1 and Charts 1, 2 and 5.) Closing rates on day to day loans which were at 3.98 per cent on July 28 fluctuated between 3.80 per cent and 4.00 per cent throughout August; rates on 30-day prime commercial paper advanced to 4. 69 per cent by the end of July and then rose to 4.81 per cent by the end of August; and 90-day finance paper yields rose fractionally above 5 per cent. The average tender on Treasury bills generally h§ld steady at 4.08 per cent throughout August. Yields on Government bonds higher after Treasury's cash offering. During the period under review, Canadian government bond yields advanced beyond the highs posted in late-July. (See Tables 1 and 2 and Chart 6.) The upward drift in market rates was given fresh impetus in mid-August when the Treasury's $450 million cash offering was priced below "ha . By the end of August yields were from 7 to 11 basis points above their month earlier levels. Yields on comparable Government securities in the United States also advanced during August, so there was little change during the month in the large differential between U.S. and Canadian bonds. (See Table 2.) It is likely, however, that U.S. investors were inhibited from investment in Canadian bonds by the expectation that yields there would go higher. Canadians, on the other hand, have raised $325 million from the U.S. in the first six months of 1965 through Canadian issues in U.S. markets. (American Banker, August 31, quoting Secretary of the Treasury Fowler.) Local government and private bond yields also continue to advance. After remaining unchanged in April, yields on bonds of municipal and provincial governments and of public utilities and industrial corporations began to advance in May. (See Table 3.) The pace of the advance quickened in June and was sustained in July as the 40 bond yield average moved up from 5.52 per cent at the end of May to 5.62 per cent at the end of June and to 5.74 per cent on July 30. Stock market shows new strength. In contrast to the lower level of bond prices, stock prices on the Toronto exchange advanced steadily during the period under review. (See Table 2.) The Financial Post's index of total industrials advanced from 185.6 on July 22 to 197.0 on August 19. Bank of Canada's holdings of central government debt decline in August. In August, the Bank of Canada sold $38.5 million from its bond portfolio and acquired only $2,7 million in Treasury bills. (See Table 4.) On balance, the general public and government agencies bought bonds,and the chartered banks sold long-term government obligations. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 2. Canada/U. S. Comparative Bond Yields, July 28-August 25, 1965 (per cent per annum; Wednesday data; Canadian bonds; mid-market yield at close; U.S. bonds, yields on bid side) _ _ _ _ _ August _ _ 25 3-year: U.S. 8/68, 3. 757c Can. 10/68, 5.0% Differential (+ in favor Can.) 4.10 4.98 4.14 5.00 4.15 4.98 4.18 5.11 4.17 5.06 +.88 .86 .83 .93 .89 7-year: U.S. 8/72, 4.0% Can. 9/72, 4.25% Differential 4.16 5.25 +1.09 4.19 5.27 +1.08 4.21 5.20 + .99 4.25 5.31 +1.06 4.25 5.28 1.03 19-year: U.S. 78-83, 3.25% Can. 9/83, 4.5% Differential 4,18 5.30 +1.12 25-year: U.S. 2/90, 3.5% Can. 5/90, 5.25% Differential 4.18 5.27 +1.09 4.20 5.26 +1.06 4.22 5.24 +1.02 4.23 5.37 +1.14 4.25 5.38 1.13 Source: Table 3. Federal Reserve System. Canada: Municipal, Provincial, and Private Bond Yields, April-July 1965 (per cent per annum) April 10 10 10 10 40 Provincials Municipals Public Utilities Industrials Bond Yield Average Source: May 31 June 30 JxOZ 30 5. 37 5.58 5.48 5.50 5.44 5.59 5.52 5. 52 5. 50 5. 69 5.63 5. 64 5. 68 5.81 5. 74 5. 73 5.48 5. 52 5.62 5. 74 1 30 5.41 5.55 5.46 5. 50 5.48 McLoed, Young, Weir. OFFICIAL USE ONLY OFFICIAL USE ONLY Table 4. Canada: Holdings of Central Government Direct and Guaranteed Debt, jV April-August, 1965 (millions of dollars) Change from previous date June 30 July 28 August 25 Actual August 25 Actual April 28 May 26 Bank of Canada Treasury bills Other Total 458 2643 3101 + 1 +109 +110 + 14 - 1 + 13 - 37 + 52 + 14 + 3 -40 -37 439 2763 3202 Government Accounts Treasury bills Other Total 1286 2426 3712 - 21 + 8 - 13 + 5 + 18 + 23 + 46 -105 - 59 444 -10 +34 1360 2337 3697 Chartered banks Treasury bills Other Total 18 505 522 - 7 -101 -107 5 + 92 +97 + 6 - 56 - 51 -3 +22 +20 19 462 481 General Public Treasury bills Other Total 378 7063 7441 + 27 - 30 - 3 - 24 - 94 -118 - 14 + 53 + 39 -45 +50 + 5 322 7042 7364 —— - 13 + 15 - 57 +23 Net new issues 2/ + -- Note: Totals may not add due to rounding. If Omits Canadian Savings Bonds. 2/ Net of retirements. Expansion of money supply and bank credit less rapid in July-August. After a sharp rise of $683 million in the money supply in June, more moderate increases of $100 million and $91 million occurred in July and the first 18 days of August respectively. (See Table 5.) Similarly, an increase in total loans of $415 million in June was followed by an increase in July of $285 million and of $146 million in the first 18 days of August. One consequence of the more moderate increase in the money supply has been the restoration of the chartered banks liquid asset ratios from a low of 16.39 for the week ending June 30 to 16.67 for the week ending August 18. OFFICIAL USE ONLY - 6 - OFFICIAL USE ONLY Table 5. Canada: Selected Chartered Bank Statiisties, April-August, 1965 (millions3 of dollars or per cent) April 28 Currency outside banks Chartered bank deposits held by general public Total General loans a/ Loans to instalment finance companies a/ Average ratio Average ratio cash reserve b/ liquid asset b/ May 26 Changes from previous date August 18 June 30 July 28 Actual August 18 4 +173 - 68 + 12 2,241 15,932 18,054 -174 -170 +510 +683 +168 +100 + 79 + 91 16,515 18,756 8,544 +166 +424 +209 + 49 9,392 293 - 10 + 64 + 22 + 5 374 -- +.01 -.02 +.02 8.09 -.15 -.38 +. 34 -.06 16. 67 2,120 8.08 16.92 + _a/ End of the month. b/ Daily average, minimum cash ratio is 8 per cent; minimum liquid asset ratio is 16 per cent. Source: Bank of Canada, Weekly Financial Statistics. U.S. residents continue to withdraw dollar deposits from Canadian banks. The Bank of Canada has recently published new data on the U.S. dollar deposits of Canadian banks. According to this information, U.S. residents have steadily drawn down their dollar deposits in Canadian banks ever since the President's balance of payments message of last February. (See Table 6.) Between January and June of this year U.S. residents have withdrawn a total of $742 million. In addition, Canadian residents have decreased their U.S. dollar deposits by $231 million while residents of other countries have increased their dollar deposits in Canadian banks by $173 million. Foreign trade position continues moderate improvement through May. Canada's merchandise trade position remained in surplus, on a seasonally adjusted basis, through the first five months of 1965. Although the value of exports and re-exports in May fell by $11 million, imports dropped by $30 million. Consequently, the surplus in the foreign trade balance expanded in May by $19 million to $42.4 million. However, the cumulative surplus of $119.0 million in the trade accounts for the first five months of 1965 was only about one-half of the surplus recorded in the same period last year. (See Table 7.) OFFICIAL USE ONLY OFFICIAL USE ONLY Table 6. Canada: United States Dollar Assets and Liabilities of Chartered Banks, January- June, 1965 millions of dollars) Level at end of January 1965 Change from the p revious date Feb. Mar. Apr. May June Level at end of June 1965 Assets With residents of: United States Other countries Sub-total Canada Total 2171 1383 3554 647 4201 +66 -84 -18 +28 +10 -337 -216 -553 + 71 -482 + 85 -189 -104 - 31 -135 + 13 -175 -102 + 21 - 89 -154 + 29 + 75 - 60 - 79 1823 822 2645 819 3464 Liabilities With residents of: United States Other countries Sub-total Canada Total 1948 1027 2975 1257 4232 -89 +5 7 -32 +55 +23 -393 + 9 -384 -151 -535 -123 +124 + 1 -122 -121 - 1206 1200 2406 1026 3432 Source: + + - 98 6 92 11 81 Bank of Canada, Statistical Summary, August, 1965. Table 7. Canada: Foreign trade, seasonally adjusted Exports and re-exports Imports Balance Source: 35 23 58 24 82 Merchandise Trade, January-April, 1964-1965 (in millions of dollars) 1965 1964 JanuaryMay JanuaryMay 3,352.5 3,118.8 233. 7 3,489.8 3,370.8 119.0 January February March April May 666. 5 64 7. 7 693.0 662. 2 30. 8 707. 9 704 . 5 3.4 716.8 693.2 23.6 705. 6 663.2 42.4 Dominion Bureau of Statistics. The agreement to export $450 million of Canadian wheat to the U.S.S.R,, announced on August 11, will materially improve Canada's trade position. Imports can be expected to rise somewhat as a result of the rise in consumer OFFICIAL USE ONLY OFFICIAL USE ONLY - 8 - incomes, so that the impact of the sale on the trade account will be an expansion of both exports and imports with the balance of the account improving by somewhat less than the full $450 million. Consequences of the transaction will'include both a reduced need to borrow from U.S. capital markets and an increased capacity for expanding imports. Reserves rise. The gold and U,S. dollar holdings of Canada increased by $11.4 million during the month of July, and $106.5 million in August, interrupting a downward trend in evidence since the latter part of 1964. Over the first six months of 19653 Canada's holdings of gold and U.S. dollars had fallen by $(U.S.)194.2 million. (See Table 8.) The recent improvement reflects among other factors the combined result of Canadian bond flotations in the U.S., and U.S. tourist expenditures in Canada which are seasonally high at this time of the year. Table 8. Canadian Official Holdings of Gold and U.S. Dollars, February-July, 1965 (millions of U. S, dollars) Level on February 28 Gold U.S. dollars Total Initial drawing right position in I.M.F. Gold as a percentage of total reserves Source: Mar. Change during the month of: July May June Aug. 1040.6 1608.1 + 3. 5 -98. 1 + 0.6 +11.8 + 36. 7 + 7.7 -104.5 -26. 3 + 7.2 + 4.2 n!a! 2648.7 -94.6 +1-2.4 -67.8 -18.6 +11.4 +106.5 212.5 +2 7. 5 + 5.0 + 81.5 -- +15.0 n. a . 39.3 40.9 40.7 43.2 43.9 44.0 Bank of Canada, Statistical Summary. Canadian dollar continues to improve in foreign exchange markets. The spot Canadian dollar continued its strong advance during the period under review. (See Table 9.) Between July 29 and September 2, the rate rose 43 points to a le vel of 92.94 (U.S. cents). Sustained commercial demand as well as the announcement of the large wheat sales to the Soviet Union were reported to be the most import-ant factors behind the recent advance. OFFICIAL USE ONLY - 9 - OFFICIAL USE ONLY Table 9. Canada/U.S. Exchange Rates and Arbitrage Calculations, July-September, 1965 August 12 19 July 29 Exchange rates: Spot (U.S. cents) Forward (p.c. p.a.) 3-month yields and differentials Treasury bills Canada (covered) U. S. Differential (+ in favor Canada) Finance paper a/ Canada (covered) U. S. Differential a/ 26 September 2 92.51 -.14 92.59 -.27 92.79 +. 20 92.78 +.07 92. 90 -.07 92. 94 -.40 3.79 3.78 3.68 3.83 4. 19 3.81 4,05 3.80 3.87 3.84 3.58 3.85 .01 -.15 . 38 .25 .03 -.27 4.73 4.25 +.48 4.98 4.25 +.73 5.06 4.25 +. 81 4.92 4.25 +.67 4.72 4.25 +.47 5.19 4.25 +.94 Friday data. Over the a discount (in per of 20 basis points September 2. (See same period the forward rate fluctuated widely moving from cent per annum) of 14 basis points on July 29 to a premium on August 12, and then to a discount of 40 basis points on Table 9.) Yield spreads on Treasury bills fluctuated from 38 basis points in favor of Canada on August 12 to 27 basis points in favor of the U.S. on September 2. Spreads on finance paper continually favored Canada, although they ranged from 48 to 94 basis points. (See Table 9.) Europe and British Commonwealth Section. OFFICIAL USE ONLY Chart 1 INTERNATIONAL MONEY M A R K E T Y I E L D S FOR U S. D O L L A R I N V E S T O R S 3 - M O N T H E U R O D O L L A R DEPOSIT VS. CERTIFICATE OF DEPOSIT Wednesday figure! A | EURO-DOHA* OVER | U . S . C E R T I F I C A T E OF D E P O S I T i i I i i I i i Mi i I i i I i i I i i I i i I i i I i i SELECTED I N T E R N A T I O N A L M O N E Y RATES Friday figures EURO-DOLLAR DEPOSIT RATES ( L O N D O N ) !WF »«t. I««) >*M 1»*5 \\ INTEREST A R B I T R A G E , U N I T E D STATES / C A N AO A Friday figures* 3 - M O N T H TREASURY BILL RATES UNITED STATES M AAJ II 1 I 11 I I J BILL RATE DIFFERENTIAL A N D F O R W A R D C A N A D I A N DOLLAR SPREAD IN FAVOR OF CANADA FORWARD RATI -3 - M O N T H C O V E R E D RATE D I F F E R E N T I A L S (NET I N C E N T I V E S ) - PRIME FINANCE PAPER FAVOR CANADA -II i I 1 1 II ii : i i i M i i I iiM J M M T hur I do Y Itgurei 1 96 2, Friday thereafter. i i I ii I i i S D M i i J 1*65 iiT T T S i D INTEREST A R B I T R A G E , N E W Y O R K / L O N D O N Friday figures 1 3 - M O N T i TRE ASUF Y BIL L RA1 E S 1 X Ia U . K . 1 OCAL A U T N O I I T t DIP OSITS J1 M i J 11U j \ I I 1 1ri v ,1i l . T T v n F 2 X y U i i 1 i i 1 i i 1 i i 1 i i 1 ii RATE D I F F E R E N T I A L A N D FORWARD STERLING 1 1 11 I i - 1 i LONDON N i l 1 VOIR I | 1 I 1 J*' 1 I 1 1 1 1 i i 3-MONTH / v \ RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R (NET I N C E N T I V E ) IN FAVOR Of LONDON 1962 1963 1964 1965 I N T E R E S T A R B I T R A G E FOR G E R M A N C O M M E R C I A L B A N K S Friday llgurei , p, | | r i 1 1 1 1 3 - M O N T H TREASURY B I L L S , I N T E R B A N K L E N D I N G RATE A N D E U R O - D O L L A R D E P O S I T RATES i i — GERMAN TREASURY DLLS I I I I I I 1 1 I I I 1 I I 1 I 1 I M 1 I 1 1 I I ll I I I I III o I r i i i 1 1 r RATE D I F F E R E N T I A L A N D F O R W A R D DEUTSCHE M A R K INTERIANK 10AN RATE f I FORWARD RATE I T I I I I I I I RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R (NET I N C E N T I V E ) IN FAVOR OF FRANKFURT I ^ f xy Vr/v< \ f i ! I INTERIANE 10AN R A T I . t L / V v i / ' | & IN FAVOR OF LONDON EURO-DOUARS I I I I I I I I I I I I I 1 SHORT-TERM INTEREST R A T E S * EUIO-DOUAI - LONDON W LAJ~I I I i I I I M 1141 I I I I I I I I I I I I I I I I I I I I I I I I 1 I I I I I I I I I I I I I I I I I I I I i ^ U Mil "X* 3-month treoiury bill roles for oil countries except Japan. and Switzerland (3-month deposit rote) "f" 3-month rale for U.S. dollar deposits in London 1143 1144 1145 x \... L O N G - T E R M BOND YIELDS v I Chart 7 I N D U S T R I A L STOCK INDICES •all* scale ' Japan: inde* of 2 2 5 industrial and other i t o c k i traded on the Tokyo enchange w . SPOT EXCHANGE RATES - M A J O R CURRENCIES AGAINST U.S. DOLLAR <•-• 1.2 FRENCH FIAMC /X \ | ITALIAN I I I A 3 - M O N T H F O R W A R D E X C H A N G E RATES Friday figures A G A I N S T U.S. DOLLARS A G A I N S T POUND STERLING - L O N D O N A G A I N S T POUND STERLING - L O N D O N I P H. 13 " No. 212 September 8, 1965. III. _Latest Figures Plotted In H.13 Chart Series Per cent per annum Chart 1 Upper panel (Wednesday, Sept. 1 Chart 5 4. 44 U.S. certif. of deposit 4. 31 Treasury bills: Lower panels ) Euro-dollar deposits: Call 7-day 30-day 90-day 180-day Finance Co. paper: 4.00 4., 13 4.19 4, 38 4, 34 U.S. 4, 25 Canada 4.10 Hire-purchase paper, U.K. U.S. 3.84 U.K. 5. 36 Germany 3.88 Canada 4.00 Swiss 3-month deposits (Date: Aug. 15 )* 3.69 Euro-$ deposit (London) 4. 38 Japan: composite rate (Date: Apr. 30 ) 7.92 Chart 6 4. 72 Bonds: Chart 2 ) (Friday, Sept. 3 Treasury bills; Canada 4,qq U.S. 3.84 Spread favor Canada +0.16 Forward Canadian dollar -0.34 Net incentive (Canada +) -0.18 Chart 3 (Friday, Sept. 3 Treasury bills: Per cent per annum (Friday, Sept. 3 , except as noted) ) Euro-$ deposit (Friday, Sept. 3 1965 ) U.K. U.S. 5. 36 U.S. govt. (Wed., sept. 1 &_2% U.K. war loan (Thurs., Sept. 2 6.58 German Fed. Railway (Fri. Sept. 3 7^13 Swiss Confederation (Fri. Aug. 27 1^93 Canadian govt. (Wed. , Sept. 1 5^33 Netherlands government perpetual (Fri. , Aug.- 27 ) 5.24 3.84 Spread favor U. K. -fl, 52 Forward pound -2,59 Net incentive (U.K. +) -1.07 '< Additional rates : July 23 3.81 30 3.81 Aug. 7 3.81 For description and sources of data see special annex to H. 13 Number 164, FRASER September z3, 1964. Digitized for w
@FedFRASER