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Treasury-Federal Reserve Study of the
U#S. Government Securities Market

MARKET PERFORMANCE AS REFLECTED IN AGGREGATIVE INDICATORS




Staff Study prepared by
Louise Ahearn and Janice Peskin
Economist, Board of Governors
Decexriber 1967




, , THE
FEDERAL
RESERVE
RANK of
SE LOUIS

Research Library

- iTABLE OF CONTENTS
TEXT

Page Number
—62

Chapter I.

Summary and Conclusions

1

Chapter II.

Trading and Related Indicators
A. Comparison of Average Level and Volatility
of Trading
B. Statistical Problems
C. Regression Analysis of Trading
1. U. S. Debt Outstanding
2. Trading by Official Aacounts
3. Treasury Financings
4. Monetary Policy and Interest Rate
Expectations
.
5. Tax Swapping . .
6. Number of Dealers
D. Annual Rate of Turnover of Marketable u. S. Debt . . .
E. 16th Lowest Daily Volume of Trading

14
14
18
19
21
22
27
29
31
32
33
36

Chapter III. Dealers1 Positions
A. Introduction
B. The Model
C. Data and EmpiricalResults
1. Data
2. Empirical Results
D. Implications for Market Performance

40
40
47
53
54
60
85

Chapter IV.

92

Other Indicators
A. Frequency of Large and Small Daily Price
Changes
.
B. Spread Between Quoted Bid and Asked Prices

92
95

CHARTS
I.

II.

III.

IV.

V.

Profile of Market Performance for United States
Treasury Bills . . . . . . .

9

Profile of Market Performance for United States
Government Securities (Other than Bills)
Maturing in 1 year or Less

10

Profile of Market Performance for United States
Government Securities Maturing in 1-5 Years

11

Profile of Market Performance for United States
Government Securities Maturing in 5-10 Years

12

Profile of Market Performance for United States
Government Securities Maturing After 10 Years

13

VIjVII^VIII, Dealers1 Daily Average Gross Positions




44,45,46

- ii -

TABLES

Page Number

Text
1.

Average Level of Trading Indicators in Fifties and in Sixties . . 15

2.

Coefficients of Relative Variation in Trading Indicators

3.

Average Level of Daily Net Positions . . •

4.

Net Regression Coefficients for the Variables Measuring
Expectations

64

Net Regression Coefficients for the Variables Measuring
Trading Profitability
.

68

Net Regression Coefficients for Interest Carry and Financing
Cost Variables

72

7.

Net Regression Coefficients for Treasury Financing Variables . .

74

8.

Net Regression Coefficients for Official Market Operations
Variables

78

5.

6.

17
42

Appendix
1.

Gross Dealer Transactions in U. S. Government Securities, by
Maturity, Quarterly 1950-1966 . .

98-99

2.

Annual Rate of Turnover of Marketable United States Debt . . 100-101

3.

Sixteenth Lowest Daily LeveL of Gross Dealer Transactions
in Each Quarter for Selected Maturity Classes of U. S.
Government Securities

4.

4a.

4b.

Dealer Net Positions in U. S. Government Securities, by
Maturity, Quarterly 1950-1966 . . . .

102-103

.

104-105

Dealer Gross Long Positions in U. S. Government Securities,
by Maturity, Quarterly 1960, Q4 — 1966, Q3

106

Dealer Gross Short Positions in U. S. Government Securities,
by Maturity, Quarterly 1960, Q4 — 1966, Q3

107

5.

Frequency of Large Daily Price (or Yield) Changes in Selected
U. S. Government Securities . . .
.108-109

6.

Frequency of Small Daily Price (or Yield) Changes in Selected
U. S. Government Securities
110-111




Page Number

6a.

Coupon Issues Used for Calculations in Tables 5 and 6 . . . . 112-113

7.

Spread Between Dealers1 Quoted Bid and Asked Prices
on U. S. Government Securities

114-115

Description of Multiple Regression Analyses Explaining
Trading (Chapter II)

116-117

List of Independent Variables for Multiple Regressions
of Trading (Chapter II)

118-119

Results of Multiple Regressions Explaining Trading in
U. S. Treasury Bills

120-121

Results of Multiple Regressions Explaining Trading in U. S.
Governments (coupon issues) Maturing in < 1 Year

122-123

Results of Multiple Regressions Explaining Trading in U. S.
Governments Maturing in 1 - 5 Years

124-125

Results of Multiple Regressions Explaining Trading in U. S.
Governments Maturing in 5 - 10 Years

126-127

Results of Multiple Regressions Explaining Trading in U. S.
Governments Maturing After 10 Years

128-129

List of Independent Variables for Multiple Regressions of
Dealers1 Positions

130-134

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.
18.
19.

20.

Results of Multiple Regressions Explaining Dealers1
Positions in U. S. Treasury Bills

135

Results of Multiple Regressions Explaining Dealers1
Positions in U. S. Governments (coupon issues) Maturing
in < 1 Yaar

136

Results of Multiple Regressions Explaining Dealers1
Positions in U. S. Governments Maturing in 1 - 5 Years

137

Results of Multiple Regressions Explaining Dealers1
Positions irj U. S. Governments Maturing in 5 - 10 Years

138

Results of Multiple Regressions Explaining Dealers1 Positions
in U. S. Governments Maturing After 10 Years

139

Footnotes to Tables 15-19

140




CHAPTER I

SUMMARY AND CONCLUSIONS

This study analyzes the aggregative data on the market for U.S.
Government securities—such as the volume of trading, dealers1 positions,
an.d security prices—during the 1950fs and 1960fs in an attempt to answer
two questions.

First, how have these indicators behaved and what explains

such behavior?

In particular, how was the market affected by Treasury debt

management policy and by open market operations of the Federal Reserve and
the Treasury?

Second, did market performance, as reflected in these

indicators, depart further from "the ideal11 in the 1960's than in the
1950 fs?
The analysis focuses on the following market indicators:

the

daily average volume of trading, the annual rate of turnover of the
marketable U.S. debt, the 16th lowest daily volume of trading in each
quarter, dealers1 daily average positions, the frequency of small and
large daily price changes, and the spread between quoted bid and asked
prices.

Each indicator was selected in part because it measures an

essential operational characteristic of the market, in part because it
approximates desirable or undesirable attributes of the market, and in
part simply because the data were available for both the fifties and
sixties and could be developed in the time originally allotted for the
study.

Since performance may vary greatly in different segments of the

market, the indicators were examined on a quarterly basis for selected




- 2maturity classes of U.S. Government securities—bills, other securities
maturing in 1 year or less, securities maturing in 1-5 years, 5-10 years,
and after 10 years.

Charts I - V present profiles of market performance,

as defined by the indicators, for each maturity class.
The established technical definition of an efficient market is
one possessing "depth, breadth, and resiliency11, with these qualities
defined in terms of orders on the dealers' books0

The market

.... possesses depth when there are orders, either
actual orders or orders that can be readily uncovered,
both above and below the market. The market has
breadth when these orders are in volume and come from
widely divergent investor groups. It is resilient
when new orders pour promptly into the market to take
advantage of sharp and unexpected fluctuations in
prices.*
At the other extreme, in a disorderly declining market, "selling feeds on
itself so rapidly and menacingly that it discourages both short covering
2
and the placement of offsetting new orders."

In more general terms, it

is usually agreed that an adequately functioning U.S. Government securities
market would have the capacity to accommodate Treasury financings, Federal
Reserve open market operations, and private investment transactions at
reasonable speed and cost.

Such a market would be characterized by

1 From the 1952 report of the Ad Hoc Subcommittee on the
Government Securities Market. See, UoS. Congress, Joint Committee on the
Economic Report, Subcommittee on Economic Stabilization (Flanders Committee),
United States Monetary Policy: Recent Thinking and Experience Hearings,
83rd Cong., 2nd Sess,, 1954, pa 265.
2 Ibid,, p« 268* A similar definition applies to a disorderly
rising market.




continuity in trading at prices that reflect demand and supply, and would
not exhibit extremely sharp daily price movements or very large spreads
between bid and asked prices suggesting investor or dealer unwillingness
to maintain an active market©

Although lack of data on orders on the

dealers1 books prevents development of statistical indicators directly
measuring "depth, breadth, and resiliency", the indicators analyzed in this
study do approximate some of these technical characteristics as well as
the more general criteria,,

At least they should signal changes over time

in the underlying market characteristics***
The major conclusions of this study are listed below*

The reader

must be cautioned that there are errors and inconsistencies in the dealer
data, as well as statistical problems in the regression analyses.
analysis of the available data is possible and desirable.

Further

Nevertheless,

this study is valuable as an empirically documented discussion of the
performance of the Government securities market in the fifties and sixties®
1.

Market performance, as reflected in the indicators based on

trading, showed few signs of secular deterioration from the fifties to the
sixties.

Only in coupon issues maturing within 1 year was there clear-cut
2

evidence of secular deterioration.

For 1-5 and 5-10 year issues all

indicators based on trading suggested secular improvement in performance;

^ It should be noted that these definitions and the selected
indicators reflect activity of both dealers and customers since performance
of a dealer market--as distinct from performance of the dealers--depends on
the behavior of the customers as well as on the functioning of the dealers.
2 During most of the 1960's the Treasury discontinued the issuance
of certificates.




- 4and for bills and over 10 year issues the indicators offered conflicting
evidence.

Daily average trading was higher in the sixties in all maturity

classes except coupon issues maturing in 1 year or less.

The annual rate

of turnover of the marketable U.S. d e b t — a rough adjustment of trading for
debt outstanding—was generally greater in the sixties in 1-5 and 5-10
year issues, very slightly lower in bills, and considerably lower in
other short-term issues and bonds maturing after 10 years.

Moreover, there

was no evidence of increased discontinuities in trading—measured by the
16th lowest daily volume of trading in each quarter and by volatility in
quarterly data on daily average trading—except in coupon issues maturing
within 1 year.
2.

In both the fifties and sixties there were sizable short-run

fluctuations in the indicators based on trading, and in this sense market
performance was subject to periods of deterioration and improvement.

The

relative variation in trading was greater in 5-10 and over 10 year bonds,
implying that short-run variation in market performance was more pronounced
in the long-term market.

In part these fluctuations reflected cyclical

movements in free reserves and interest rates, with trading rising in
periods of easy money and falling when credit policy tightened noticeably,
and thus causing appropriate counter-cyclical changes in the liquidity of
Government securities.

Movements in trading also were related to U.S.

debt oustanding, Treasury financings, official operations in the market,
and tax swapping.




- 53.

Trading was positively associated with the size of

Treasury financings throughout the period studied*

Thus, to the extent

that advance refundings made possible more long-term bond offerings,
they contributed to a higher average level of market activity*

As

maintained by market participants, Treasury financings in long-term bonds
also caused a widening of the spread between daily average trading and
trading on low days (as measured by trading on the 16th lowest day), but
nevertheless the sixties saw a rise in trading on low days that was almost
as great as the rise in daily average trading.
4.

This study provided no evidence that official transactions

in coupon securities caused market activity in the same quarter to dry up.
On the contrary, market activity was positively related to official activity
in bills, 5-10 year issues, and over 10 year issues, although this association
was less evident in the sixties.

The stimulative impact in 5-10 and over

10 year bonds was caused by Treasury operations; Federal Reserve operations
did not show a significant relationship to trading.
5.

Analysis

of dealers1 positions unearthed little or no evidence of

secular deterioration from the fifties to the sixties in the performance
of dealers as gauged by their inventory practices.

However, this particular

study did not enter into the question of whether dealers1 profits over the
period were sufficient to justify their long-run continuance in business®

1

The dealer profit picture was analyzed in William G. Colby, Jr.,
"Dealer Profits and Capital Availability in the U.S. Government Securities
Industry, 1955-1965", Treasury-Federal Reserve Study of the U.S. Government
Securities Market, 1967.




- 6The raw data on dealers1 daily average net positions show a substantial
rise from the fifties to the sixties, in all maturity categories with
the exception of coupon issues maturing within 1 year, where trading
and debt were also lower, explaining the drop in positions.

In inter-

mediate- term issues, those maturing in 1-5 years, however, these data
may be misleading and it is possible that such positions were steady
or even declined somewhat from the fifties to the sixties. Where positions increased the rise is largely explained by the greater volume
of gross new Treasury bill issues and in some cases new coupon issues,
the sharply increased stability in day-to-day security prices (and
yields), the increased volume of official (Treasury and Federal Reserve) transactions in coupon issues, and the change in reporting
basis and number of reporting dealers in mid-1960.
6.

Official transactions had a significant influence on

dealers1 positions in the sixties while in general no such relationship
was found in the fifties.

In Treasury bills, dealers accommodated large

net purchases of official accounts in part by drawing down their positions.

The institution of official operations in coupon issues in any

size in late 1960-early 1961, generally on the buy side of the market,
allegedly increased uncertainty and engendered expectations of a oneway (upward) movement in prices.

This study found that for issues due

in 5-10 and over 10 years dealers did increase their gross (and net)
long positions in response to official purchases.

But there was in

no sector of the coupon market any evidence of dealer's reduction of
gross short positions as a result of System purchases, though in several
cases Treasury purchases were associated with declines in gross short
positions.




- 77.

Dealers1 response to the greater day-to-day stability in

security prices (and yields) during the sixties was to increase net long
positions rather than withdraw from the market.

This rise in positions

probably reflected the lessened risk of capital losses as well as an
attempt to increase the volume of trading (and hopefully trading profits)
in a period when speculative profits were limited.
8.

Dealers1 position policy was generally destabilizing as far

as interest rates were concerned but aided in the attainment of monetary
policy targets over quarterly periods, during both the fifties and sixties.
In this connection, dealers drew down their positions in response to past
increases in interest rates, thus adding further to upward rate pressures.
They also decreased their positions in response to current increases in the
discount rate and net borrowed reserves*
9o

Daily price changes were far smaller in the sixties, especially

from mid-1962 through mid-1965, than in the fifties, thus illustrating the
increased stability in securities1 markets*
10.

The published data on spreads between bid and asked prices

(or yields) do corroborate statements by dealers that spreads on Treasury
bills have declined from the fifties to the sixties*

For coupon issues,

the data show no change in spreads on maturities of 5 years or less,
fluctuation of spreads on 5-10 year issues around the same levels in the
sixties as in the fifties, and a generally greater spread on over-10 year




though the spread on these issues has been at the higher level since

1957.

These data must be interpreted cautiously, however, for they

overstate the size of the spread at which large trades take place and they
may also give an inaccurate picture of movements over time in the spreads.




uasrt i

PHOFILE OF HABKET PEKFORUN^SE FOR OKITEO STATES TREASURY BILLS
Biilicns cf dollars

1.5




Source: Appendix Tables 1 - 7 .

Quarterly data, 1850-68

ChartV10

PROFILE OF I M
Billions cf doiiars

500




Source: Appendix Tables 1—7.

(J W
I
Quarterly data, 1858-66

Cat li
hr i

PROFILE OF MARKET P E M M E FG8 UNITED STATES fiOVEBnaEHT SECURITIES m m m 1131-5 YEARS
Quarterly data, 1350-85

Pillicns of dollars

433

H
I
Per ceai cf

osrziB
bevtsS

32*is

52
Source: Appendix Tables 1 - 7 .




53

54

55

56

57

58

59

60

61

62

63

64

65

66

Chart V 10

PROFILE OF MARKET PERFORMANCE FOR UNITED STATES GOVERNMENT SECURITIES MATURING IN 5-10 YEARS
Quarterly data, 1950-68

Millions of dollars

1S50

51

52

Source: Appendix Tables 1 — 7 .




53

54

55

5E

57

58

59

60

61

62

63

64

65

68

Chart V

10

PROFILE OF MARKET PERFORMANCE FOR UNITED STATES GOVERNMENT SECURITIES MATURING AFTER JETYEARS
Quarterly data, 1950-6S

Kiliioas Of dollars




1950

51

Source: Appendix Tables 1—7.

- 14 -

CHAPTER II
TRADING AND RELATED INDICATORS

A.

Comparison of Average Level and Volatility of Trading
The volume of trading is, of course, the outstanding operational

characteristic of any securities market, and several indicators of market
performance can be developed from the data on trading. The most fundamental
of these indicators is the average daily volume of trading.

As a first

approximation a large and growing trading volume is a desirable market
feature, implying that customers are able to carry out necessary transactions.

It approximates "breath", since orders from a wide group of

investors would probably involve a large volume of actual transactions.
Secondly, an ideal market should not be characterized by sharp quarterly
variations about the average level of trading, since these fluctuations
would imply that the markets were sometimes thin.

On both these counts

market performance improved from the fifties to the sixties, except in
coupon issues maturing within 1 year (see Charts I-V and Text Tables 1 and 2).
Daily average trading in all maturities, except coupon securities
maturing within 1 year, fluctuated about higher average levels in the
sixties than in the fifties, as Table 1 shows.

Trading in bonds maturing

after 10 years averaged $32 million a day from the second quarter of 1953
through the first quarter of 1960 against an average of $40 million a day
from the third quarter of 1960 through the fourth quarter of 1965.

For

5-10 year securities the average daily volume rose from $67 million to $104
million, while for 1-5 year issues it moved from $158 million to $227 million.




-

1 5

-

Table 1
Average Level of Trading Indicators
in Fifties and in Sixties*
(Dollar figures in millions)

Maturity Class of U.S. Government Securities

Indicator and period
Daily Average Trading
50's
60' s
70 change
Annual Rate of Turnover
of Marketable U.S. Debt
50 ! s
60 's
% change
16th Lowest Daily
Volume of Trading
50 's
60 "s
% change

Bills

Other securities
_ within 1 year

1-5
years

5-10
years

After 10
years

634
1,196
+
89

195
126
- 35

158
227
+ 44

67
104
+ 55

32
40
+ 25

6.52
6.29
3

1.66
1.47
- 11

1.01
1.14
+ 13

.59
.95
+ 61

.68
.52
- 23

450
973
+ 116

125
72
- 42

109
156
+ 43

44
67
+ 52

19
23
+21

*Based on averages of quarterly data for 2 f 53 - 1 ! 60 and for 3 1 60 - 4 f 65 shown
in Appendix Tables 1, 2,and 3*




-

16

-

In Treasury bills the secular increase in trading was especially pronounced,
with trading in the sixties averaging about $1.2 billion a day, almost
twice as much as in the fifties.

Only in other securities maturing within

1 year was daily average trading usually lower in the sixties than in the
fifties:

in this class the average level dropped to $126 million from $195

million.
Table 2, which shows the coefficient of relative variation (i.e.,
the standard deviation of the quarterly data expressed as a percentage of
the mean), implies that daily average trading was less volatile in the
sixties than in the fifties, again with the exception of coupon issues
maturing within 1 year.

This measure of volatility declined about the same

amount for intermediate- and long-term issues—from 52 to 38 for bonds
maturing after 10 years, from 55 to 38 for 5-10 year bonds, and from 40
to 22 for 1-5 year maturities.

The decline in volatility was much smaller

for bills, while volatility increased slightly for short-term coupon issues.
This Table

also shows that the relative variation in trading was

far

larger in the long-term market (5-10 and after 10-year issues) than in
the short and intermediate markets, thus implying that performance in the
long-term market was subject to greater cycles of deterioration and improvement than the short-term market*




- 17 -

Table 2

Coefficients of Relative Variation
in Trading Indicators *
(In per cent)

Indicator
and
Period #

Maturity Class of U. S. Government Securities
Other
1-5
5-10
After
securities
Bills
within 1 year
years
years
10 years

Daily Average Trading
50's + 60's

36

38

35

52

47

50 ! s

20

30

40

55

52

60* s

16

35

22

38

38

10

22

29

45

64

50' s

9

24

36

48

70

60' s

9

18

18

29

39

Annual Rate of Turnover
of Marketable U. S. Debt
50's + 60's

*

Equals the standard deviation of quarterly data in Appendix Tables land 2
divided by the mean.

#

50's + «60's covers 2'53 - 4'65:




50's cover

2 '53 - 1'60: 60's cover 3'60 - 4'65.

- 18 B.

Statistical Problems
These conclusions of improved performance, however, represent

only a first approximation.

Both statistical problems and market

developments call for further analysis.

The primary statistical problem

is the change in the statistical series on trading in mid-1960.

Unfor-

tunately, the biases thus introduced are in opposite directions, so that
the net effect on comparisons of trading in the fifties and sixties is
indeterminate*
Theoretically, the average daily volume of trading includes
dealers1 gross purchases plus their gross sales, but excludes their
allotments, maturities and exchanges of Treasury issues as well as
securities bought or sold under repurchase agreements.

Before mid-1960,

however, there were probably many cases where allotments, exchanges,
maturities and repurchase agreements were included in trading.

Although

some errors may exist in later data too, this statistical discrepancy
most likely led to overstatement of trading in the fifties compared to
the sixties*
A second change in the data involves the maturity classification of securities.

Before mid-1960 securities were supposed to be

classified by first call date, while afterwards they were classified by
final maturity.

To the extent that these instructions were followed,

trading in securities maturing after 10 years was understated in the




- 19 fifties while trading in coupon securities maturing within 1 year was
overstated.

In the two intermediate maturity classes, debt outstanding

in the fifties was sometimes larger when classified by first call and
sometimes smaller, making it impossible to specify the direction of the
statistical bias.
Another problem with the series on trading is the exclusion of
Lanston from the data prior to mid-1960, thus causing some understatement
of trading in the fifties.

This omission was probably of little importance

in the long-term market but sizable in bills and other short-term securities.
The number of dealers in the statistical series changed at other times too,
but in most of these cases the dealer did not have a large segment of the
market in the period before inclusion.

C.

Regression Analysis of Trading
More important than statistical problems in analyzing and

appraising changes in the daily average volume of trading are related
economic developments, such as changes in the volume of Treasury debt
outstanding, Treasury financings, Treasury and Federal Reserve operations
in the market, interest rate expectations and levels, monetary policy, and
tax swapping.

Not only are such developments responsible for much of the

fluctuation in trading evident in the Profile Charts and the Tables, but
they also influence a judgment of the desirability of such changes in
trading volume.

For example, a somewhat lower volume of trading is not

undesirable if the stock in trade declines or if the monetary authorities




- 20 are trying to restrain inflation by reducing the liquidity of debt.

Similarly,

excessively high trading may imply speculation that could have undesirable
after-effects on the market.
The effects of many of these economic developments can be seen
in the Charts, but in order to statistically confirm and measure their
impact on daily average trading over the quarter, multiple regressions
were calculated for the entire period (2 1 53-4 1 65) and for the fifties
(2 I 53-1 I 60) and sixties (3f60-4'65) separately.^

The regressions "explained11

a relatively high proportion of the variation in daily average trading,
ranging from 96 per cent for bills in the entire period to a low of about
50 per cent for 1-5 year issues in the sixties.

Of the fifteen regressions,

six explained more than 80 per cent of the variation in trading and only
the three involving 1-5 year issues explained less than 60 per cent.

In

three of the five equations for the entire period, there appears to be
serial correlation of the residuals which, among other things, means
that the usual tests for significance are invalid.

This problem was al-

most entirely eliminated in the subperiods, however, where only one of
the ten regressions showed serial correlation.

The problem of the change

in the data series on trading also was eliminated by running separate
regressions for the subperiods, since the data are consistent within each
period.

A remaining problem is that several of the explanatory variables--

especially those measuring monetary policy and interest rate expectations-are related to each other (multicollinearity), making it impossible to

See Appendix for a more detailed description of the regression
analysis (pages 116-117)• Regression results are shown in Tables 9~13»




accurately assess the separate impact of each on trading.

Nevertheless,

the results do confirm the importance of several groups of economic variables
1.

U.S. Debt Outstanding

The supply of securities available for trading should be one
determinant of trading.

Marketable U.S. debt held outside the Federal

Reserve and the Treasury was used as the measure of the stock of securities
in each maturity class except bills where total bills outstanding was
selected.

This distinction reflects the fact that Federal Reserve and

Treasury holdings of coupon issues were not generally available for trading.
Their holdings of bills, however, were often sold.

Dealer positions might

also be considered a measure of the stock of securities available for trading
and there was a relatively high correlation between trading and positions.
The causation, however, runs in both directions, since heavy trading
encourages — and indeed requires — dealers to hold higher positions.

Using

positions on the previous day as a measure of the supply for trading on
the following day might solve the problem for daily regressions, but with
quarterly data the lag is too long to be reasonable.

Therefore, dealer

positions were not included in the regressions.
As was expected, debt outstanding was found to be one of the
most important determinants of the daily average volume of trading in all
maturity classes except bonds maturing after 10 years.

Debt outstanding

was more important in explaining the variation in trading over the entire




- 22 period partly because changes in the composition of the debt were larger
then.

It took a big change in debt to get even a small increase in

trading.

For the entire period, a $1 billion increase in debt outstanding

resulted in an increase of only about $20 million in trading in bills
and from $3 to $4 million in the other maturity classes where it was
significant. When debt outstanding was significant, the magnitude of the
impact on trading was usually larger in the sixties than in the entire
period or in the fifties.
A number of major movements in trading visible in the Profile
Charts can be partially explained by changes in debt outstanding.

These

include the sharply higher volume of trading in Treasury bills in the
sixties, the decline in trading in coupon securities maturing within 1
year after 1962, and the activity in 5-10 year bonds in 1962-64.
2.

Trading by Official Accounts

According to some market participants, trading by the Federal
Reserve System and the Treasury, particularly in longer maturities, tends
to depress activity by other customers, partly because potential buyers
feel price levels are artificially high and so hesitate to buy.

In addition,

it is sometimes argued that sellers also delay sales in anticipation of
higher prices.

On the other hand, dealers at times say that when official

accounts are buying sellers seize the opportunity of getting out of a




- 23 position they would otherwise continue to hold0

There is also some feeling

that Treasury purchases of securities during financings improves the
atmosphere and so may lead to greater activity.*"
This study revealed no negative impact of official purchases on
trading, and, on the contrary, found some evidence that official transactions led to higher trading.

Trading by the System and the Treasury

(considered together) had a positive impact on daily average trading in
bills and on trading in the two longest maturity classes for the entire
period.

Moreover, this effect was still significant (at the 5 per cent

level) when total trading was adjusted to exclude trading with official
accounts.

In bills an increase in official transactions of $1 million

resulted in an increase of slightly over $2 million in daily average
trading (excluding official accounts),

in 5-10 year issues the corres-

ponding increase was almost $4 million, and for over 10 year issues almost
$2 million.

In all these equations, however, positive serial correlation

exists, so that there is some doubt about the significance of the results.

1

The survey of institutional investors (see Joseph Scherer,
"Institutional Investors and the U.S. Government Securities Market11,
Treasury-Federal Reserve Study of the U.S. Government Securities Market,
1967) provided somewhat contradictory responses on this point. Respondents
accounting for 31 per cent of total market activity reported in the survey
felt that their ability to conduct transactions decreased because of official
operations. Activity of the other respondents was not affected or increased.
Unfortunately, no distinction was made between the impact of official operations during Treasury financings and at other times, and no dollar magnitudes
for changes were requested.




- 24 Separate examination of the fifties and sixties showed less
evidence of this positive association between official transactions and
daily average trading (excluding official transactions).

Significant

positive relationships (when other significant variables were held constant)
existed for bills in the fifties;and for securities maturing in 5-10 and
after 10 years in the fifties but not in the sixties.

The correlation in

the fifties for longer-term issues reflects substantial official purchases
in periods of market crises, such as 1958,and is probably somewhat unreliable because official operations did not occur often.

In the case of

bills, a significant positive correlation existed before other variables
were added in the sixties; but for 5-10 year and over 10 year securities
the positive relationship was Just below the required significance level
both in the simple and multiple correlations in the sixties.
On the possibility that official activity stimulated trading
among dealers, thus hiding a lower level of activity by investors, similar
regressions were run for the sixties for private trading (excluding trading
by official accounts, brokers and dealers).^"

No significant relationships

between official activity and private trading were found in these multiple
regressions, but there was a significant positive simple correlation
coefficient for bonds maturing after 10 years.
Since Treasury purchases of coupon issues were usually concentrated around financings and might be expected to have a more stimulative




No such data are available for the fifties.

- 25 effect than Federal Reserve purchases which occurred at other times,
regressions were also calculated with the trading activity of the Treasury
and the Federal Reserve treated as separate variables.

These regressions

showed that the positive impact of official transactions in coupon issues
on other trading was a result of Treasury operations.
Federal Reserve operations were not significant.

Coefficients for

In the multiple regres-

sions explaining trading (excluding official trading) significant positive
coefficients were found for Treasury operations in 5-10 and over 10 year
issues in the entire period and in the fifties.

These coefficients were

about the same size as the coefficients for Federal Reserve and Treasury
operations taken together.
tions also

In these multiple regressions, Treasury opera-

had a significant positive influence in che sixties on private

trading (excludes brokers and dealers and official accounts) in bonds
maturing after 10 years,

with a $1 million increase in Treasury operations

leading to a $1.2 million increase in private trading.*
Possibly, further refinement of the data, such as separating
purchases from sales and using periods shorter than a quarter would have
revealed a negative impact of official transactions on trading.

But no

The equation was
Trading = -26.3 + 1.21 x 2 + 6.54
- 6.60 x y + 2.09 x 1 6
(1.96)
(1.13)
(.54)
(1.65)
The adjusted R^ was .638; the D-W ratio was 1.405. The numbers in parentheses
are standard errors of the regression coefficients, x^ is Treasury operations
and the other variables are listed in Appendix Table 8.




- 26 such negative relationship appeared in an earlier analysis (undertaken
for the System Study on the Impact of

Official Activity in Coupon Issues)

of daily data on both sales and purchases of private customers during
Treasury rights financings from March 1961 through July 1964 and on days
without financings during a period of relatively heavy official activity,
August 22, 1962 through December 31, 1963.

This study found that private

customers were encouraged to increase their purchases and their sales of
5 - 10 and over 10 year issues by official operations during rights
financings.

On days without financings official buying of 5 - 10 and over

10 year Governments was associated with higher sales by private customers,
1
while there was no impact on purchases.

The stimulation of sales by

private customers supports the dealers' contention that official buying
leads to dumping by other investors.

Another, but less probable, explana-

tion is that official accounts buy securities when they are availableavailability presumably being increased by large sales to dealers by
private customers.

The higher volume of private purchases during financings

when official accounts were active suggests that some buyers at least were
2
encouraged, probably by the improved market tone.

1 Although the relationships between private trading were significant they explained only a very small part of the variation in daily trading.
In addition the number of days with large official operations was small.
2 One by-product of this study is a possible way to measure the
market's resiliency. Presumably in a resilient market purchases by private
customers would increase in response to a precipitous drop in prices vhile
market sales by private customers would rise following an unusually sharp
rise in prices. This study tested the relationship of daily private purchases and private sales to the average change in prices on the previous day
(for 1 - 5, 5 - 10', and over 10 year Governments) for days without financings
from August 22, 1962 - December 31, 1963. The desired positive relationship
between sales by private customers and price changes did show up in all
maturity classes, but there was no significant relationship between private
buying and price changes. Although the task of updating the daily figures
would be time consuming, it might be useful to study the relationship of
daily private purchases and private sales and price changes on the previous
day (possibly testing other lags too) in a period when price changes were
larger, as for example, September 1965 - August 1966.



- 27 30

Treasury Financings

Treasury financings in coupon issues lead to heavy trading by
dealers and customers in rights and new issues and also promote swapping
in outstanding issues for a number of days during and after each financing.
Even for periods as long as a quarter such heavy trading should cause higher
daily average trading—an expectation that was confirmed by the regressions.
While new issues of Treasury bills also stimulate trading, no significant
relationship was uncovered, possibly because of the use of the net change
in bills outstanding instead of a series on gross issues.
Trading in coupon issues due within 1 year was stimulated by the
volume of rights (in this maturity class) held by the public—an increase
of $1 billion in rights being associated with a $4 million rise in daily
average trading for the entire period.

Although the volume of rights had

an important influence on trading in both the fifties and sixties, the
magnitude of the response was far larger in the fifties.

An increase of

$1 billion in rights led to an $11 million rise in trading in the fifties
against only $2 million in the sixties.

Possibly this lower coefficient

for the sixties was a result of the introduction of prerefundings.

Lack

of knowledge or the option of continuing to hold the rights may have led
to lower trading in rights relative to the amount held by the public in
prerefundings.




-

28

-

Trading in 1-5 year issues responded to the volume of new
issues sold to the public in the fifties and to the volume of rights in
this maturity class held by the public in the sixties.

The importance of

rights in the sixties obviously reflects the introduction of advance
refundings.

Neither variable was significant for the period as a whole--

in the case of new issues partly because of intercorrelation with debt
outstanding.
In longer maturity classes an increase of $1 billion in the
volume of new issues sold to the public led to an increase in daily
average trading of roughly $4 to $6 million for 5-10 year issues and $12
to $15 million for bonds maturing after 10 years.

When this financing

occurred in the last month of the quarter, the positive impact on that
quarter was more than wiped out for bonds maturing after 10 years, perhaps
because some of the heavy trading that normally occurs after a financing
was pushed into the next quarter while the lull in trading that usually
precedes a financing fell in the current quarter.

For 5-10 year bonds the

volume of new issues was significant in the fifties but not quite significant
in the sixties; but for longer bonds it was significant in both periods,
although the timing variable showed up only in the sixties.
In view of the relatively small size of the sample, advance
refundings were not considered separately from other financings, so that
the differential effect (if any) of the size of various types of financing




- 29 on secondary market activity could not be assessed.

Nevertheless, since

the size of financings in general was positively associated with the level
of daily average trading and since a much smaller volume of long-term bonds
would probably have been sold in the sixties without advance refundings,
they may well have promoted activity in the Government securities market.
4.

Monetary Policy and Interest Rate Expectations

The Profile Charts for most maturity classes show that there has
been a definite cyclical pattern in daily average trading, with trading
rising in recessions and declining, less uniformly, late in expansions.
This showed up in the regressions in the form of a significant relationship
between trading in all maturity classes and at least one of a group of
variables representing the stance of monetary policy and expectations about
interest rates and security prices (free reserves, the level of rates, the
change in rates in the current quarter, and the change in rates in the
previous quarter).

Because of the multicollinearity between these variables,

however, not much importance can be attached to the particular ones that
were significant in any equation.
In general, daily average trading was lower in a climate of tight
money, or in other words, when free reserves wero»low and interest rates
high.

Such a reaction might be anticipated if good business and tight money

were expected to continue, since the outlook for Government bond prices




- 30 would be poor and other bonds would often be more attractive on a rate
basis while stocks would offer the chance of participating in the
business boom.

In addition, potential buyers might delay because of the

possibility of buying at still lower prices, while sellers might be
locked-in by their unwillingness to take established losses, even
though greater losses were possible.

Moreover, the dealers1 unwillingesss

to position securities at such times would slow down execution of orders
that did appear.
In the fifties, the change in rates in the previous quarter
frequently had a negative impact on trading in coupon issues, possibly
because a faster rise in rates also led buyers to expect further increases
and so discouraged purchases.

The change in rates was not important in

the sixties, but interest rates were far more stable in the latter period.'*
A certain degree of such cyclical deterioration and improvement
in this aspect of market performance, and hence in the liquidity of Government securities, probably is consistent with a counter-cyclical monetary
policy.

In inflationary periods the difficulty of finding buyers may

slow down sales of Governments by banks or other lenders and thus also
reduce the rate of growth in loans.

In recessions, on the other hand,

any contribution that greater ease in selling securities can make towards
financing business recovery would be welcome.

Of course, both excessive

1 It should be noted again that the discussion is based on r e g r e s sions which d i d not cover 1966 but ended with the fourth quarter o f 1965.




speculative activity in recessions or practically complete disappearance
of activity at any price in booms could lead to disorderly markets and
financial crises,
5.

Tax Swapping

According to many dealers a lower volume of tax swapping by
commercial banks caused some deterioration in the market in the sixties.
Tax swapping refers to the sale

of a security at a loss and the purchase

of a similar security at about the same price.

This may increase banks1

after-tax profits over time, because net capital losses can be deducted
from taxable income while capital gains are taxed at the 25 per cent
capital gains rate.

In the year of the swap, taxes paid will be reduced

by roughly 50 per cent of the loss.

Taxes paid in the future when the

new bond matures and the loss becomes a gain will be larger, but only by
roughly 25 per cent of the original loss.

So the tax swap will have

increased after tax profits by approximately 25 per cent of the loss.
Unfortunately, no fully satisfactory proxy for tax swapping was available,
but a dummy variable for the fourth quarter of the year, a time when
banks frequently concentrate transactions for tax purposes, was included
in the regressions.

One reason why tax swapping may be heavier in the

fourth quarter of the year is that banks may not know until then if the year
is

suitable for a loss year.




- 32 In the 1-5 and 5-10 year maturity classes daily average trading
did show a significant rise in the fourth quarter, amounting to about $31
million for 1-5 year issues and $24 million for 5-10 year bonds for the
fifties and sixties taken together.

Moreover, the size of this seasonal

increase or its significance was greater in the fifties than in the sixties,
thus tending to support the argument that tax swapping was smaller in the
sixties when prices of securities were unusually stable.
6.

Number of Dealers

Over the years covered by this study the number of dealers
included in the statistics has changed several times.

Normally, a change

in the number of dealers should not cause a change in customer activity,
although total activity would be redistributed among the dealers«

In

cases where the dealer added had previously been trading, however, the
more complete coverage of the market would imply greater activity.

In

addition, with more dealers, inter-dealer activity, and hence total
activity, might well expand*

To test this last hypothesis, a series on

the number of reporting dealers was included in the regressions, but the
results were inconsistent.

In longer maturity classes a significant

positive relationship did appear, but it is possible that this variable
was acting as a measure of trend and did not have significance for the
hypothesis being tested.




- 33 D.

Annual Rate of Turnover of Marketable U.S. Debt
The previous sections clearly established the importance of

changes in the available stock of securities or debt outstanding for
market activity.

In order to help visualize the changes in activity

or performance after rough allowance for this important environmental
change, a series on the annual rate of turnover of the marketable U.S.
debt was developed for each maturity class.

It is defined as daily

average trading multiplied by 249 (the number of trading days in most
years) and then divided by the average debt held by the public (for
bills, total debt outstanding).

Treasury and Federal Reserve holdings

are excluded from debt except in the case of bills because they were
not part of the available market supply since these accounts seldom sold
such securities in this period.

Until the middle of the second quarter

of 1960, maturity classifications of the debt are based on first call
date, and thereafter on final maturity in order to correspond to reporting
instructions on the trading data.
A rise in this indicator, like a rise in daily average trading,
implies improved market performance.

Such an interpretation, however,

assumes that trading should change in the same proportion as debt outstanding in order for market performance to remain unchanged—an assumption
that is not necessarily justified.




In addition, the statistical problems caused

- 34 by the change in the definition of maturity classes (from first call to
final maturity) may be magnified in this indicator, especially for
bonds maturing after 10 years and coupon securities maturing within 1
1
year.

Therefore, the rate of turnover of the debt should be regarded

only as a supplement to daily average trading, not as a superior indicator
of performance.

Moreover, as was the case with daily average trading,

the rate of turnover of debt would be expected to show considerable changes
in either direction because of economic developments, and such short-run
or cyclical movements are not necessarily undesirable.
These series on the rate of turnover of the debt are shown in
the Market Profile Charts (pages 9 - 13) and in Appendix Table 2.

As

text Table I (page 15) illustrates, the turnover rate for intermediate
securities in the sixties (3 1 60-4 1 65) fluctuated about an average level
that was higher than in

the fifties (2f53-lf60).

In bills the average

level was very slightly lower—the strong upward trend evident in
daily average trading in bills was completely eliminated.

In coupon

securities maturing within 1 year and bonds maturing after 10 years,
short-run movements were around a definitely lower level in the sixties.

1 For bonds maturing after 10 years, debt outstanding, the
divisor for the rate of turnover in the fifties, was far smaller than if
a final maturity definition had been used (less than half as large). In
addition, the dealer data on trading was sometimes mistakenly classified
by final maturity in the fifties. Thus, the rate of turnover of the
debt in the fifties was overstated. Similarly, rate of turnover for
coupon securities maturing within 1 year may have been understated in
the fifties. The problem is minor in intermediate maturity classes
because average debt outstanding was about the same on both bases.




- 35 For long-term securities the decline may have been caused by the overstatement of the turnover rate in the fifties that probably resulted from
the statistical problems in the definition of debt maturing after 10 years.
In all maturity classes short-run movements were more marked than any
trend, and they were also more evident than in trading.
The volatility in the annual rate of turnover of the marketable
debt, as well as in the daily average volume of trading, was generally
greater in the fifties than in the sixties for all maturity classes, as
can be seen in text Table 2 (page 17) which presents the coefficient of
relative variation (i.e., the standard deviation of quarterly data
expressed as a percentage of the mean). While this might be considered a
sign of improved market performance in the sixties, it was a result of
underlying economic conditions that have been shown to explain variations
in trading and might easily be reversed as the rest of the sixties covers
more phases of the business cycle.

The Table also shows that the relative

variation in turnover as in trading was larger in 5-10 and over 10 year
bonds than in shorter maturities, thus implying that performance in the
long-term market was subject to periods of greater deterioration and
improvement than in the short-term market.
Multiple regression analysis was also used to relate the movements
in this indicator to other economic developments.

A much smaller part of

the movement (usually about 30 to 60 per cent) was explained than for daily




- 36 average trading, in part because debt outstanding was incorporated into
the indicator itself0

Indeed, in the sixties no significant correlation

was found for 5-10 year issues.
Much the same sets of variables were important in explaining the
rate of turnover as were significant in explaining the daily average
volume of trading,,

The volume of new issues sold to the public again

caused higher turnover in intermediate- and longer-term issues, except
sometimes when the financing occurred at the end of the quarter; and the
volume of rights held by the public led to higher turnover in coupon
issues maturing within 1 year and in 1-5 year issues in the sixties*

Open

market operations of official accounts exerted a positive influence
on bills and 5-10 year bonds for the entire period and for the fifties; and
for this indicator the positive relationship also held in the sixties
for bills and bonds maturing after 10 years.

Variables representing

monetary policy, interest rate expectations, and tax swapping also had
an impact on the turnover rate similar to that on daily average trading,

Ep

16th Lowest Daily Volume of Trading
The average daily volume of trading, as well as the annual rate

of turnover, may conceal discontinuities in daily trading, especially
when the average is pushed up by a few days of heavy trading during a
Treasury financing.

Some market participants have claimed that advance

refundings in the sixties have had just this result in the intermediate-




and long-term markets. They contend that although average trading has
held up or increased, trading on days between financings has at times
almost completely dried up.

To appraise this criticism, special

attention was given to days when trading was lowest; and as a market
indicator, series were constructed to show the sixteenth lowest daily
volume of trading in each quarter.*"

Daily trading would be below this

level approximately 25 per cent of the time.

Moreover, this indicator

would be influenced by days of light trading and, in contrast to the
average, would not be influenced by days when trading was heavy, unless,
of course, trading was almost always heavy.

A decline in this indicator

in the sixties would imply greater discontinuities in daily trading and
thus a deterioration in market performance, even if the average daily
volume of trading increased.
The Profile Charts, however, show that this indicator rose and
fell with the average daily volume of trading in all maturity classes.
In no maturity class was trading on the 16th lowest day down in the sixties
when average daily trading was up (see Table 1, page 15).
In longer maturities, however, the percentage increase was
slightly smaller than in average daily trading.

Average daily trading in

bonds maturing after 10 years rose 25 per cent from the fifties to the
sixties, while trading on the sixteenth lowest day rose 21 per cent.
the 5-10 year class the increases were 55 per cent and 52 per cent,




See Appendix Table 3 and Profile Charts.

In

- 38 respectively.

It seems likely that this slightly smaller improvement

in trading on the sixteenth lowest day than in daily average trading
was at least partly a result of advance refundings since trading was
concentrated during refundings and drawn away from other days.

This

is indicated in the Charts by the failure of trading on the sixteenth
lowest day to rise proportionately with average daily trading at most
peaks, as it would have if the higher average level had been evenly
distributed throughout the quarter.

Further consuderation reveals that

frequently those peaks in trading were caused at least partly by
Treasury financings.
For bonds maturing after 10 years, the only peaks in daily
average trading where trading on the 16th lowest day rose as much as
(actually relatively more than) the average were those in the 1953-54
and 1960-61 recessions when no Treasury financings took place in this
maturity class.

At other peaks in daily average trading, all of them

associated with Treasury financings, the percentage rise in the daily
average was greater than that in trading on the 16th lowest day.

These

impressions were confirmed by simple correlation coefficients between
new issues sold to the public in Treasury financings and the ratio of
trading on the 16th lowest day to daily average trading of -.666 in
the fifties and -.561 in the sixties.1

Incidentally, in the sixties there was a correlation of -.412
between official transactions and this ratio, implying that official
transactions also led to a wider spread between trading on peak days and
trading on low days.




- 39 In the 5-10 year maturity class the impact of financings on the
relationship between daily average trading and trading on the sixteenth
lowest day is less obvious because there were more financings; and peaks
in trading volume cannot be attributed as clearly to financings.

Neverthe-

less, the ratio of trading on the sixteenth lowest day to daily average
trading for 5-10 year bonds was low or falling from mid-1962 through 1963,
in the third quarter of 1964, and early 1958—all periods of high trading
and a large volume of Treasury financing.
To the extent that more long-term financings were accomplished
in the sixties because of the advance refunding technique than in the fifties
or than would otherwise have been possible, advance refundings can be said
to have caused a larger difference between average daily trading and trading
on the 16th lowest day.

But as noted earlier this wider spread occurred at

a time when both daily average trading and trading on the 16th lowest day
were increasing sharply.

Thus the rise in daily average trading, in part

caused by financings, did not mask a disappearance of markets between
financings; and although trading declined between financings in the sixties,
even this level of inter-financing trading was substantially larger than
in the fifties®




- 40 CHAPTER III
DEALERS1 POSITIONS

A.

Introduction
A primary characteristic of the U.S. Government securities

market is the existence of dealers who take positions in securities in
the process of accommodating buy and sell orders of investors, that is,
in the process of making markets.

While position-taking is not a

necessary condition for the existence of a market--the simple bringing
of buyers and sellers together is sufficient--it is clear that the
quality of a market for securities is improved by functioning dealers.
For the private investor it means a more liquid and a more marketable
asset, one that can be bought (or sold) with little, if any, delay
and that can be traded in large amounts with little price concession.
Moreover, the sizable operations of the U.S. Treasury and the Federal
Reserve might be precluded were there not dealers to underwrite Treasury
financings and System sales as well as to enable System purchases,,
Any deterioration in the willingness of dealers to operate
should thus be viewed as a deterioration in the state of the market for
U.S. Government securities.

While the most direct way of studying this

aspect of market performance would be through an analysis of the size of
buy and sell commitments dealers make, together with the prices at which




- 41 they are made, and of the lag between dealer commitments and investor
buy (or sell) orders, such data do not exist.

Data on dealers1 positions

do exist, however, and the dealers1 willingness to make commitments is
closely related to positions.

A large gross long position (the outright pur-

chase and ownership of securities) indicates a willingness to buy while
a large gross short position (securities borrowed in order to make a sale)
implies a willingness to sell.
Net positions are gross long less gross short positions, and
their size reflects primarily the extent to which dealers hedge gross
long positions by selling short.

If in fact short sales exceed securities

owned outright, net positions will be negative.

Therefore a decline in

net positions need not necessarily imply decreased dealer willingness to
make buy and sell commitments.

Such a decline, for example, might result

from rises in both gross long and gross short positions, but with gross
short positions rising by a larger absolute amount.

However, as a practi-

cal matter fluctuations in net positions often parallel those in gross
long positions, since gross long positions, and changes in them, are
usually much larger than gross short positions.
A rapid glance at movements in dealers1 daily average net
positions since the early 1950! s, presented in the Profile Charts
(pages 9-13) and in Appendix Table 4, underlines their two main characteristicss




short-run volatility and a higher average level in the 1960fs

- 42 as compared with the 1950fs.

In all market sectors, except for coupon

issues due within 1 year, net positions rose quite sharply from the fifties
to the sixties.

As shown in Table 3, in the sixties dealers held daily net posi-

tions averaging $268 million in 1-5 year issues, one-third higher than
in the fifties; of $98 million in 5-10 year issues, a three-quarter per
cent rise from the fifties; and of $67 million in over-10 year issues, a
116 per cent increase over the fifties.

In Treasury bills, dealers*

daily net positions averaged $2.3 billion during the sixties, compared with
only $.6 billion in the fifties.

Table 3
AVERAGE LEVEL OF DAILY NET POSITIONS*
(Dollar figures in millions)

U.S, Government Securities Maturing
Within 1 Year
1 - 5
5 - 10
Other
Years
Bills
Years
501 s

603

60 f s

2,308

% Change

+

283

After 10
Years

343"

201

55

31

341

268

98

67

+ 33

+78

+116

-

1

-Based on averages of quarterly data for 1 1 54 - 1*60 and for 4*60 - 3'$6
shown in Appendix Table 4.

Data on gross positions were not practically available for the
fifties.

During the sixties, dealers1 gross positions have fluctuated

sharply, as shown in Appendix Tables 4a and 4b and in the following




- 43 Charts VI-VIII. By 1966 gross short positions were, in all maturity
areas, at higher levels than in late 1960 while gross long positions
were higher in some maturity areas and lower in others.
Apart from the obvious notation that dealers do indeed carry
positions of some size, conclusions

about

shifts in dealers1 willingness

to take positions can in no case be drawn from such a simple inspection
of the data.

The sharp rise in net positions from the fifites to the

sixites does not in and of itself indicate improved performance nor does
the decline in some gross long positions over the sixties necessarily
indicate a deterioration in dealers1 performance.

In the first place, the

data on dealers1 positions are not consistent from the fifties to the
sixties, accounting for a large part of the rise in bill positions, and
possibly for some of the rise in other maturity areas.

More will be said

of this data inconsistency later.
But over and above data problems, dealers will alter the size
of their positions in an attempt to improve their earnings, and these
explicable position movements should be viewed not as basic shifts in
the performance of the dealer function but as the sine qua non for the
maintenance of that function.

For example, an inability to hedge, and

indeed cut, long positions as security prices fall would result in such
a severe impairment of earnings that a dealer firm could not long remain
in business.




CHART VI: DEALERS1 DAILY AVERAGE GROSS POSITIONS
Millions
of.
dollars
TREASURY BILLS

Gross Long

^

2,5001-

b W /i *
'
I
\

itSOOh




Gross Short

'

Net

/

CHART

Millions




VII:

DEALERS'

DAILY

AVERAGE

GROSS

POSITIONS

CHART VII I DEALERS' DAILY AVERAGE GROSS POSITIONS
s

Millions
ofl
dollars




COUPON ISSUES MATURING IN 5-10 YEARS

1961

1962

1963

196<T

"I5ST

T55T

- 47 In what remains of this chapter a model of the determination
of dealers1 positions is formulated and estimated for the fifties and
for the sixties.

It attempts to ascertain the degree to which position

movements can be explained by such factors as Treasury financings,
Federal Reserve open-market operations, the financial environment including
expected future interest rates and dealer financing costs, and the volume
of trading in securities.

The model, once estimated, can then be used to

pinpoint causes of the observed changes in dealers1 positions.

Also,

the model incorporates the position impact of several of the important
factors composing the altered environment in the U. S. Government securities
market during the sixties, such as greater stability of interest rates
and Federal Reserve operations in coupon issues.

Utilizing such analyses,

a final section in this chapter attempts to draw some conclusions about
dealer performance in the sixties as compared with the fifties..

B.

The Model
Underlying the model of the determination of dealers1 positions

tested here are two primary assertions.

First, it is claimed that

dealers' daily positions on average over a quarter year are generally
in equilibrium, namely that dealers1 actual positions are equal to their
des#ired positions.

Such an assertion at first glance may seem at odds

with the statement that in an efficiently functioning market the dealers
will readily absorb investor buy and sell orders, even when such absorption




- 48 may lead to actual levels of dealers1 positions that vary from the
desired.

These statements can be reconciled, however, by consideration

of the adjustment process whereby dealer positions that diverge from
the desired are brought to an equilibrium level.

Given such a divergence,

dealers could be expected to react by changing bid and offered security
prices, in order to elicit greater net purchases or sales by investors
and thus bring actual into line with desired positions."''

This adjustment

process could be almost instantaneous but, in any event, it would be
very rapid relative to a period as long as a quarter year.
An added factor that allows dealers to remain basically in
equilibrium and still rapidly satisfy investor orders is that the size
2
of single investor

transactions is usually small in relation to dealers1

positions, at least for short-term issues.

Thus while it is likely

that such transactions will be partially reflected in position levels,
so that by the end of any day the actual position of a dealer will vary
slightly from the desired, such a variance should be relatively minor.
And in addition it should partially average out over the quarter.

The

variance of actual from desired positions should be greater on this account
for longer-term bonds where the size of an individual transaction might

1 The new level of security prices might of course also alter
dealers1 desired positions.
2 The model explicitly includes Treasury and Federal Reserve •
transactions which are large enough to affect dealers1 positions significantly, and which may also alter the level of desired positions.




- 49 be large relative to dealers' positions,*-

When all is considered, some

divergence between actual and desired positions probably occurs and, if
so, the model tested here would be unlikely to explain fully the variance
in dealers1 positions.
Secondly, the model asserts that the desired level of dealers1
positions is a function of profitability, and the basic economic factors
influencing that profitability.

In an extreme

case of a sustained period

of losses (involving at least several years), dealers might respond by
withdrawing completely from the market or by reducing gross positions to
minimal levels in an attempt to reduce losses while still remaining in
business.

In the more normal short-run situation, dealers will vary the

size of their gross positions and the relationship between their gross
long and gross short positions — and thus the size of their net positionsin order to augment profits (or reduce losses).
For purposes of analysis, dealers1 profits (or losses) may be
said to flow from three main sources:

(1) speculative operations;

(2) trading operations; (3) interest carry.

Speculative profits (or

losses) derive from capital gains and losses on the securities held by
dealers as security prices fluctuate.

A gross long position will bring

1 In both long- and short-term sectors of the market, seasonal
and cyclical forces may lead a wide range of investors to enter the market
simultaneously on either the buy or sell side. Dealers1 response to such
investor transactions that are occasioned by the business cycle is likely
to be reflected in changing security yields and prices rather than in a
sustained deviation between desired and actual positions, since dealers
could be expected to move with the market rather than against it. Strong
seasonal net purchases or sales by investors are more likely to be reflected in dealers1 positions, if dealers are aware of the seasonal nature
of the transactions. To account for the latter possibility, seasonal
dummies were included in the regressions and these were, in some cases,
significant.



- 50 profits when security prices are rising (yields are declining) and a
gross short position will bring profits when security prices are falling.
Thus, when security prices are expected to fall in the near term, dealers1
net positions should be relatively low (and possibly negative) as gross
short positions are increased while gross long positions decline.
The certainty with which expectations are held should also
have an impact on positions.

Growing uncertainty about the interest rate

outlook might well lead to a decline in gross positions and should
certainly bring about increased hedging of gross long by gross short
positions so that net positions decline.
Profits are also derived from trading.

The size of such profits

will depend on the volume of trading and the spreads between bid and
offered prices, less trading costs.

Enhanced profit opportunities

resulting from either a greater volume of trading or wider spreads'*" should
be associated with larger positions (gross and net), although this is
more important as a factor underlying long-run position levels than as
a factor in short-run fluctuations in positions.

A potentially important

factor influencing trading profits is the share of trading accounted
for by small odd-lot transactions.

Such transactions probably involve

higher unit trading costs, though the higher costs could be offset by
wider spreads.

A shift in the share of debt held by commercial banks,

which generally involves an opposite shift in the share of debt held by
individuals who presumably account for the bulk of odd-lot transactions,
might thus influence positions.




Assuming, of course, that marginal revenue exceeds marginal cost.

- 51 Interest carry is also an important factor in the dealers1
profit statement.

Nonbank dealers finance their positions by borrowing

short-term, generally from the major New York City Banks, from "outside11
banks or from corporations.'"

They simultaneously earn interest on the

securities they hold in position.

When interest paid on the funds borrowed

to finance the position is more than interest earned on the securities
held there is a "negative carry11; when interest earned is greater than
interest paid on borrowings there is a "positive carry".

A rising

negative carry or a falling positive carry should induce dealers to
lighten their portfolios.
A theoretical framework accounting for the determination of
dealers1 positions would not be complete without allowing for the
influence of Treasury financings and System and Treasury open-market
operations.

Dealers play a major role in underwriting Treasury financings.

While it is difficult to conceive of

large-scale financings without

dealer underwriting, it must be noted that dealers would be unlikely to
position newly-offered Treasury securities if they could not expect some
profits, either speculative or trading, in subsequent market activity.
2
The relationship between financings and positions is complex,

but in

general positions (gross and net) will be positively related to financings
unless the financing is very late in the quarter.

1 See Louise Freeman, "The Financing of Government Securities
Dealers" in the Federal Reserve Bank of New York, Monthly Review, June 1964.
2 The precise relationships will be detailed when the empirical
results are presented.




- 52 Dealers also accommodate a large volume of System and Treasury
trust fund market transactions.

Such purchases and sales may have two

distinguishable impacts on dealers1 positions.

In the first place,

because official transactions on any one day are often large in relation
to total market transactions and to dealers1 positions,*" they may cause
dealers1 positions to diverge temporarily from the desired level.

This

is likely to be the case when purchases and sales do not net out over
the quarter, that is, when net purchases or net sales are considerable.
Secondly, official transactions may cause a shift in the level of positions
dealers desire to hold because of their impact on expectations of future
security prices or the success of a financing and because of their possible
effect on uncertainty.
The relative importance of these two impacts might well vary
by maturity area:

for bills and short-term coupon issues it is the first

impact that should predominate while for longer-term coupon issues price
uncertainty effects would gain in importance.

an( j

To further complicate

matters, the impact on positions may vary depending on whether the
transactor is the Federal Reserve or the Treasury, and on whether the
Treasury transaction is in support of a financing.

In the specific case

1 Daily average official transactions over the entire quarter
are minute compared to daily average total market transactions or dealers1
positions, even in the bill area.




- 53 of Federal Reserve operations in coupon issues, undertaken in late 1960early 1961 and largely concentrated on the buy side of the market, it
would be expected that such purchases would induce dealers to hold larger
gross long and net positions but smaller gross short positions, if indeed
they have any noticeable impact.

C.

Data and Empirical Results
A model of dealer behavior was estimated by the simple least

squares technique, with quarterly data, for three separate time periods:
1954-1966,Q3; 1954-1960,Ql; and 1960,Q4-1966,Q3.1

For every time period,

regressions were calculated for each of the following maturity classes of
U.S. Government securities:

bills, coupon securities maturing in 1 year

or less, securities maturing in more than 1 but less than or equal to 5
years, securities maturing in more than 5 but less than or equal to 10
years, and securities maturing after 10 years.
The dependent variables were daily average dealers1 positions
in U.S. Government securities.

For the fifties and sixties together,

and for the fifties, only net positions were analyzed.

For the sixties,

gross long positions (including repurchase agreements) and gross short
positions were analyzed as well as net positions.

1 The shorter periods subdivide the longer period into the
fifties and sixties and also into periods for which the source of dealer
data is the same.




- 54 While the specification of the theoretical model is reasonably
straightforward, a number of problems were encountered in attempting to
estimate the model.

To allow the reader to reach his own conclusions

about the reliability of the empirical results these problems are
presented in some detail.

They include both data insufficiencies and

difficulties of measurement of the relationships, in particular
multicollinearity.
1.

Data

Data problems were encountered from the outset, due to the
inconsistent reporting of dealers1 positions.

In mid-1960 the reporting

basis was changed in certain respects and the number of reporting dealers
was increased at the same time the trading series was changed as noted
in Chapter II.

Specifically, position data were supposed to be classified

by the first call date of the U.S. Government security issues before mid-1960
and by the final maturity date of the issues thereafter.

Moreover, repur-

chase agreements for all dealers and investment accounts for nonbank
dealers were included in positions in the later period whereas dealer
reporting practices in this respect were not uniform earlier.
The extent and direction of the bias in dealers1 positions
between the fifties and the sixties as a result of these statistical
discrepancies varies.

The omission in the fifties of one dealer with a

substantial business led to an understatement of positions in the fifties
when compared with the sixties, particularly in bills.

The less comprehen-

sive inclusion of repurchase agreements in the fifites also resulted in




an understatement of positions, primarily in bills and short-terra
coupon issues.

Finally, the shift from a first call to a final maturity

basis in reporting coupon issues meant an understatement of positions in
over-10 year issues and an overstatement of positions in within 1 year
issues during the fifties; the impact on intermediate-term issues is#unclear.
The net result of these various sources of statistical bias is to lead to
a clear-cut understatement of dealers1 positions in Treasury bills and
to a lesser degree in over-10 year maturities in the fifties.

The impact

on other maturity classes is unclear but likely to also result in some
understatement in the fifties, except perhaps for coupon issues maturing
within 1 year.
This data problem is not present in the regression analyses of
the two sub-periods, for which the data is consistent within each period.^
In the regression analyses of the entire period, 1954-1966,Q3, a dummy
variable equal to +1 in every quarter from 1960,Q2 through 1966,Q3 was
introduced to account for the data discrepancy.

In only one maturity

class, that of Treasury bills, did this variable account for any significant change in dealers' positions.
dummy, and thus

For bills, however, the effect of this

presumably the reporting shift, was substantial.

In

1 In comparing the two sub-periods, the data differences would
presumably be reflected in a larger (positive) constant term for the sixties
when compared with the fifties, ceteris paribus.




- 56 the period beginning with the second quarter of 1960, dealers 1 net bill
positions have been higher by about $1.1 billion as a result. 1
There are also some strategic data inadequacies concerning
a number of the independent variables.

The most serious shortcoming in

this regard is an inability to satisfactorily measure dealers 1 expectations of future interest rates.
A number of variables were employed in this study to measure
expectations.

In general, these measures postulate that expectations of

future movements in security prices are based on what has happened in
past periods or on what is currently happening.
tested in the regressions were the change

The specific variables

in interest rates in the

2
preceding quarter,
free reserves. 3

and the current change in the discount rate and in

In addition to allowing for expected changes in interest

1 See Appendix Tab1b 15, variable X34. This dummy variable was
the single most important determinant (as defined by the largest beta
coefficient and partial correlation coefficient) of dealers 1 net bill positions for the whole 1954-66 period. The dummy could, however, be picking up
other structural changes from the fifties to the sixties not specifically
included in the regression as independent variables. As an alternative, a
series on the number of reporting dealers was tried in the regressions. The
number of reporting dealers varied between 16 and 21 during the 1954-66 period,
and was greatest during the sixties. As with the dummy, it was found to be a
significant determinant of positions only for Treasury bills. The dummy
was used in the final regressions because use of the dealer series postulates a linearity assumption (positions rise by the same amount with each
new reporting dealer) that is not valid.
2 The use of current interest rate changes would have improved
the regression results but would at the same time have resulted in biased
coefficients. The bias would occur since current interest rate changes may
be a result, as well as a cause, of current position changes. For example,
a rising negative carry might lead dealers to reduce their positions, in
turn putting interest rates under upward pressure.
3 Changes in free reserves were tried in the regressions in an
unadjusted form and also in a form that excluded all quarterly changes of
less than $50 million. The latter form performed the best, as was expected,
since dealers are aware that small misses in free reserves do not indicate
a shift in monetary policy.




- 57 rates, the study incorporated a measure of expected stability in interest
rates.

A high frequency of small daily price or yield changes over the

quarter indicates that near-term expectations are for relative stability
in interest rates.
A measure of the certainty with which expectations are held
is even more difficult to derive.

Working from published data on daily

yield levels, a series was constructed on the number of turning points in
yields in the quarter weighted by the size of the turnaround.

Or, to

put it another way, the series is the summation over the quarter of the
n
absolute sizes of turning points:
2 |A (Ai)|
t=l
where i - interest rates
t - number of days in the quarter where Ai has
changed direction.
The larger the number, that is the more daily interest rate changes shift
direction and the greater the size of the shifts, the greater is the
degree of uncertainty.

In practice this variable is highly correlated

(negatively) with the frequency of small daily price or yield changes,
and thus the relative impacts on dealers1 positions of the certainty with
which expectations are held and expectations of rate stability cannot be
separated.

1
But these expectational measures leave much to be desired.

Dealers1 expectations are at least partly--and perhaps mainly—based on

1 The simple correlation between this measure of uncertainty and
the frequency of small daily yield changes for Treasury bills was -.78 in
the 1954-66 period, -.64 in the 1950fs, and -.84 in the 1960's. Differences
between the two series arise when there are sizable and frequent one-directional
movements in interest rates. Such movements should occur in certain stages
of the cycle, increasing the frequency of yield changes but not affecting the
measure of uncertainty. The decreased correlation between the two measures
in the 1950fs when compared with the 1960fs may be explained in this light.



- 58 forecasts of policy actions, monetary or fiscal, and of credit demands that
will not necessarily be related to current or past movements in these
variables.

Moreover, a quarterly period is too long to adequately allow

for the much shorter time horizon dealers undoubtedly have in taking
advantage of expected price (and rate) movements.
Measurement of the factors affecting trading profits presented
a number of problems.

A series on trading costs is not available and the

series on spreads between bid and asked securities1prices originated for
this study is not felt to be reliable•enough to use in the regressions.
While data on the volume of trading is available, it must be used carefully
since (1) the volume of trading and positions increase simultaneously
during Treasury financings; (2) there is probably a two-way relationship
between trading and positions with position size having some influence on
trading volume as well as the more important influence of trading on positions.

For these reasons, this study for the most part utilized either

the volume of trading during the preceding quarter or debt outstanding
as a proxy for trading volume.
The difficulties in deriving series to measure interest carry
(interest earned less financing costs) are almost innumerable.

To begin

with the financing cost side, series on nonbank dealer borrowing costs
"out-of-town" are at best rough and the series on financing costs in




- 59 New York are largely based on posted rates, not rates actually paid.^

In

addition, bank dealers utilize internal funds, for which a cost is not
available.

Since dealer loan rates can often be considerably lower

"out-of-town11 than in New York, particularly when money is tight, a shift
in the relative amounts borrowed in and out of New York can significantly
alter interest carry.
From the interest earned side, shifts in the composition of
the dealers1 portfolio among specific Treasury issues can importantly
affect interest carry.

Because the portfolio composition is unknown,

however, this study could use as a measure of interest earned only a
simple unweighted average of market yields on bills (the latest 3-month,
2
6-month, and 1-year bills) and an unweighted average of coupon rates on

1 The posted rates will overstate dealer borrowing costs since
dealers satisfy their borrowing needs at the lowest posted rates. Also,
a wide use of repurchase agreements by the System will lower dealer borrowing costs. The several alternative measures of financing rates used in
this study include: (1) the midpoint of posted loan rates on new loans in
federal funds at the New York City banks; (2) the midpoint of typical
posted loan rates on new and renewal loans at the New York City banks; (3)
the midpoint of typical loan rates "out-of-town11. Posted dealer loan rates
at the New York City banks are reported daily to the Federal Reserve Bank
of New York. "Out-of-town" rates are derived from informal reports of
dealers to the Trading Desk at the New York Federal Reserve on the rates
at which they cover the bulk of their financing needs; these rates are
then passed on to the Federal Reserve Board where sometimes sketchy records
have been kept.
2 The turnover of dealers1 holdings of Treasury bills may be so
great as to make this measure of carry on bills almost meaningless. To
the degree dealers sell newly-auctioned bills prior to the payment date
they incur no financing costs; for weekly auctions of 3-month and 6-montli
bills dealer sales begin on Tuesday and the payment date is Thursday. And
since interest on Treasury bills accrues as the bill approaches maturity
a rapid turnover may eliminate interest earned.




- 60 other outstanding Treasury issues.

From this measure of interest earned

financing costs were then subtracted to yield a measure of interest carry.
2.

Empirical results

As noted earlier, separate multiple regressions on dealers1
net positions were calculated for three individual time periods (1954-1966,
1954-1960,Ql; 1960,Q4-1966,Q3) and for five individual maturity classes.
For the period of the 1960fs, regressions were also calculated for gross
long and gross short positions.

There are, therefore, 25 final equations,

which are presented in Appendix Tables 15-20.

In addition, for the sub-

periods equations are included in the Tables using the same variables as
appear in the equation for the entire 1954-66 period.
The number of observations, particularly for the sub-periods,
was quite small relative to the number of variables specified in the
theoretical model.

For this reason, the final equations generally include

only those variables that were significant at at least the 5 per cent
level.

In some cases, variables were included in the final equations if

they were close to being significant and carried the expected coefficient
sign and size.
The proportion of the variance in dealers1 positions explained
by the equations differs considerably by maturity category and by data
period.

2

The adjusted R

-2

(R ) ranges from a high of .93 (for net positions

1 The 1-1/2 per cent notes were not included in the average o f
coupon rates.




- 61 in Treasury bills during 1954-66) to a low of .38 (for gross short
positions in coupon issues maturing within 1 year during the 1960!s).
Of the 25 final equations, R
below .50 in 4 equations.

was at or above .75 in 7 equations and

In every maturity category except for

Treasury bills the variance in net positions in the two sub-periods was
more fully explained than in the entire 1954-66 period taken alone.
It is difficult to characterize the overall reliability of the
regression results.

There was found to be no basis to reject a hypothesis

of no serial correlation of the residuals in just under half of the final
2
equations.

But in the remainder there was evidence of negative (in 5

of the 25 final equations) or positive serial correlation, thus raising 3
some doubts about the true significance of the regression coefficients.
A more serious problem is presented by the strong presence of
4
multicollinearity.

It has resulted in the exclusion of some variables

from the final equations that might actually be significant determinants

1 Because of the small number of degrees of freedom in the
equations for the sub-periods, there is a wide divergence between R^
and R . In most of the final equations for the sub-periods the unadjusted
R^ accounts for 5-10 per cent more of the variance in dealers1 positions.
2 Based on Theil and Nagar's table, using 1 per cent significance
levels.
3 Serial correlation of the residuals, while it leaves the estimated regression coefficients unbiased, results in an understatement of the
computed standard errors and an invalidity of the usual significance tests.
4 In J. Johnston, Econometric Methods3 page 201, multicollinearity is
defined as l!. . . the general problem which arises when some or all of the
explanatory variables in a relation are so highly correlated one with another
that it becomes very difficult, if not impossible, to disentangle their
separate influences and obtain a reasonably precise estimate of their relative effects. 11




-

62

-

of dealers1 positions and in these cases probably made the coefficients
of certain of the remaining (multicollinear) independent variables
larger, and of greater significance, than would have been the case.
Multicollinearity in this study involves primarily the following
independent variables:

new issues in Treasury financings, the volume*

of trading and debt outstanding, official market transactions, and the
frequency of small daily price and yield changes.

During the period

studied, and particularly beginning in the early 1960fs, these variables
in some maturity areas have all increased considerably.

The problem

was particularly serious for the Treasury bill sector during the sixties
when the frequency of small daily yield changes by itself accounted for
some 75 per cent of the variance in net bill positions--to the exclusion
of all other theoretically important variables; since this was felt to
1
be a nonsense result this variable was dropped from the final equation.
In interpreting the statistical results these data and estimation problems
must be kept in mind.

But these problems

notwithstanding, the estimated
2

model was for the most part consistent with a priori expectations.
Expectations of future interest rates.

Changes in security prices

are probably the most important determinant of dealers1 profits

3
and it is

1 See Table 15.
2 There is one other known econometric study of dealers1
positions: Ira 0. Scott, Jr., Government Securities Market, McGraw-Hill
Book Company, 1965. Comparison of the empirical results is difficult
due to diverse specification and time periods, but the model's results
do not appear to be inconsistent with the results of this study.
3 William Colby, Jr. "Dealer Profits and Capital Availability
in the U.S. Government Secuirties Industry, 1955-65", Treasury-Federal
Reserve Study of the U.S. Government Securities Market, 1967.




- 63 not with surprise therefore that expectations of future interest rates
were found to be a critical factor in the determination of dealers1
positions.

An association between positions and expected changes in

security prices was found to be significant in virtually eveiy maturity
category for every time period tested (1954-66; 1954-60; 1960-66).

Text

Table 4 summarizes the findings of this study on the position impact of
dealers1 expectations of future interest rates.
Daily average net positions in any quarter were negatively
related to changes in yields last quarter (column 3 of the Table),
implying that dealers expected the direction of rate changes last quarter
to continue.

Net positions were also negatively related to current changes

in the discount rate (column 1) and positively related to changes in free
reserves (column 2).

In all cases, dealers expected past or current policies

and interest rate movements to continue, and altered their positions
accordingly.

In doing so they were generally destabilizing as far as

interest rates are concerned (at least for quarterly periods) but aided
in the attainment of monetary policy targets.
The change in net positions associated with expectational
currents resulted from movements in both gross long and gross short
positions.

When interest rates were expected to rise, gross long posi-

tions declined while gross short positions rose.

Thus the size of the

coefficient for rate expectations was always larger for net than for
gross long positions.




- 64 TABLE 4
NET REGRESSION COEFFICIENTS FOR THE VARIABLES MEASURING EXPECTATIONS

Equation

Change in Change in
discount free reserved
rate (X-j) $50 mil. (X 2 )
(basis
(millions of
points)
dollars)

Change in
interest
rates in
preceding
quarter (X^)
(basis pts.)

Frequency
Uncertainty
of small
daily price
(x5)
& yield
changes(X,)
(per cent;

POSITIONS IN TREASURY BILLS
50 f s & 60's
50 f s
60's
Gross Long: 60's
Gross Short: 60's
POSITIONS IN COUPON ISSUES
DUE WITHIN 1 YEAR
Net: 50's & 60's
50's
Net:

.51*

9.63**
-1.68**

1.60
1.57*
• .27**

-3.06
-2.65

-1.33**
-1.55**

POSITIONS IN ISSUES DUE
IN 1-5 YEARS
Net:

50*s & 60's
50's
60's
Gross Short: 60's
POSITIONS IN ISSUES DUE
IN 5-10 YEARS
Net: 50's & 60's
50's

.31**
-1.91**
•2.52*
1.78*'

2.18**

- .40

1.26*

-2.05**
-1.56*

2.23**
3.05**

10*

60's

Gross Long: 60's
Gross Short: 60's

, 25-

POSITIONS IN ISSUES DUE
AFTER 10 YEARS
50*s & 6 0 ' s
50's
60's
Gross Long: 6 0 ' s
Gross Short: 60's
Net:

.56*
.43*

1.30**
•3.12*
-2.46*

.31*

NOTE:

1.72**
1.70**
.49**

*

These coefficients for the expectational variables are as they appear in the
final multiple regression equations, Tables 15-20. jf a n y maturity category
or period of time is"not shown above, no expectational variable was found to
be significant. The coefficients reflect an impact of $1 million on daily
average positions over the quarter.
: Significantly different from zero at 5 per cent level.

**

:

Significantly different from zero at 1 per cent level.




- 65 Because of mu1ticollinearity only one of the three expectational measures was used in any one equation, and no great import should
be attached to which particular measure entered.

For most maturity

categories, the expectational measure that was most significant in the
fifties was the change in the discount rate while during the sixties 'it
was the change in yields last quarter.

Such a shift reflects at least

partly the* fact that during the sixties the discount rate was changed
only three times

and usually after the 3-month bill yield had risen

above the discount rate.
During the fifties, expectations concerning future security
prices were often the most important determinant of dealers1 net positions.
Expectations were not as important a factor during the sixties, at least
in part because the economic climate led generally to expectations of
interest rate stability and because some variables used to measure expectations were unusually stable.
As noted, expectations were a significant factor in position
determination in all maturity categories.

It would be anticipated,

however, that expectations would be a more important factor in longerterm maturities, where relatively small yield changes involve sizable
capital gains and losses.

Generally, this was found to be the case.

While the size of the coefficients of expectational variables was often

1 During the 19£1i-1960 Q 1 oeriod it was changed during:
16 quarters.




- 66 smaller in the longer-term maturity areas, after allowing for the
differences in average position size the impact of expectational factors
on positions was considerably larger in percentage terms in the longerterm sectors.
As to expected interest rate stability, dealers1' net positions
(and in some cases gross long and gross short positions) were significantly
influenced in a positive relationship by the frequency of small daily
price and yield changes during the quarter*" (column 4).

This variable

was significant only for Treasury bills and the longer-term coupon issues
2
and only for the 1960fs and the entire 1954-66 period.

Xn these cases,

however, it has been one of the most important factors affecting movements
in dealers1 positions.
Through most of the 1960fs, until about mid-1965, day-to-day
3
rate stability increased sharply.

Its positive impact on positions

certainly reflects the decreased risk of capital losses on gross positions
inherent in greater rate stability:
in longer-term issues.

thus the significance for positions

But in addition it probably reflects an attempt

by dealers to increase the volume of trading—and trading profits — i n a

1 Small daily yield changes were defined as 1 basis point or
less for Treasury bills and small daily price changes as 2/32 or less for
over 5 year issues.
2 Its insignificance during the 1950fs is not unexpected. Over
f
the 1950 s day-to-day rate stability decreased considerably. But expectations of greater rate instability would have a different directional
impact on positions depending on whether expectations were for upward or
downward movements in interest rates, and the 1950fs was a period of
alternating expectations.
3 See Profile Charts and Chapter IV.




- 67 period when speculative profits were restricted because of the lack of
fluctuation in security prices:

thus its importance for Treasury bill

positions.
The variable constructed to measure uncertainty (column 5)
was tested only in the Treasury bill and over 10 year maturity sectors.
It was not significant in the latter sector but it was almost significant
for Treasury bill positions in the 19601s--presumably as a substitute for
the frequency of small daily yield changes which was not utilized in
the final bill equation for the 1960fs.

In this case, as

uncertainty

increased, positions declined.
Trading and debt.

The empirical results on the position impact

of trading activity are not altogether satisfactory and, in addition,
are rather difficult to evaluate.

This certainly stems in part from the

data difficulties noted earlier, but also from multicollinearity problems
involving particularly debt outstanding but volume of trading measures
as well.

As a result, for a number of the final equations--most notably

for the 1950fs in intermediate-term maturities and for 5-10 year issues
generally--no significant relationships were found between positions
and trading.

Table 5 summarizes the studyfs findings on trading and

debt measures.
In only one maturity category, coupon issues due within 1
year, did such measures consistently and significantly account for some




TABLE 5
NET REGRESSION COEFFICIENTS FOR THE VARIABLES MEASURING TRADING PROFITABILITY
(1)
Volume of
trading
preceding
quarter (X^)
(millions of
dollars)

EQUATION

(2)
Volume of
trading
current qrtr.
excluding
financing days
(X_)(millions
of dollars)

(3)
Marketable
debt, publicly-held,
current qrtr.
(Xg)(billions
of dollars)

(4)
Marketable
debt, publicly-held
preceding qrtr.
(X )(billions
of dollars)

(5)
Ratio of debt
held by commercial
banks to total
debt outstanding
(X 1Q ) (per cent)

POSITIONS IN COUPON
ISSUES DUE WITHIN 1 YEAR
Net:

50 1 s & 60's
50 ! s
601 s

Gross Long:

8.89**
11.17*

6.66**

1.30**

60 s

7.15*

1.29**

!

7.22*

POSITIONS IN ISSUES DUE
IN 1-5 YEARS
50 1 s & 60's
60 1 s
Gross Long: 60 f s
Gross Short: 60's

4.52*

Net:

2.23*
2.22**
8.99*

-8.16**

POSITIONS IN ISSUES DUE
IN 5-10 YEARS
Gross Long: 60 f s
Gross Short: 60 f s

10.31**
1.04**

-12.31*

POSITIONS IN ISSUES DUE
AFTER 10 YEARS
501 s
601 s
Gross Long: 60 ! s
Gross Short: 60*s
Net:

. 95**
36.02**
34.17**
-.79**

9.71**

NOTE: These coefficients for the expectational variables are as they appear on the final multiple regression
equations, Tables 15-20
. If any maturity category or period of time is not shown above, no trading
variable was found to be significant. The coefficients reflect an impact of $1 million on daily
average positions over the quarter.
*
Significantly different from zero at 5 per cent level.
**
Significantly different from zero at 1 per cent, level.




- 69 of the variance in dealers1 positions.'*

For these issues, trading was

one of the most important determinants of positions.

A $1 billion

increase in publicly-held debt was associated with a $9 million rise in
net positions of coupon issues due within 1 year in the 1954-66 period and
with an $11 million rise in these net positions in the 1950fs (column 3
of the Table).

In the final equation for the 1960!s, a $1.0 million rise

in the volume of trading (adjusted to exclude financing days) was associated
with a $1.3 million dollar rise in net positions (column 2).
In the sporadic cases where trading and debt measures were found
to be a significant determinant of positions, the relationships with only
one exception surprisingly indicated a more than proportional impact of
trading on long positions.

That is, a $1 million rise in trading occasioned
2

a greater than $1 million rise in net positions.
For issues maturing in more than 10 years, the coefficients of
debt and trading appear out-of-line.

Net and gross long positions in

the 1960!s are shown to rise roughly

$35 million for a $1 billion increase

in debt (column 3), far too large to fit in with theoretical expectations
or the empirical results in other maturity categories.

It may be that

this coefficient in part is picking up a relationship of positions to
Treasury financings in the form of advance refundings not accounted for
solely by the use of a new issue variable.
1 A trading measure was not tried in the regressions in the
Treasury bill sector, in which the volume of gross new bill issues was
instead utilized.
2 This conclusion was drawn in part by utilizing results from
the study of the volume of trading in Chapter II, which includes estimates
of the increase in the volume of trading for a given increase in debt outstanding. An increase in debt in every case increased positions by a
greater amount than it increased tradings




- 70 It was suggested in an earlier section that profits from
trading operations might be negatively related to the share of trading
accounted for by investors who deal in odd lots.

In addition, dealers

might be able to hold smaller positions when the size of single transactions declines, even with a constant volume of trading.

It was in fact

found that as the share of debt held by commercial banks rose (and presumably the share of odd lot transactions declined), positions in some
cases also increased, as shown in the Table's column 5.

For net and gross

long positions such a relationship was significant only for coupon issues
maturing within 1 year.

For gross short positions in intermediate-terra

maturities there was a negative relationship between a rising bank share
and such short sales.

This relationship is difficult to interpret since

the share of outstanding debt held by banks moves sharply over the
business cycle, rising during recessions when security prices are rising.
As a result, the bank share may simply--and probably--be measuring
expected changes in security prices.
Interest carry.

Empirical results relating to interest carry

were not completely satisfactory, again at least in part because of data
inadequacies.

The cost of--or profit from--carrying a position was found

to be a significant determinant of dealers' positions in only some cases.
Most importantly was the Treasury bill sector, where net
positions during the 1954-66 period and net and gross long positions




during the 1960fs declined with rises in negative carry,

though the

relationship was not always quite significant at the 5 per cent level.
These results are shown in columns 4 and 5 of summary Table 6.

The

influence of carrying costs on bill positions was sizable, however, a 50
basis point rise in the negative carry leading to a $350-450 million
decline in long bill positions.
For

coupon issues maturing within 1 year and in 1 - 5 years

long positions were in some cases significantly related to interest
carry (including positive carry as well as negative).

As positive carry

increased (or negative carry decreased) by 100 basis points (1 percentage
point), long positions rose by some $44-109 million (columns 1-3).

In

the longer-term maturity areas for the period of the 1960fs, however,
the opposite impact of carrying costs on positions was encountered:
carry declined and became negative, positions increased.
2
perhaps inexplicable,

as positive

While unexpected and

these results were too consistent and too signifi-

cant to dismiss.
In most maturity categories, there was a significant and
positive association between gross short positions and dealers1 financing

1 The series used included only observations for which the
interest carry was significantly negative (financing costs> interest
earned), deleting observations for which the carry was positive or a
small negative. It was used because the variable including positive
carry was not significant, perhaps as a result of multicollinearity. In
any event, it might not be unreasonable to assert that while a high or
rising positive carry would be an insignificant factor in position determination, a sizable negative carry would be important in a maturity area
where positions are so large.
2 As negative carrying costs increase, the rise is usually the
greatest for long-term issues as is the size of the negative carry. There
is therefore no incentive for dealers to shift into the longer-term maturity
areas in order to minimize losses from negative carry. While true of the 50'sf
during the 60 f s this pattern did not develop. The carry on longer-term securities
v/as more similar to that on shorter-term issues, both as to level and change.




- 72 TABLE 6
NET REGRESSION COEFFICIENTS FOR INTEREST CARRY AND FINANCING COST VARIABLES

(1)

(2)

(3)

(4)

Interest Carry—^
(basis points)

EQUATION
x

n

X

12

X

14

|

X

15

(5)
(6)
Financing Costs
(basis points)
X

16

X

17

POSITIONS IN TREASURY
BILLS
50 f s & 60's
601 s
Gross Long: 60 f s
Gross Short: 60 f s

7.32*

Net:

8.91
7.81
-2.10**

POSITIONS IN COUPON
ISSUES DUE WITHIN 1 YR
Net: 50 f s
Gross Short:

.52*
60 f s

.24**

POSITIONS IN ISSUES
DUE IN 1-5 YEARS
50 f s & 60 f s
60's
Gross Long: 60 f s

.44**
.92**
1.09**

Net:

POSITIONS IN ISSUES
DUE IN 5-10 YEARS
50 f s
60 f s
Gross Long: 60's
Gross Short: 60's

.27**
-.43**

Net:

. 50**
.19

POSITIONS IN ISSUES
DUE AFTER 10 YEARS
Net: 60's
Gross Long: 60's
Gross Short: 60 f s

-.71**
-.66**
.31**

NOTE:
These coefficients for the expectational variables are as they appear in the
final multiple regression equations, Tables 15-20 . If any maturity category or
period of time is not shown above, no interest carry variable was found to be
significant. The coefficients reflect an impact of $1 million on daily average
positions over the quarter.
*
Significantly different from zero at 5 per cent level.
**

Significantly different from zero at 1 per cent level.

1/ Interest carry variables were entered so that a positive coefficient
indicates rising positions as positive carry rises or negative carry declines
A negative coefficient indicates declining positions as positive carry rises
or negative carry declines.




- 73 costs on long positions (columns 5-6).

Since financing costs move with

interest rates this relationship is probably another measure of interest
rate expectations, although it may also reflect a need for dealers to
go short in order to make sales when long positions have been reduced to
low levels.
Treasury financings.

The empirical results relating dealers1

positions to Treasury financings and official operations in the market
are not constrained by data inadequacies, as was the case for other independent variables.

Interpretation of the results, summarized in Table 7,

is not always straightforward, however.
The underwriting function dealers perform during Treasury
financings has at times been the single most important determinant of
their positions, and has often been one of the most important, for all
maturities and for both the fifties and the sixties.

For bills, the final

equations show that dealers hold a $60-90 million higher level of daily
average bill positions for every $1.0 billion rise in gross new bill
issues (column 1).

This relationship reflects not only the dealers1

underwriting of Treasury bill auctions but the response of dealers to
a sharply increased volume of market trading as bills outstanding have
risen.
The impact on dealers1 positions of Treasury financings in
coupon issues is a more difficult one to sort out, since such financings




- 74TABLE 7
NET REGRESSION COEFFICIENTS FOR TREASURY FINANCING VARIABLES

(1)
Gross new
bill issues
(X)(billions of $'s)

EQUATION

(2)
Rights held
by public
(X19)(billions of $'s)

(3)
New issues
sold to publie (X 2 0 )
(billions of
$'s)

(4)
New issues
sold to public during
last mo.of
preceding qrtr.
( X ^ ) (billions
of Z $ y s)

(5)
New issues
sold to public drng.last
mo. of current
qrtr ( X ^ )
(billions of
$'s)

POSITIONS IN TREASURY
BILLS
Net:

50's & 60's
50's
60's
Gross Long: 60's

62.03**
58.30**
85.58*
92.55**

POSITIONS IN COUPON
ISSUES DUE WITHIN 1 YR
Net: 60's
Gross Long:

36.91**
35.9-7**

60 's

POSITIONS IN ISSUES
DUE IN 1-5 YEARS
Net: 50's & 60's
50's
Gross Short: 60's
POSITIONS IN ISSUES
DUE IN 5-10 YEARS
Net: 50*s & 60's
50's
60's
Gross Long: 60's

8.129.52
10.97*

13.26**
8.55*
13.64*
17.34**

35.65**
27.16*

-14.34*
-21.17**
-21.32**

POSITIONS IN ISSUES
DUE AFTER 10 YEARS
Net:

50's & 60's
50's
60's
Gross Long: 60's
Gross Short: 60's

NOTE:

33.95*
34.70**
29.93*
51.48**
16.35**

-46.04**

-35.44

*

These coefficients for the expectational variables are as they appear in the final
multiple regression equations, Tables 3-5-20 . jf a n y maturity category or period
of time is not shown above, no financing variable was found to be significant. The
coefficients reflect an impact of $1 million on daily average positions over the
quarter.
Significantly different from zero at 5 per cent level.

**

Significantly different from zero at 1 per cent level.




may have both negative and positive effects.

In "rights11 refundings,

dealers sell newly-offered securities over the period following the
financing announcement and prior to the allotment of the new issues-usually a period of about 1 week.

The immediate impact of the financing

is thus to raise gross short positions and decrease dealers' net positions
in the maturity category of the new issue.

After the new issues are allotted,

dealers1 daily average long (gross and net) positions will be increased
by an amount that will depend on the size of dealers1 allotments less
prior

l!

when-issued!l sales and the speed with which the new issues are sold.

The impact on positions over the entire quarter will thus depend importantly
on the specific date of the financing.

In such exchanges prior to allot-

ment, dealers1 net and gross long positions will also be enlarged in the
maturity category of the "rights11.

In cash offerings or cash exchanges

dealers1 gross long and net positions in the new issues will rise beginning
1 or 2 days after the books close.
Moreover, as a

financing approaches dealers may make adjustments

in their holdings of other issues not directly involved in the financing.
This could be done by dealers either to maintain a balanced position in
terms of different maturities--thus calling for sales of outstanding
issues in the maturity area of the new issue--or to accommodate investor
switching into the new issues.
Empirically, such mixed effects on dealers1 positions were foutid.
During both the fifties and sixties, Treasury financings were a significant




- 76 determinant of movements in dealers1 positions.

Dealers' daily average

gross short, gross long and net positions increased with the volume of
new issues (taken by public investors) in the current quarter (column 3).
When the financing occurred in the last month of the quarter the positive
impact was wiped out, as shown in column 5 of the summary Table, apparently
mainly because dealers lightened their positions of other securities not
involved in the financing.*"

Financings in the last month of the current

quarter sometimes had a positive impact on dealers1 net positions in the
following quarter (column 4).

The volume of rights was generally not a

significant determinant of positions.
In a number of cases in the within 1 year and 1 - 5 year maturity
areas financings did not have a significant impact on positions.

This

result is due, in all likelihood, to difficulties of measuring a financing
impact that is surely significant in actuality.

In these maturity areas,

financings in certain of the data periods analysed occurred in almost
every quarter.

While the financings did vary in size, it is reasonable

to suppose that dealers1 positions are related more to the existence of a
financing than to its size.

Thus the true relationship was not capable

of being measured statistically.

When, in these maturity categories,

financings were less frequent there was a significant positive impact on
positions.

2

1 This statement is based on the fact that the negative coefficients
for net positions resulted from a decline in gross long positions rather than
an increase in gross short positions as would result from heavy purchases of
"when issued11 securities by investors.
2 It is probably for this reason that in the 1-5 year maturity area
for the 1954-66 period positions were positively related to rights (column 2)
rather than to new issues.




No great importance should be attached to the relative size
of the financing coefficents.

In the first place, their size is influenced

by the particular timing within the quarters of the financings and by the
mix between cash and "rights11 exchanges, for any one period or maturity
area.

Secondly, if it is true, as postulated in the preceding paragraph,

that dealers1 positions are to some degree insensitive to the size of
financings, the magnitude of the coefficient becomes difficult to interpret.
Official market transactions.

Besides underwriting Treasury

financings, dealers accommodate a large volume of System and Treasury
trust fund market transactions.

These transactions, as noted earlier,

have a short-run position impact involving a decline in long positions
with official purchases and a rise in long positions with official sales
and a longer-run impact as well if such transactions lead to specific
expectations about future security prices.
Table 8 summarizes this study's findings on the position impact
of official operations.

The reader will observe that these official

operations appear in the final equations in a number of alternative forms:
Treasury and Federal Reserve System separately or lumped together, and as
total transactions (purchases plus sales), purchases, sales, or net purchases (purchases less sales).

In the shorter-term maturity categories-

bills and coupon issues due within 1 year--it was assumed that there would
be no distinguishable impact on positions as between Treasury and System
operations.




Otherwise, these variables generally appear in the final

TABLE 8
NET REGRESSION COEFFICIENTS FOR OFFICIAL MARKET OPERATIONS VARIABLES

(1)

EQUATION

(2)

Official
Official
Transactions Transactions
( X 2 4 ) 2/
( x 2 3 ) 1/

(3)
Official
Purchases
(X 2 5 ) 2/

(4)
Official
Sales
( X 2 6 ) 2/

(mil. of $'s) (mil. of $'s) (mil. of $'s) (mil. of $'s)
POSITIONS IN
TREASURY BILLS
Net: 50's & 60's
60's
Gross Long: 60's
Gross Short: 60's

(5)

(6)

Official Net Fed. Reserve
Purchases
Transactions
( X 2 ? ) 2/

<V v

(7)
Fed. Reserve
Purchases
( X 2 9 ) 2/

(9)
(10)
(8)
Fed. Reserve Treasury
Treasury
Sales
Transactions Purchases
( X 3 0 ) 2/
( X 3 1 ) 2/
( X 3 2 ) 2/

(11)
Treasury
Sales
( X 3 3 ) 2/

(mil. of $'s) (mil. of $'s) (mil. of $'s) (mil. of $'s] (miL of $'s) (mil. of $fe) (mil. of $'s

-7.81*
-.21*
-.17*
.05**

POSITIONS IN COUPON
ISSUES DUE WITHIN 1YR
Net: 50's & 60's
50's
Gross Short: 60's

-.11*
-.15*
.08*

.05*

POSITIONS IN ISSUES
DUE IN 1-5 YEARS
-.35
-.46**

Net: 60's
Gross Long: 60's
Gross Short: 60's
POSITIONS IN ISSUES
DUE IN 5-10 YEARS
Net: 50's & 60's
60*s
Gross Long: 60's
POSITIONS IN ISSUES
DUE AFTER 10 YEARS
Net: 50's & 60's
60's
Gross Long: 60's
Gross Short: 60's
NOTE:

*
* *

-1.98*
-2.24*
-.12

.8*
1*
.30*
.31**

.87
1.14*
1.29*

.21*
.16*

-8.74*
-6.23*

-.033*
These coefficients for the expectational variables are as they appear in the final multiple regression equations, Tables 15-^0.
if any maturity
category or period of time is not shown above, no official operations variable was found to be significant. The coefficients reflect an impact of $1
million on daily average positions over the quarter.
Significantly different from zero at 5 per cent level.
Significantly different from zero at 1 per cent level.

1/

Daily average.

2/

Total for quarter.




- 79 equations in the most disaggregated form that permitted significant
results.

In other words, where, for intermediate- and long-term issues,

Treasury and System operations are not separated it is because they were
either not significant when separated*" or were not significantly different
as to coefficient size.
During the fifties, official transactions were a significant
determinant of dealers1 positions only for coupon issues due within 1
year.

In this case, a rise of $1.0 million in official net purchases was

associated with a $.15 million decline in daily average net positions over
the quarter (column 5 of the Table).

The insignificant position effect

of official transactions for other maturity areas during the fifties probably reflects their limited extent.

In the sixties, however, there

was a very sharp rise in official operations in all maturity areas except
for coupon issues due in 1 year, and they became a significant determinant
of dealers1 positions in all sectors of the market.
In the Treasury bill sector, official transactions led to a
decline in dealers' net positions.

During the 1954-66 period a rise of

$1 million in official transactions on a daily average basis (column 1)

1 Since Treasury and System transactions have been small relative to total market transactions a lumping together may in some cases
enable significant results.




-

8 0

-

was associated with ail $8 million decline in net positions.^

For the

sixties, official transactions were entered as totals, without adjusting
them to a daily average basis.

In this case, a $1.0 million rise in

official transactions led to a $0.21 million decline in net positions
2
(column 2).

The decline in net positions was the result of a $.17 million

decline in gross long positions and a $.05 million rise in gross short
positions.

The decline in net positions in bills probably reflects the

fact that in virtually every quarter during the sixties purchases of
official accounts far exceeded sales, although official net purchases
3
were not significant as an independent variable.
For coupon issues due in 1 year, long positions during the
sixties were not significantly affected by official operations*

In this

regard, it might be noted that in this coupon maturity category alone
were official sales at all comparable in size to purchases.

Gross short

1 The large size of the coefficient indicates a multiple impact
of daily average official transactions on net bill positions. It signifies
that a large transaction by an official account on one day of the quarter
will have an impact on dealers1 positions lasting for more than one day.
For example, should the System purchase $300 million on one day, dealers1
positions might be lowered by $300 million the same day, by $250 million
the next day and so on in a decreasing progression until dealers1 positions
have regained their "normal'1 level.
2 Adjusting this coefficient for the approximate number of
trading days in the quarter would transform the coefficient of .21 to 12.0,
somewhat larger than the coefficient for the 1954-66 period.
3 Perhaps net purchases were not sizable enough to be statistically
significant. In 1965, for example, official net purchases of bills^ totaled
$4.6 billion and official transactions in bills $11.4 billion; total transactions in the bill market were $347 billion.




-

8 1

-

positions were so affected, however, rising by $.08 million with a $1.0
million increase in official purchases (column 3) and rising by $.05 million
with a $1.0 million rise in official sales (column 4).

It would appear

that official sales, which were concentrated in 1961-1962 as part of
operation twist, might have led to expectations of rising yields on these
issues, thus causing dealers to hold larger short positions.
Long positions in issues due in 1 - 5 years were negatively
related to both official purchases and official sales.

A $1 million

rise in official purchases caused a $.35-.46 million decline in net
and gross long positions (column 3), similar to the results for bills
and coupon issues due in 1 year.

A much larger $2.0 million decline in

long positions resulted from a $1.0 million rise in official sales
(column 4).

As for shorter-term coupons, the bulk of official sales,

while considerably smaller, were concentrated in 1961-62 and apparently
led dealers to expect upward yield pressures on these securities.*"

Gross

short positions were negatively related to Treasury purchases (column 10),
though not to System purchases *7hich were substantially larger.

2

In the 5 - 1 0 year maturity area, dealers1 net and gross long
3
positions were positively related to System purchases:
a $1.0 million

1 The bulk of official sales were by the Treasury. All official
sales of 1 - 5 year maturities totaled
$435 million during the 1960,Q41966,Q3 period. All but $98 million of the sales were during 1960-1962.
2 While larger, System purchases were concentrated in the 1961-63
period when official accounts were also selling these issues. Treasury
purchases, on the other hand, were more concentrated in the 1965-66 period
when rising interest rates brought the Treasury into the market to support
its financing operations. There would seem to be little reason for Treasury
operations of this kind to cause a decline in dealers1 short positions; in
fact, to the degree the Treasury operations involved purchases of "whenissued11 securities prior to the allotment date, gross short positions would
rise.
3 System purchases accounted for about 60 per cent of total official
purchases of 5-10 year issues.




-

82

-

rise in purchases causing a $.3 million rise in positions (column 7),
Over the entire 1954-66 period, total official transactions also led to
higher net positions (column 2).
Official purchases led as well to higher net and gross long
positions in bonds due in more than 10 years.

A $1 million rise in

System purchases was associated with a $1.14—1.29 million position
increase (column 7) and a similar rise in Treasury purchases with a $.16-.21 million rise in positions (column 10).

The smaller coefficient for

Treasury purchases may imply that System operations have a greater impact
on dealers1 expectations; but it may also be a reflection of the concentration of Treasury purchases in financing periods when dealers' inventories
are weighing on the market and the impact of such purchases might well
be different in kind.

But in any event it would appear that System and

Treasury purchases bolstered^dealers1 expectations of rising bond prices
and/or moderated any expectations that prices might fall.

In reaction

to this changed expectational environment, dealers desired to hold larger
net and gross long positions of over 5 year issues.
It might be anticipated that such expectations would cause dealers
to decrease their gross short positions.

But no significant impact of

System purchases on short positions was found, although Treasury purchases
had the expected negative impact.

A $1 million rise in Treasury purchases

was associated with a very small $.033 million decline in gross short
positions of over 10-year bonds (column 10).




The absence of any

- 83 significant gross short position impact from System purchases in the
face of a significant impact from Treasury purchases is similar to the
results for 1 - 5 year issues.

But for these over 10-year issues

Treasury purchases during the sixties were 6 times larger than System
purchases; nevertheless, System purchases seem to have been large
enough to have a significantly measurable impact on dealers1 long positions.
The System has not sold any securities maturing in more than 5
years but the Treasury has, on a few instances, engaged in very small market
sales.*"

While it is difficult to judge the meaningfulness of the results

due to the small number of observations, these Treasury sales did have a
significant negative impact on net and gross long positions.

A $1 million

rise in sales was associated with a very sizable $6-9 million decline in
long positions during the 1960-1966 period (column 11).
Several important conclusions emerge from this over-abundance of
results on System and Treasury market transactions.

Official operations

in the short- and intermediate-term sectors were associated with declines
in dealers' long positions while in the longer-term maturities they were
associated with rises in long positions, despite the fact that net
purchases predominated in most sectors.

2

We conclude from this that for

1 The Treasury sold over 10-year bonds during 6 quarters of the
sixties, with total sales
aggregating only $30 million. During the
fifties, Treasury sales were larger but had no measurable impact on positions.
2 For coupon issues due in 1 year sales were slightly larger than
purchases.




- 84 the shorter-term sectors the relationship was simply one of official
net purchases necessarily causing short-lived declines in positions
while official purchases of long-term bonds influenced dealers1 expectations of future interest rates in such a manner as to cause dealers1
desired long position levels to rise.
Consistent with the rise in long positions would have been a
cut by dealers in their gross short positions of over 5-year securities
as official buying led to expectations of higher security prices.
such a decline in short positions was not always in evidence.

But

In parti-

cular, System purchases had no significant impact on gross short positions.
Treasury purchases had a small negative impact on short positions of over
10 year bonds but no effect on bonds due in 5 - 10 years.
As for official sales of securities, there is some evidence
that they may possibly lead to sizable declines in dealers1 long positions,
at least when it appears to the dealer community that a rate objective
is involved.

This appeared to be the case in the intermediate-term sector

where sales in the sixties had a negative impact on positions twice their
size.

But before any firm conclusions can be drawn about the position

impact of official sales, more evidence is necessary.

Moreover, in the

within 1-year maturity area where official sales were largest there was
no significant impact on long positions, though gross short positions did
rise as a result.




- 85 D.

Implications For Market Performance
This final section attempts to ascertain whether there has been

any substantial shift from the fifties to the sixties in dealers1 willingness to take positions.

Specifically, have there been any shifts in

position-taking that are evident within the framework of the model just
presented or that cannot be "explained" by it?

Secondly, have any of

the factors in the changed market environment in the sixties--such as
System purchases of coupon issues or greater price and yield stability-caused dealers to reduce their positions, ceteris paribus?
As discussed earlier, dealers1 net positions have on average
been at substantially higher levels in the sixties, for all securities
except coupon issues due in

1 year.

But, again with the exception of

short-term coupon issues, the factors affecting dealers* desired position
levels would in all cases have induced position increases.
The rise in net positions in Treasury bills from a daily average
level of about $600 million in the fifties to one of $2.3 billion in the
sixties can be explained essentially by two factors.

Based on the

equations, the changed reporting basis and larger number of reporting
dealers in the sixties accounted for about a $1.1 billion rise in daily
average positions.

And secondly, the rise in gross new bill issues from

a quarterly average of $21.4 billion in the fifties to $29.4 billion in
the sixties would have induced a $500-700 million rise in daily average
net positions.^

1 It is likely that a portion of this rise should really be attributed to the increased day-to-day yield stability in the sixties.




- 86 For coupon issues it is more difficult to attribute the
higher average net positions in the sixties to specific independent
variables, since in many cases there was a shift between the fifties
and the sixties in the specific variables which entered the equations.
However, a number of observations seem in order.
Net positions in coupon issues due within 1 year were virtually
unchanged from the fifties to the sixties, averaging about $342 million
a day.

These positions held constant, however, in the face of sizable

declines in debt held by the public and the volume of trading, as well as
in the volume of new Treasury issues in this maturity area.

For example,

the drop in publicly-held debt from an average $27.8 billion in the fifties
to an average $20.4 billion in the sixties would, ceteris paribus, have
caused a $70-120 million decline in average net positions of issues due
in 1 year.
Dealers did decrease such positions progressively beginning
in 1962 and by early 1965, when trading and debt outstanding in this
sector reached a low for the sixties, dealers1 net positions had dropped
to about $200 million.

With the increased financing activity in this

area since late 1965 dealers have held considerably higher positions, of
around $336 million during the first 3 quarters of 1966.
Dealers held net positions in issues due in 1 - 5 years of
$268 million on average in the sixties, up from an average $201 million
during the fifties.

The contribution of specific variables to the rise

in positions can't be quantified but the increased volume of financings,




- 87 trading and debt outstanding as well as the mid-1960 change in reporting
of positions certainly played some role.
Among all coupon issue maturities, positions in longer-term
securities increased most sharply in percentage terms from the fifties
to the sixties:

5 - 1 0 year positions were up from $55 million to $98

million and over 10 year positions rose from $31 million to $67 million.
One factor whose contribution to the higher positions can be quantified
is the volume of new issues.

For both 5 - 1 0 year and over 10 year bonds

the increased volume of new issues in the sixties accounts for some $6-11
million of the higher net position levels.
Official operations in the market during the sixties were also
a factor contributing to the higher net positions.

System purchases of

5 - 1 0 year issues averaged $98 million per quarter and purchases of over
10 year issues averaged $19 million per quarter, as compared with virtually
no System purchases during the fifties.

Daily average net long-term

positions, based on the equations, were probably some $20-30 million higher
as a result.

Increased Treasury purchases and decreased Treasury sales

in the sixties may also have contributed to the position rise.

In

addition, the continual increase in day-to-day price stability throughout
the sixties until mid-1965 probably contributed something to the higher
positions, as did a rise in the volume of trading.
For all maturity areas except short-term coupon issues, then,
the independent variables in general moved in such a manner as to induce




-

88

-

higher positions in the sixties when compared with the fifties.*"

But how

much of a rise in positions would be explained by these factors is uncertain, and it is thus impossible to conclude whether any unexplained
shift—either upward or downward — in dealers1 positions occurred.
Movements in dealers1 positions during the sixties were in
general related to the same causative factors as in the fifties.

But in

a number of respects the environment in the U.S. Government securities
2
market was altered in the sixties

and dealers reacted quickly.

The

greater day-to-day stability of security prices and interest rates,
described in Chapter IV, led dealers to increase their net and gross long
positions and in some cases their gross short positions.

This was due to

a decreased risk of capital loss on the positions but probably also to
dealers1 attempts to increase their trading profits at a time when chances
3
for speculative profits were greatly reduced.

1 The impact interest rate expectations had on positions on
average in the fifties and in the sixties is indeterminable. The fifties
included two full business cycles while the sixties was largely a period
of recovery from recession and renewed expansion at a moderate pace. Of
the variables used in this study to measure expectations, average changes
during the fifties and sixties were remarkably similar. Quarterly net free
reserve changes averaged a negative $27 million in the fifties and a negative $20 million in the sixties. Quarterly interest rate changes were
barely positive on average during both periods.
2 For a discussion of the altered environment see Edward C. Ettin,
"The Financial and Economic Environment of the 1960fs in Relation to the
U.S. Government Securities Market", Treasury-Federal Reserve Study of the
U.S. Government Securities Market, 1967.
3 That such profits were reduced is clear from the study of
William Colby, Jr., ££. cit. A long-term decline in such profit potential
might ultimately cause dealers to withdraw completely from the market even
though dealers1 short-run response is to raise their positions.




- 89 The initiation of sizable System operations in coupon issues
during the sixties was also associated with higher net and gross long
positions in the long-term maturities, where operations were confined
to purchases which apparently led dealers to expect higher security prices.
These purchases showed no evidence of causing dealers to reduce their
gross short positions.

Very small declines in gross short positions were

associated with Treasury purchases, however, which also rose considerably
from the fifties to the sixties.

And there was limited evidence that

official sales of securities might have a downward impact on long positions.
Treasury innovations in the debt management area in the
sixties—most notably advance refundings—do not appear to have been
associated with any deterioration in dealers1 position-taking.

Dealers1

underwriting of financings continued to be sizable, and of roughly the
same magnitude during both the fifties and sixties.
It has sometimes been asserted that the increased competition
for short-term funds during the sixties with the development of active
markets in certificates of deposit and in federal funds led to a deterioration in dealers1 positive carry (or rise in negative carry).

The

accompanying table indicates that carrying costs on long-term securities
did indeed rise in the sixties.

For shorter-term Government securities,

however, while dealers1 financing costs increased in the sixties> coupon
rates and bill yields rose even more* thus causing a decline in negative




- 90 -

1
carry.

And it is in the shorter-term issues where carry is an important

factor due to the size of these positions.

Average Interest Carry
(Basis points)

Period

Bills

Coupon issues due:
Within 1 year 1 - 5 years 5 -• 10 yearsjOver 10years

1954-60 Q1

-50

-45

-20

-34

13

1960Q4-66 Q2

-27

- 8

-10

-43

-16

NOTE:

Interest carry uses dealer loan rates in New York on new loans;
had rates on loans ,fout-of-town11 been used the direction of movement in carry would have remained the same'.

Moreover, it is difficult to attribute shifts in interest carry
to any one factor.

The shifts in carrying costs from the fifties to the

sixties might, for example, reflect cyclical movements in the yield
structure.

During periods of tight money the term structure of interest

rates is flat to backward-sloping, i.e., short- and intermediate-term
rates approach and sometimes rise above long-term rates.

The carry on

long-term securities held in position thus automatically worsens.

But

generally in such periods the carry also moves against dealers on short-and intermediate-term issues, which was not the case.

Perhaps the

divergent movement in carry on short- and long-term securities from the

1 A renewed warning must be issued about the inadequacies of
the carry data, especially for bills.




-9150's to the 60fs should be traced primarily to monetary and debt management policies.

During the early years of the 60 f s, these policies were

aimed at keeping short-term Treasury rates under upward pressure and
long-term Treasury rates from rising.

Simultaneously, substantial

reserves were provided to the banking system, helping to keep dealer
loan rates low relative to short-term market rates.
In conclusion, this study has found no evidence of any deterioration in dealers1 willingness to take positions thus far during the
sixties.

Positions in most maturity areas were higher on average in the

sixties than in the fifties, and in no cases were loxver; and these
increases could in broad outline be traced to movements in the factors
that significantly affect position-taking.

Moreover, the changed market

environment in the sixties--involving greater day-to-day rate stability,
System operations in coupon issues and debt management innovations-resulted in higher, not lower, position levels.




-

9 2 -

CHAPTER IV
OTHER INDICATORS

A.

Frequency of Large and Small Daily Price Changes
Extremely large daily price changes have been considered

undesirable because they often imply that the market lacks resiliency-that orders were not available to prevent wide price changes that
presumably were out of line with true supply and demand conditions.
On the other hand, a period of very small daily price changes has been
criticized by dealers as eliminating the possibility for them to make
short-run profits on technical price swings.

In -order to compare the

fifties and sixties with respect to the extent of extreme price
fluctuations, frequency distributions of daily price fluctuations in
selected U.S. Government securities were constructed.

One class out of

each frequency distribution was selected to represent small changes and
one to represent large changes, but movements for other classes would
have been similar (see Market Profile Charts, pages 9-13, and Appendix
Tables 5 and 6).
In all maturity classes of notes and bonds for which data
were prepared, the frequency of small daily price changes increased
very sharply in the sixties, particularly after mid-1962 and prior to
mid-1965.

In fact, for long-term bonds the frequency of small changes

in 1963-65 was as great or greater than in 1950 before pegging was
eliminated.




Thus, from 1963 through most of 1965 daily price changes in

- 93 bonds maturing in 5 - 10 years and more than 10 years were 2/32 or less
from 75 to 95 per cent of the time.

In contrast, such small daily changes

during the last half of the fifties occurred only 25 to 50 per cent of the
time for bonds maturing after 10 years and 30 to 60 per cent of the time
for 5 - 1 0 year issues.
Correspondingly, large daily changes (defined as ;> 8/32 for
over 10-year issues and 5 - 1 0 year issues and as^
issues) decreased in the sixties.

6/32 for 1 - 5 year

Whereas from 1956 through 1960 large

daily changes in long bonds usually occurred on 10 per cent of the days in
the quarter and frequently on 20 to 40 per cent of the days, such large
daily changes almost disappeared after mid-1962.

Of course, towards the

end of 1965 the pattern again changed, with large changes increasing and
small changes decreasing.
Daily yield fluctuations in the 3-month Treasury bill showed the
same pattern of increased stability in the sixties.

From 1963 through 1965,

a daily yield change of 1 basis point or less on 3-month bills occurred 70
to 92 per cent of the time.

In the fifties the peak frequency of such

small changes was 57 per cent.

Generally such small changes were seen only

25 to 45 per cent of the time.

Similarly, large daily changes in bill yields

(greater than 5 basis points) occurred less than 2 per cent of the time
from 1962 through 1965, compared to a typical frequency of 20 to 60 per
cent from 1958-60 and 6 to 16 per cent in 1956 and 1957.
This pattern of price and yield stability in the sixties stemmed from
a number of changes in the environment which have been discussed in another




- 94 part of the Government Securities Market Study.*

To summarize briefly,

stability in the long-term bond markets largely reflected specific expectations about Federal Reserve and Treasury policy and the business
situation.

Operation twist was popularly interpreted as an attempt by

the Federal Reserve to prevent a rise in long-term rates.

Moreover,

moderate demands for credit and the absence of expectations of inflation
lent added stability to rates.

At the same time, the Treasury's eagerness

to extend the maturity of the debt through advance refundings whenever
the market situation appeared suitable was expected to temper any decline
in rates, as was the continuing business expansion.
In the bill market, the authorities'desire to prevent large
outflows of short-term funds for balance of payments reasons kept a floor
under bill rates, while their objective of accommodating further credit
and business expansion tended to keep bill rates from rising much.

The

publicity given these objectives tended to set up expectations that
helped make their attainment possible.

Also promoting day-to-day stability

in bill rates was the growth of alternative short-term instruments and
increased participation in the money market by many investors, both
developments that increased the opportunities for arbitrage.
Thus, this indicator of market performance clearly confirms
the statement of market participants, but judgments on whether such

1 See !,The Financial and Economic Environment of the 1960's
in Relation to the U.S. Government Securities Market" by Edward Ettin.




- 95 stability was desirable

are complex, depending in part on its impact

on behavior of dealers and other investors.

For example, there is

some evidence that increased stability cut into dealer profits'" which
is undesirable, particularly over a sustained period.

On the other hand,

dealers apparently responded by holding larger positions, a development
that usually implies greater speed in meeting investor orders but that
may be risky if positions become exceptionally large relative to dealer
capital.

B.

Spread Between Quoted Bid and Asked Prices
Spreads between bid and offered prices quoted in the U.S.

Government securities market are a key factor in the market's functioning.
The size of the spreads is both an indicator of the willingness of dealers
to make markets and a determinant of the participation of other investors
in that market.

A healthy market—one with "depth, breadth, and

resiliency"--would be characterized by small spreads, but subject to some

2
minimum level that would not preclude dealer profitability.

The smallness

of the spreads could be taken as signifying dealer willingness to operate
on both sides of the market, to take positions and to trade on the quoted
spreads in size.

A widening of spreads, on the other hand, might indicate

dealer withdrawal from both sides of the market in an attempt to hold positions constant in the fact of extreme uncertainty or dealer desires to
change their net positions sharply in one direction.

In the extreme

1 See "Dealer Profits and
Capital Availability in the
U.S. Government Securities Industry, 1955-65" by William Colby, Jr.
2 A reduction in spreads reduces dealers1 trading profits unless
the volume of trading rises correspondingly. Trading profits may be especially
important when other dealer profits are limited by either high carrying
costs or steadily rising interest rates.




- 96 case, the dealers would be performing as brokers, taking orders only
on a work-out basis.

Moreover, widening of spreads would increase

investors1 costs and give impetus to reduced investor participation in
the market.
In the accompanying Profile Charts (pages 9-13) and in Appendix
Table 7 spreads are shown for bills and for certain maturity categories
of coupon issues.

A note of caution must be introduced in interpreting

these data, which are derived from published quotations.

The published

quotations overstate the size of the spread for all preferred customers,
whose trades take place at "inside" quotations.

Nevertheless, this

published series provides the only evidence available on trends in spreads.
Dealers contend that spreads in the 1960's have decreased, at
least for Treasury bills.

They trace such a decline to increasing compe-

tition among the dealer community, to attempts to increase trading activity
in a period when speculative operations were largely precluded by the
unusual short-term stability in interest rates, and to a rising supply of
securities in some maturity areas.
The data confirm the dealers1 assertion of declining spreads
for Treasury bills but not for other issues.

Over most of the period

beginning in 1961, the published spread between bid and offered market
yields for Treasury bills has been only 2 basis points, though in the
latter part of

1965 the spread did rise to 3 basis points.

In the

mid- to late-1950!s, in contrast, the spread fluctuated between 3 and 4




- 97 basis points.

The typical spread on coupon issues maturing in 6-13 months

has generally held steady at 2/32 since the early 1950!s, despite a
decline in the outstanding debt and in secondary market activity in this
maturity category.

For issues maturing in 3-5 years the typical spread

has also remained generally steady since the early 1950fs, fluctuating
around 4/32.
For issues maturing in 5 - 10 years, the spread increased in
the late 1950fs and early 1960's from a typical 4/32 to 8/32, where it
remained until 1963 when it declined again to 4/32.

In part this

fluctuation represents the shifting composition of the issues in the
5 - 1 0 year maturity area towards high-coupon issues, on which spreads
have been lower in recent years.

Thus, since early 1961 the spread on

high-coupon issues alone has remained steady at 4/32.

The typical

published spread on over-10 year issues rose to 8/32 in 1958 and has
since remained there.
In general, then, the movement in spreads between bid and asked
prices indicates some deterioration in market performance in longterm issues, at least for small investors, but this began in the late
fifties and not in the sixties.

Perhaps some short-run market improvement

is implied by the decline in spreads on Treasury bills.

A note of caution

must be injected, however, in interpreting the decline in bill spreads as
an unmitigated blessing.

As one factor in dealer profitability, and an

important one sincd the majority of trading is consummated in bills, the
low level of spreads on bills at 1 east prior to late 1965 could imply a
long-run weakening of dealers1 ability to function.




-98-

Table 1
Gross Dealer Transactions; in IKS. Government Securities,
by Maturity, Quarterly 1950-1966*r.
(Averages of daily-data in millions of dollars)

Quarter

Bills

Other
securities
within
1 year

1950-1
II
III
IV

350.3
344.2
433-2
466.0

193.8
150.7
460,1
281.6

107.1
129. T
lV*.0
76.8

21.1*
H*.l*
27.2
15.0

1951-1
II
III
IV

4io.6
381.6
422.3
518.2

182.8
201.2
140.9
139.3

85.7
59-1

16.0
7-7
6.1
5-8

179-2
72.1
39-6
U7.8

1952-1
II
III
IV

^77.7
523.1
452.7
694
0.

189.7
193.3
211.8
116.4

51.1
**9-9
1*5-3

130.7

6.2
^3-7
57-1*
1*9-5

1*9.1
82.5
28.3
52.7

1593 1
II
III
IV

597.6
520.9
465.3
518.4

164.0
189.6
228.4
199.6

1*6.9

27.7

821*. 3
826.3
929.1

1594 1
II
III
IV

619.7
609.3
528.3
535.5

1595 1
II
III
IV

1-5
years

5-10
years

1*6.2
86.1+

After
10. years

9b.9

IO5.7

119.1
116.3

Total

767. h
7k\.7
1,203.6
955-8
871*. 1
*
721.7
655.1
797-6
773-9

892.6

795-3
958-8

80.0
100-7

21.3
60.0

21.0
1*0.8
31-3
50.3

413.6
225
2.
172.5
185.1

150.0
179-2

101. h

61*. 1

58.8

l,3h8.8
x,ihj.Q

35-9
36.0

950.1
1,013.2

490.7
529.2
473.9
588.9

196.4
152.2
129.8
196.9

137-9
138.2
1U5.U

80.9
56.8

67.1*
21.7

898.2

217. b

90.3
146.0

36.5
31-7

1,180.7

1596 1
II
III
IV

588.7
544.3
515.3
642.1

166.8
140.7
176.1
174.6

1U9.2
132.5
116.3
210.8

69.7
71-7

21.6
18.3
1U.7
19.O

907-5

1957-1
II
III
IV

727.1
619.6
651.4
661.1

183.4
162.2
171.6
190.8

102.3
103.6
92.7
196.5

15 98 1
II
III
IV

6^1.3
6 00
2 .
625.8
844.0

229
9.
295.7
215.2
149-0

196 A
32U. 3




29-3

123-3

li*6.0

125.U

100.1

78.0
90.1
110.7

68.1
89.6

18.2

20.5
19-5

10.7
13-2
11*.8

63.O

33-b

100.6
163.0
79.1

51* .0
1*1*. 6
51.8
22.7

39-5

857-1

973-2

875-8

996.1
890.5

1,136.1

1,01*1.7
919.O
91*9.9
l,li*'*.9
1,285.1
1,1*7.5
1,097-4
1,155-2

-99Table 1 - 2

Quarter

Bills

1959-1
II
III
IV

877.6
780.0
793.6

I96O-I.
II#
III
IV

1961-1
II
III
IV

1962-1
II
III
IV

1963-1
II
III
IV

1964-1
II
III
IV

1965-1
II
III
IV

1966-1
II
III

*

Other
securitiei
within
1 year

216.8

1-5
years

5-10
years

After
10 years

269.9
173.8
179.1

38.3
21.1
13.8
14.4

1,483-0
1,139-0
1,160.5
1,379-7

Total

866.0

130.1
145.9
164.8

279.O

80.4
33.9
28.0
55.5

876.9
761.6
722.6
908.7

191.3
141.9
111.7
163.5

222.1
21.6.4
193.1
313.1

24.7
20.9
51.2
63.2

11.2

1,326.2

17.2
26.6
33-8

1,158.0

932.8
955.1

139.0

364.9
227.4
204.2

29.3
30.9
22.1
37-5

1,524.7
1,473-8
1,533-2
1,677.4

1,095.8
1,161.5
1,266.5
1,189.2
1,205.9

1,259.7

188.6
165.6
176.8

263.9

58.7
71.7
45.4
37.5

172.5
159.9
194.9
155.5

215.3
196.6
192.4
296.1

75.0
109.1
100.0
195.8

1+6.6

178.6

163.9
132.1
143.3
125.2

62.3
51.1

1,269.8
1,169.6
1,128.2
1,230.8

98.3
130.3
71.1

276.8
216.9
171.4
197.9

1,350.8
1,254.6

109.4
79.1

216.2

1,169.1
1,435-4
1,435-4

1,362.0

1,177.6

1,626.1

1,551.9
1,481.9
1,^35.1

85.6
69.1

248.9

189.4
222.4

82.2
72.1
72.0
^ 89.O

234.7
175.0
149.8
21.9.2

136.6

288.7
181.3
180.7

94.0
144.4

127.9
109.2
145.4
121.9
116.2

100.6
81.0
110.3
156.7
90.4
73.1

34.1
31-9
32.6

48.5
37-8

1,105.3

1,482.5

1,775-9

1,688.9

1,725-1
1,939-8
1,951-5
1,668.1

1,621.8
1,662.9

20.3
51.2

50.3

1,887.4
1,679-4
1,640.8

^3-3

1,892.3
1,960.9

92.3
33-8
37-4
3^.7

2,079.3

37-7

2,171.9

3 6.4

1,869.9

29.2

1,743-6
1,517-9

1,877-1

Transactions include dealer purchases and dealer sales, but should exclude allotments of new issues, exchanges, maturities and repurchase agreements. Until
mid-May i960 securities were to be classified by first call date; but after midMay i960 they were to be classified by final maturity. Averages are based on the
number of trading days in the quarter.

7 The estimates for the second quarter of i960 are based 011 Securities Department
~
data through May 1.3 and Market Statistics division data after May 13.
Source: 1950 through mid-May i960, Securities Department, Federal Reserve Bunk of
New York: mid-May i960 on, Market Statistics Division, Federal Reserve Bank of
New York.




-100-

Table 2

Annual Rate of Turnover of Marketable
United States Debt*

Other
securities
within 1 year

1-5
years

5-10
years

1.13
1.26
1-13

.539
.816

.^80
.465

.430
.321

.915

1.158

.531

2.76
1.76

1.368

1.208

1.771

.981
I.060

-74l

.828
.895

.732
.697
.1*83
.509

.921
.880

.5^2
.355

1.111
.403

1.80

.953
1-534

.566
.969

.649
.556

1.65

.936

A96

1-39
1-73
1-52

.904

.849
1.367

.486

3
4

6.69
6.52
6.17
6.92

.^70
.772

.395
.383
.308
.401

1957 1

7-13

I.69

.566
.581
.567
1.125

.194
.219
.204
.592

.226
.288
.388
1.155

.798
1.127

1.25

1.223
2.039
.769
.559

.295

2.241
1.586
1.654
.734

l.fO
1.22
1.30
1^3

1.350
.823
.832
1.254

.676
.315
.287
.569

1.149
.590
.378
.437

1.61

.896
.802
.762
1.310

.342
.340
.671
.915

.349
.327
.368
.411

1.602
1.123
1.025
1.206

.821
.793

.352
.411
.288
.440

Quarter

19531
2
3

Bills

6.65
5.82
6.62

195^ 1

2
3
4

1955 1

2
3

1956 1

2

2
3
I
f

1958 1

2
3
4

7-75
7.19
6.75
6.84
6.27
6.76
5.87

6.92

6.12
6.19
6.17

6.19
6.83
6.93
7.81

1959 1

2

7.05
5.81

3
I
t

5.46
5.56

i960 1
2

5A9
5.22

3
4

5.04
5.85

1961 1
2




3
4

5-97
6.34
6.80
6.74

1.61
2.30
2.13
1.63

1.51
1.40

1.58
2.29
2.37
1.82

1-53
1.50
1-95

1.51
1.76
1.45

1.69

.527

.549

.553

After
10 years

-101-

Table 2 - 2

Quarter

Bills
7.22

1962 1
2
3
4

7.03
6.80

1963 1
2
3
4

6.4 7
5.98
5.91
6.13

1964 1
2
3
i
t

6.1+1
6.05
5.62
6.1+6

19651
2
3

1966 1
2
3
*




6.87

Other
securities
within 1 year
.

1-5
years

5-10
years

After
10 years

1.56
1-35
1.61
1-55

1.004
1.020
1.046
1-539

1.079
1.306
1.064
1.766

.542
•399
•397
•451

2.04
1.34

I.65

1.415
1.111
.900

•935
• 703
.664

•95

I.067

1.329
1.025
1.122
•956

1-59

1.280
1.105
1-057
1-199

1.021
.877
1.006
.901

.656
.265

1.17

1.46
1.12

1.270

5.46
6.99

1.42
1.26
1.13
1.28

.850
1.252

6.35
6.33

2.05
1.49

1.590
• 978

2.14

1.005

6.21

6.08

6.32

• 958

.848
• 750

.626

• 909
1.303

.772
.650

.501

.641

.562
1.161

.419
.468
• 439

.478
• 372
.465

For coupon issues the annual rate of turnover equals daily average gross dealer
transactions multiplied by 2^9 divided by marketable U. S. debt held by the
public. Until the middle of the second quarter of i960 the debt is classified
by first call, thereafter by final maturity. In the case of Treasury bills thedivisor is bills outstanding.

-102-

Table 3
Sixteenth Lowest Daily Level of Gross Dealer Transactions-sin Each Quarter for Selected Maturity Classes
of U. S. Government Securities
(in millions of dollars)
U. S. Government Securities
Other
Quarter

Bills

securities
within 1 year

1953 1
2
3
4

441.5

357.6
313 • 4
378.1

122.0
138.1
160.7
138.5

1954 1
2
3
4

448.1
453-3
393-7
371-8

265.3
145-3
109-7
114.2

105-5

1955 1
2
3
4

353-4
367.5

106.8
110.0

83.O

88.7
88.1
111.0

401.7

135.6

154.8

1956 1
2
3
4

408.6
349.7
347.3
442.8

111-3
99-1
105.6
115.8

107.3
78.2
125.3

1957 1
2
3
4

536.2
440.7
453.4
482.2

95-7
88.6

105.1

69.9

1958 1
2
3
4

488.0
409-9
420.8
599-3

198.9
113.7

1959 1

639.1
591.6
574.0

2

3
4

i960 1




2
3
4

305.2

626.0
641.4
524.9
553-1
715-9

1-5
years

5-10
years

After
10 years

31-4
21.9
46.0

20.7
18.0
10.2
35-5

15.9
23.6
19.3
30.3

63.4
55-0
52.0
70.8

49.1
42.0
24.3
24.5

52.3
42.0
64.2
110.9

27.1

51-9
57-5
42.2
68.3

16.2
13-0
10.1
10.2

147.5

11.6
14.3
11.2
39-0

7-2
7.7
6.5
20.3

139-6

58.6

94.8

84.5
64.9

93-4
40.7
31.0

21.9
25.0
23.7
15.3

133.1
84.1
93-4

198.1
118.9
112.5
210.7

51.7
21.3
19.2

24.3
14.1
9-0

36.9

10.7

156.3
142.2
14-1.9
219.2

17.3
8.9
27.8
43.2

7-7
9-4

117.5
194.9

105.8

137-6
84.7

72.5

104.2

76.4
127.4
78.3
99-6

95-1

75-0
52.1

220.8

16.1
20.0
22.4

15.6

23.3

-103-

Table

Quarter

Bills

1961 1
2
3

806.7

1962 1

1,026.8

782.4
938.3
943.9

2
3
4

978.0
962.5
1,020.5

1963 1
2
3
4

1,093-1
910.0

1964 1
2
3

1,098.2
1,007.5
963.7

892.O

1,014.8

1,138.7

1965 1

1,245.2

2
3
4

1,108.0
924.0

*




1,291.6

3 - 2

U. S. Government Securities
Other
5-10
securities
1-5
years
years
within 1 year

After
10 year

103.7
132.0
89-7
117-9

251.7
149.5
118.3
188.9

39-3
34.8
26.1
22.9

18.9
20.8
12.4
20.4

108.9
98.8
109-5

150.9
148.7
128.3
235-8

52.7
86.1
60.0

22.2
22.9
23.1
20.0

88.7

73-0
51.8
48.7

hl-3

27.6

184.8

99-0

112.0
112.8

88.3
82.5
90.1

28.9
18.2

90.8

27.3
11.7
27.1
27.4

163.2

47-9
44.7
30.4
40.1

190.6
158.0
109.3

33-9
40.0
36.7

142.9
124.1
107.9
141.5

62.7

139-1

156.3

65.8
83.1
80.8
70.1

64.5

58.8
69.8

23.5

39-6

18.8
22.9
23-3

Transactions include dealer purchases and dealer sales, but should exclude allotments of new issues, exchanges, maturities and repurchase agreements. Until
mid-Ifey i960 securities were to be classified by first call date; but after nidMay i960 they were to be classified by final maturity. Averages are based 0 1 the
1
number o£ trading days in the quarter.

-104-

Table 4

J^MaiajiLi^
(Averages of daily data in millions of dollars)

Quarter

Bills

Other
securities
within
1 year

1950-1
II
III
IV

4c 6.9
423-4
491.7
424.7

383.5
387-8
345.7
261.0

255.3
364.7
153-7
107.3

15.1
6.6
-6.0
-8.2

15-3
9-7
127.6
92-7

1,076.0
1,192.2
1,112.6
877-7

1951-1
II
III
IV

491.1
400.6
667-3
621.5

231.0
292.2
404-5
214.3

174.2
67-9
75-0
66.4

9-6
2-3
3-0
3-6

98.3
16.6
41.6
22.6

1,004.2
779-5
1,191.4
928.3

1952-1
II
III
IV

337-8
585.1
467-2
763-1

132.1
414.3
320.5
167.I

7-1
59-3
73-6
97-1

16.3
32.7
54.5
13-2

25-1
93-7
16.5
12.3

518.3
1,185.1
932.2
1,052.9

1953-1
II
III
IV

575-5
683.9
691-3
811.4

253-5
169.1
391-6
429.8

41.6
63.2
106.9
191.9

60.5
53-8
27.8
70.4

1-7
14.4
26.7
51-7

932-9
984.4
1,244.2
1,555-1

195^-1
II
III
IV

572.9
612.3
785.4
350.3

486.4
455.3
575-5
561.8

173-8
309.1
295.3
275-2

222.8
199.8
134.8
92.5

34.7
36.7
17.4
-2-3

1,490.5
1,613.2
1,808.4
1,277-5

1955-1
II
III
IV

254.8
448.8
537-4
575-6

277-1
232.3
162.O
319-5

177-8
160.4
104.9
129-5

-7-8
-2.7
-12.8
55.O

60.0
90.2
72.8
52.8

761.9
929.O
864.4
1,132.3

1956-1
II
III
IV

460.1
606.7
516.8
435-3

304.9
258.8
251.5
188.7

239-6
296.1
165.5
160.6

61.0
39-5
32.9
12.9

18.1
1-7
-6.8

1,083.8
1,202.9
959-9
802.0

1957-1
II
III
IV

620.2
614.4
709.4
764.3

305-5
321.9
414.3
499-5

274.8
227.7
103.8
310.6

-38.0
• 3-1
5-3
26.8

13-3
1.0
4.7
63.3

1,175-9
1,168.0
1,237-5
1,665.0

1958-1
11

868.4
949.8
620.0
466.1

574-7
531-5
188.0
227.9

266.5
384.6
101.5
96.6

113-2
178.8
77-0
49-4

109.2
153.7
31 - 5
'
-0-5

1,932.0
2,198.3
1,017.9
839-5

"'""
iT'

IV




1-5
years

5-10
years

After
10 years

Total

-105Table k - 2

Quarter

Bills

Other
securities
within 1 year

1-5

5-10

years

years

100.9

After
10 years

Total
1,380.8

1959-1
II
III
IV

933
851.2
555-7
^58.7

297-8
305.8
213.4
331-3

64.0
178.1
233.0

36.0
46.0
25.6
24.0

12.6
0.4
- 4.4
0.9

1960-1
II#
III
IV

515.6
904.6
1,683.2
1,631.2

280.8
379-5
330.8
281.2

191.7
^91.7
619.3
519.7

3.6
25.2
102.0
90.2

2.1
29.1
12.1
50.9

1961-1
II
III
IV

1,703.0
1,552.6
1,918.4
2,500.1

311.0
553-1
492.6

489-1
340.2
211.6
304.9

5 M
63.3
21.7
- 39-1

42.7
2.8
- 0.5
65.7

1962-1
II
III
IV

1,909.6
2,182.5
2,959-9

529.6
597-3
46i.o
404.8

232.2
307.8
155.1
397.2

22.3
134.6
66.5
156.0

33-1
34.8
20.0
18.1

1963-1

2,513.8
2,500.9
2,431.0
2,729.3

477.1
304.5
384.9
165.7

466.2
^51.9
318.9
295. ^

169.I
77-5
56.2
88.1

50.9
22.5
16.2
107.5

3,677.2
3,357.5
3,207.2
3,386.1

2,553-4
2,512.6
2,868.4
2,597.3

286.5
223.0
267.9

347.6
136.1
381.3
372.0

34.8
122.6
303.0
60.8

51.6
- 13.1
206.7
93.0

3,273.9
2,981.3
4,027.5
3,418.3

2,513.7

199-9

210.0
125.7
210.4

154.0
125.8
133-8
144.4

217.6
323.3
197.6
34.3

318.3
234.7
198.5
33.6

3,403.7
3,510.5

290.0

- 53-7

- 13-3
56.4
46.3

9-5
11.5
- 4.3

2,181.6
2,197.3

II
III
IV

196^-1
11

in
IV

1965-1
11
HI
IV

1966-1
11
HI

2,652.9

2,616.5

2,873.4

2,512.6

1,949.2
1,730.6

1,484.9

39b. 9

295.0

317.5
400.4

81.3

115-7

1,267.4
968.3
1,048.0
993.7

1,830.1

2,747.6
2,573.2

2,600.9
2,512.0
2,546.2
3,324.4

2,726.9
3,727.5

2,885.1

3,936.2

3,529.2
2,935.4

2,042.9

*

Data are on a commitment "basis and include securities sold by dealers under repurchase
agreement since mid-May i960. From 1950 through the fourth quarter of I960, however,
some dealers may have reported differently. Securities were to be classified by first
call prior to mid-May i 6 and by final maturity after mid-May i960. Averages are
90
based on the number of trading days in the quarter.

#

Estimated from Securities Department data through May 13 and from Market Statistics
Division data after May 13.

Source: 1950 through mid-May 1960, Securities Department, Federal Reserve Bank of New
York: mid-May i 6 on, Market Statistics Division, Federal Reserve Bank of New York.
90




-106-

Table

4a

by Maturity, Quarterly I960* Q4--1966, Q3*
(Averages of daily data in millions of dollars)
Other
securities
within
1 year

1-5
years

5-10
years

After
10 years

Total

302.4

603.2

118.5

81.8

2,840.3

1,807.2
1,686.3
2,053.5
2,627.1

346.5
600.5
455.4
532.3

636.1
497.9
422.2
507.4

105.6
115.4
80.4
39.7

61.0
28.4
27.7
107.3

2,956.4
2,928.5
3,039.3
3,813.9

1962-1
II
III
IV

2,127.6
2,785.0
2,413.8
3,087.6

574.7
631.4
527.6
426.7

390.1
444.3
328.8
504.1

75.2
179.0
141.4
235.4

100.4
79.9
68.5
51.5

3,268.1
4,119.7
3,480.1
4,305.4

1963-1
II
III
IV

2,656.6
2,678.3
2,627.8
2,873.0

498.5
323.0
410.4
209.5

612.2
603.6
474.3
497.8

320.6
172.1
223.1
240.2

105.3
63.7
81.7
125.9

4,193.2
3,840.8
3,317.4
3,946.4

1964-1
II
III
IV

2,706.9
2,673.0
3,038.0
2,811.6

319.4
267.3
288.8
310.8

568.6
325.1
541.7
576.6

206.4
269.3
472.3
162.2

96.1
30.7
272.3
121.7

3,897.4
3,565.6
4,613.4
3,983.2

1965-1
II
III
IV

2,757.7
2,811.9
3,091.8
2,796.6

224.3
298.1
232.7
294.2

366.1
369.7
358.3
316.3

299.9
408.3
258.5
137.2

374.2
267.5
224.8
76.5

4,022.3
4,155.7
4,166.3
3,621.4

1966-1
II
III

2,239.7
2,064.1
1,886.8

376.1
380.7
484.8

222.6
2.40.0
238.3

154.9
1G4.4
125.4

52.3
61.9
52.5

3,045.4
2,9ll«Q
2,787.7

Quarter

Bills

1960-IV

1,734a4

1961-1
II

III
IV

*

Data are on a commitment basis and include securities sold by dealers under
repurchase agreement. Averages are based on the number of trading days in
the quarter.

Source:




Market Statistics Division, Federal Reserve Bank of New York.

-107-

Table 4b
Dealer Gross Short Positions in U. S. Government Securities,
by Maturity, Quarterly I960, Q4--1966 Q3*
(Averages of daily data in millions of dollars)
Other
securities
within
1 year

After
10 years

Total

28.3

30.9

267.0

147.0
157.7
210.6
202.5

50.7
52.0
58.8
78.8

18.3
25.6
28.2
41.6

355.5
416.4
493.0
489.4

45.1
34.1
66.6
21.9

157.8
136.4
173.6
106.8

52.9
44.5
74.9
79.4

67.3
45.1
48.5
33.4

541.1
392.2
594.9
369.1

142.8
177.3
196.8
143.7

21.3
18.5
25.5
43.8

145.9
151.7
155.3
202.3

151.4
94.5
166.9
152.1

54.4
41.2
65.6
18.4

515.9
483.3
610.2
560.3

1964-1
II
III
IV

153.5
160.4
169.6
214.3

32.9
44.3
20.9
15.8

221.0
189.0
160.4
204.6

171.6
146.7
169.3
101.4

44.5
43.8
65.6
28.7

623.5
584.3
585.9
564.9

1965-1
II
III
IV

244.0
195.4
218.4
284.0

24.4
88.1
107.0
83.8

212.1
243.9
224.5
172.4

82.3
85.0
60.9
102.9

55.9
32.8
26.3
42.9

618.6
645a 2
637.1
686.0

1966-1
II
III

290.5
333.5
401.9

86.1
63.2
84.4

276.3
158. 7
122.6

168.2
108*0
79.1

42.8
50.4
56.8

863.8
713.7
744.9

1-5
years

5-10
years

21.2

83.4

104.2
133.7
135.1
126.9

35.4
47.4
60.4
39.7

1962-1
II
III
IV

218.0
132.0
231.3
127.7

1963-1
II
III
IV

Quarter

Bills

1960-IV

103.2

1961-1
II
III
IV

*

Data are on a commitment basis.
days in the quarter.

Source:




Averages are based on the number of trading

Market Statistics Division, Federal Reserve Bank of New York,

-108Table 5

Frequency of Large Daily Price (or Yield) Changes in
Selected U. S. Government Securities*
(in per cent of observations)

Quarter

3 month bill
(Change > 5
basis points)

1 - 5 year
Governments
(Changed 6/32)
.0
.0
.0
.0

1950 1

2
3
4

1.6

19511
2

5 - 1 0 year
Governments
(Changed 8/32)
.0
.0
.0

.0

After 10 year
Governments
(Change> 8/32)

.0
•5

1.1

1.6

4

4
>

-P
ffi

o
»
H
0
3
U
•P

O

1953

1954
3-2
14-3
4.8
4.7
13-3

1955

1956

.0

4.2
3-7

1.6

6.0

.0
.0
.0
.0

.0
.8

1.0

.0

6.6

.0
.0
.0
.0

.0
6-3
3-1
.0

1.6

3

8.2

.8

1.6

3
4

19521
2

3-3

.0
4.8

.0
.0

2.4
.0
.0

1.6

.8

.8
.0

2
3
4




13.1
11.9
1.6
.0

11.9

1.6

8.6

1-7

3-3

8.7
6.7

.0

11.8
10.3
13.9

16.4
6-3

13.1
4.0

16.3

11-3

4.6
15-5

3-2
.0

2.3
.8
1.6

10.9

4.9

21.1

.0

16.4
12.5
14.3
6-5

1957 1

4.8
9-4

3-9

12.8

5-7

7-9
9-4

26.6

1.6

7-3
14.1

19.9
21.3
34.4

18.3
16.4
31.5

-109-

Table

Quarter

3 month bill
(Change •> 5
basis points)

1958 1

29.O
20.7

3

37-6
26.2

2

1 - 5 year
Governments
(Change > 6/32)
2.4
4.8

25.8

7-3

5 - 2

5 - 1 0 year
Governments
(Changes 8/32)
4.0
7-2
35-9
18.8

After 10 year
Governments
( C h a n g e s 8/32)
16.9

27.0

37-6
36.1

1959 1

2

36.7
24.6

5-0

3
4

36.9
36.1

1-5
5-8

5-8
5-3
4.6
16.3

i960 1

48.5

17-8
30.2
13-3
9-1

34.7
22.2
17.2
12.5

7-3
10.2
.8
.8

8.1
9-4
1.6
3-3

14.0
11.7
13-5
5-7

2.4
9-5

11-3
13-6
6.4
2.4

6O.3

2
3
4

28.1
28.3

1961 1

14.8

.8

12.6
8.4

10.7
23.8

45.1

23.O
24.3
24.3

2
3
4

10.9
1.6
4.9

1962 1
2

1.6
.0
1.6
1.6

3-2
2.4

.0
.0

.0
.0
.0
.0

.0
.0
.0

.0
1.6
.0

.0
.0

.0
.0

.8

3
4

1963 1
2
3
4

3-2

1964 1
2
3

.0

1965 1
2
3

.0

.0
.0
1.6
.0
.0
.0
1.6

1966 1
2

12.7

3

29.7

*

9-5

.0
.0

.0
1.6

.0

.0
.0
1.6

1.6
2.4
8.6

.0
.8

•5

.0
2.5

.8

.0
1.6
2.4

.0
.0
.0
3.2

9-0

8.7
10.3

21.4
21.4

21.1

34.4

.0
.0
.0

The three month bill issue and usually two issues in each of the other maturity classes
were used in the calculations. For the specific coupon issues see Table 5a.

Source: Daily quotation sheets prepared by the Securities Department, Federal Reserve
Bank of New York and later by the Market Statistics Division, Federal Reserve Eank
of New York.




-110-

Table 6

Frequency of Small Daily Price (or Yield) Changes in
Selected U. S. Government Securities'*
(in per cent of observations)

3 month bill
(Change 1
basis point
or less)

1 - 5 year
Governments
(Change 1/32
or less)

5 - 1 0 year
Governments
(Change 2/32
or less)

After 10 year
Governments
(Change 2/32
or less)

1950 1
2
3

96.8
97-6
87.3
82.8

95-1
92.9
81.8
82.0

89.3
92.6
80.9
81.4

1951 1
2
3

81.1
76.5
96.8
82.0

77-1
78.1
87.3
86.1

72.1
69.3
60.8
60.1

85.5
92.8
90.6
91.0

82.3
84.1
81.3
85.2

59-6
60.8
53-9
49.2

88.5
71.8
92.3
93-4

88.6
71.9
86.9
86.9

49.1
38.2
65.4
40.1

68.0
70.6
86.0
74.5

91.0
67.5
85.2
67.3

48-3
41.2
70.4
53-3

Quarter

•
d
(I)
1952 1
2
3
4
1953 1
2
3
4

1954

-P
Cf
t
r-J
H

c
t
f
0

O
S3

1

2
3
55-6
1955 1
2
3
4

Ul. 3

56.4
71-5
63.2
61.7

61.9

42.9
40.6
41.6

71.4

60.1
50.0

47.6
63-5
53-7
57-5

1956 1
2
3

37-7
32.9
33-3
57-3

57-4
57-1
73-0
67.2

50.0
48.4
30.9
49-2

52.5
44.5
31.7
40.1

1957 1
2
3
4

37-7
39-6
40.6
46.8

32.8
54.8
57.-8
39-5

36.1
61.9
53-1
33-1

24.6
34.1
37.6
26.6




-Ill-

Table 6 - 2

Quarter
1958 1

2

3
4
1959 1

2

3
4

i960 1
2
3

3 month bill
(Change 1
basis point
or less

1 - 5 year
Governments
(Change 1/32
or less)

5 - 1 0 year
Governments
(Change 2/32
or less)

After 10 year
Governments
(Change 2/32
or less)

30.7
33-3

55-7
64.2
32.8
38.5

39-5
31-7

36.1

51.6
42.0
13-3
39-3

35-0
24.6
27.7
26.3

48.3
59-3
51.5
41.0

58.3
62.4
52.3
33-6

25.0
19.O
25.8
29.2

18.5
34.9
43.7
47.5

32.8
35-9
36.5
54.1

29,6
44.5

57-3
49:2

52.4
57.4

61.9
58.2

51-5
43.7
53-3

50.0
58.8
61.9
80.3

60.5
62.7
69.0

81.9
92.0

18.7

8.1

8.0
17.2

16.7

1961 1
2
3

1962 1
2
3

b
1963 1

2

28,9
29.5

49.2
61.5
44.6
38.5

19.4
32.5
36.8
40.8

49.2

58.0

41.9

82.8

46.0
74.6
69-7

61.1
65.5

88.5

76.5

68.8

83-3
80.4

80.9
82.9
86.1

34.1

76.2
89.9

3
1
+

70.3

80.3

82.0

1964 1

86.9
85.9
81.2

78.7
76.6
87.5

83.6

77.1

87.7

73-7

89.9
86.7
72.1

1965 1

2

78.6
82.5

84.4
95-3

86.1
95-3

3

73-5

91.O
92.1
90.6
79-5

59-0

54.1

2

3
4

b

72.1

77-3

86.0

90.6

84.4
87.7

86.8

1966 1

49.2

52.4

43-7

55-6

65.9

49.2

38.1

2
3

46.1

35-9

40-5
26.6

*

26.6

The three month bill issue and usually two issues in each of the other maturity cla:
were used in the calculations . For the specific coupon issues see Table 6a.

Source: Daily Quotation sheets prepared by the Securities Department, Federal Reserve
Bank of New York and later by the Market .Statistics Division, Federal Reserve Bank
of New York.




Table 6a
Coupon Issues Used for Calculations
In Tables 5 and 6
Quarter
1950 1

1 - 5
2 12/52-54

years
1 3/8.N

10 years
3/54

2 7/8 3/55-60

2 1/4 9/56-59

Over 10 years
2 1/2 6/62-67

2 1/2 9/67-72

2 1/2 12/67-72

2
3

4
1951

L952

1 3/4 N 12/55

1953

H

IV

3 1/4 6/78-83
2 3/8 6/58

1954

2 1/2 "/6l
1 7/8 N 2/59

2 1/2 8/63

1955

1956

1957 1

2 1/2 "/6l

2
3

U




2 1/2 6/62-67

1958 1
2

2 1/25

8/63

"/&.

3 3/4 N "/62

2 l/2

6/62

2 5/8

3

i
t

3 1/4
3 1/2

6/78-83
2/90

3 1/2

2 1/2

2 l/2 12/67-72

"/98

2/65

4
1959 1

i960 1
2

5 N 8/64
2 5/8

2/65

3
4

3 7/8

5/68

196.1 i
1
1962 1
4

1963 1
3 7/8 5/68

3 5/8 N 2/67

1964 l
2

1965 1
2
3
1966 1




4 B 2/69

8/71

2 1/2 12/67-72

4 1/4

8/87-92

-114-

Table 7

Spread Between Dealers ' Quoted Bid and Asked Prices
on U. S. Government Securities*

Quarter

3-Month
Treasury
bill

6-13 Month
coupon
issues

3-5
year
Issues

5-10
year
•issues

After
10 year

issues

(Most typical spreads in 3^nds)

(in basis points)

1950 1
2
3
4

4
4
4
6

n.a.
n.a.
n.a.
n.a.

2
1
1
2

2
2
2
2

2
2
2
2

1951 1
2
3
4

6
8
4
4

n.a.
n.a.
n.a.
n.a.

1
3
3
2

4
4
4
4

2
4
4
4

1952 1
2
3
4

8
6
3
4

n.a.
n.a.
n.a.
2

2
2
2
2

4
4
4
4

4
4
4
4

1953 1
2
3
4

4
5
4
3

2
2
2
2

4
4
6
6

4
4
6
6

4
8
8
6

1954 1
2
3
4

4
4
4
2

2
2
2
2

4
3
2
2

6
4
4
4

6
6
4
4

1955 1
2
3
4

3
4
3
4

2
2
2
2

3
2
2
4

4
4
4
4

4
4
4
4

1956 1
2
3
4

3
4
4
4

2
2
2
2

4
4
2
4

4
4
4
4

4
4
4
4

1957 1
2
3
4

4
4
3
3

2
2
2
2

8
4
4
4

8
4
4
4

8
4
4
4

n.a.




- Not available.

-115Table 7 ~ 2

Quarter

3-Month
Treasury
bill

6-13 Month
coupon
issues

3-5
year
issues

5-10
year
issues

After
10 year
issues

(Most typical spreads in 3^nds)

(in basis points)
1958

1
2
3

k
3
k
3

2
2
2
2

b
b
b
b

8
b
8
8

8
8
8
8

1959

1
2
3
b

b
b
b
b

2
2
2
2

6
b
b
b

6
6
6
6

8
8
8
8

i960

1
2
3
b

3
5
3
b

b
6
b
b

b
b
b
b

8
8
8
8

8
8
8
8

1961

1
2
3
b

3
2
3
3

b
2
2
2

b
b
b
b

8
8
8
8

8
8
8
8

1962

1
2
3
k

3
2
2
2

2
2
2
2

b
b
b
b

8
8
8
8

8
8
8
8

1963

1
2
3
b

2
2
2
2

2
2
2
2

b
2
2
2

8
6
6
U

8
8
8
8

196k

1
2
3
k

2
2
2
3

2
2
2
2

2
b
b

b
b
k

8
8
8
8

1965

1
2
3
k

2
2
2
3

2
2
2
2

b
b
b
b

b
b
b
b

8
8
8
8

1966

1
2
3

3
3
3

2
2
2

b
b
b

b
b
b

8
8
8

* The quarterly series were derived from observations on the 15th of each month (for bills
on the Wednesday closest to the 15th). Hie typical spread is the one which existed on the
15th of two out of the three months; or, if each spread was different, it is the middle
spread.
Source: 1950-February, 1953, U. S. Treasury, Prices and Yields of Public Markotable
Securities Issued by the U. S. Government and Federal ^Agencies ; March 1953 t o date, Board
of Governors of the Federal Reserve System, daily quotation sheets.




-116-

Description of Multiple Regression Analyses
Explaining Trading (. Chaptoy II
J

Multiple regressions were calculated with quarterly data for
three periods, 2153 - V65, 2' 53 - lf60, and 3'60 - U165•

The shorter

periods subdivide the longer period into the fifties and sixties and also
into periods for which the source of dealer data is the same.
The dependent variables were y ^ gross trading in U. S. Government
securities (in millions of dollars); yg, gross trading in U. S. Governments
minus trading with the Federal Reserve and Treasury (in millions of dollars);
y^j gross trading in U. S. Governments with private customers, i.e. all
customers except the Federal Reserve, Treasury, dealers and brokers (in
millions of dollars);1 and y^, the annual rate of turnover of the marketable U. S. debt held by the public, (for problem 101, total bills outstanding).
Separate regressions were calculated to explain these dependent variables
for each of the following maturity classes of U. S. Government securities:
bills, coupon securities maturing in 1 year or less, securities maturing
in more than 1 but less than or equal to 5 years, securities maturing in
more than 5 but less than or equal to 10 years, and securities maturing
after 10 years.

Problems concerning these maturity classes were labeled

101, 201, 301, U01, and 501 respectively.

The independent variables are

listed in Table 8.
The regression program was a stepwise program which first enters
the independent variable that causes the greatest reduction in the variance
of the dependent variable, with other variables entered in the order of their
contribution to the remaining unexplained variance.

As a first approximation

regressions were calculated using most of the relevant independent variables.




1

Calculated for 3 f 60 - U 1 65 only.

-117-

Then additional regressions were run using only those variables that caused
a significant reduction in unexplained variance when they were entered or
that had a significant (at the 5 per cent level) net regression coefficient
when all variables had been added."1" The major results of these equations
are presented in Tables 9 through 13. For the sub-periods results are
presented both for equations using the same variables as the equation for
the entire period and for equations with independent variables that were
significant in the given sub-period.

x

In a few cases variables that were not significant were included
because they made others significant.







-118-

Table 8
List of Independent Variab1es for
Multiple Regressions of Trading (Chapter II)

Problem

Variable

Unit

All

Federal Reserve and Treasury
transactions, quarterly average of daily data

Millions of dollars

All, except 101

Rights to Treasury financings
held by public, quarterly
total

Billions of dollars

101

Rights in all maturity classes
to Treasury financings held
by public, quarterly total

Billions of dollars

All, except 101

New issues sold in Treasury
financings to public,
quarterly total

Billions of dollars

101

Dummy variable +1 if advance
refunding in quarter
New issues sold in Treasury
financings in last month
of preceeding quarter

Billions of dollars

All, except 101

101

Net change in bills outstanding from start to end
of quarter

Billions of dollars

New issues sold in Treasury
financings in last month
of current quarter

Billions of dollars

Marketable debt held by
public, average of endof-month data for four
months in and closest to
quarter (maturity classification based on first
call until 5 f 60 and on
final maturity for 5'60 on)

Billions of dollars

Marketable debt outstanding,
average of end-of-month
data for four months in and
closest to the quarter

Billions of dollars

All, except 101

All, except 101

101

-119Table 8 - 2
Symbols

Problem

Xj
-q

Variable

Unit

Level of interest rates quarterly average of monthly
averages
Market rate on S-rconth bills
Hate on 3"5 year Governments
Rate on long-term Governments

$

Same as for X ^

Change in interest rates in
current quarter (based on
weekly average for last week
in quarter)

$

Same as for X^Q

Change in interest rates in
preceeding quarter

$

101, 201
301
kOl, 501
X

11

X-^2
X^

301, kOl

X-^
101
301
1+01, 501
Xnc

All

Dummy variable - +1 in fourth
quarter
Frequency of small daily price
changes in Governments
$ of observations in quarter
with yield change of 2 basis
points or less
# with change of 1/32 or less
°jo with change of 2/32 or less
Free reserves - quarterly

$

Millions of dollars

average of monthly averages
X-^g

Number of dealers in series

X]^

*

All
All

Cost of financing at New York
City banks, quarterly average

Variable uses data for appropriate maturity class in each problem.




#

Table 9
Results of Multiple Regressions Explaining Trading in U. S. Treasury Bills

Net regression coefficients and standard errors

Y

R

2

Degrees
of freedom

Durbin-Watson
ratio

• 957

46

1.48

.859

23

1.44

.855

variable
and ueriod

25

1.42#

.886

17

1.6l#

adjusted

3

x12

20.59*
(1.09)

3.36*
(-90)

56.12*
(18.98)

.086*
• 029)

19.13*
(1.81)
18.86*
(1.53)

4.43*
(1-55)
5.08*
(1.49)

27.19
(17.40)

.037
• 031)

34.25*
(5.47)

147.00

(l.ll)

38.77*
(4.81)

'2.96*
(1.14)

.476*
.145)
.582*
.133)

x

9

x

X

15

16

1
8c

50's

60's

50's

60's

.877
v

18

1.4S#

2.74*

(94.58)

2

50's & 60's

• 95^

46

1.48

20.59*
(1.09)

2.36*
(-90)

56.12*
(18.98)

.086*
..029)

50's

.857

23

1.44

.852

.037
• 031)

1.42#

3.43*
(1.55)
4.08*
(1.^9)

27.19
(17.40)

25

19.13*
(1.81)
18.86*
(1.53)

.874

17

1.6l#

18

1.49#

1.74
(l.ll)
1.96
(1.1*0

147.00
(94.58)

.864

34.25*
(5.47)
38.77*
(4.81)

.476*
.145)
.582*
.133)

•919

18

1.89#

126.36*
(55-21)

• 299*
(.085)

60's

y

X±0

3

60 f s




25.84*
(3.16)

h)
o

YU
50's & 60's

1-39

.016*
(.005)

• 519*
(.137)

Mb

2b

l.55#

• 319
(.174)

25

l-53#

.042*
(-014)
.044*
(-015)

.U56

18

1.51#

.652

60's

bl

.b03

50's

.409

18

.017*
(.007)

1.734*
(.501)
1.161*
(.404)

*

No positive serial correlation.
Theil and Kar^ar ' s table.)

(

511*
089)

_ 403*
( 109)
294*
( 095)

.0022*
(.0004)

(

521*
184)

Significantly different from zero at 5 o level.
1

#

-




(The hypothesis of serial correlation is rejected at 1$ significance level according to

Table 10
Results of Multiple Regressions Explaining Trading

in U. S. Governments (coupon issues) Maturing in
Dependent
variable
and period

R

adjusted

Degrees
of freedom

Durbin-Watson
ratio

50's & 60's

.737

46

1.65#

50's

.702

23

1.59#

Xq

Net regression coefficients and standard errors
X 1Q
X^
X
YL
X
'

4.07*
(.74)

-24.75*
(5-73)

1.66

-11.66

(1.06)

Year

(6.87)

3-78*
(1.05)

-20.8l*
(8.79)

9.76*

-24.31*

(1-96)

(9.30)

IO.98*
(1.68)

-25.07*
(8.55)

.735

24

1.57#

.873

17

2.62#+

4.39*

-30.21*

2.14*

13.03

2.58#

(1.12)
4.60*

(9.80)
-27.66*

(.71)
2.00*

(21.49)

(1.04)

(8.69)

(.67)

3-97*

-24.47*

3-79*

-22.83*

(.73)

60's

(5-64)

(1.03)

(8.65)

1.67
(1.04)

-11-99
(6.72)

9.59*
(1.91)
10.88*
(1.67)

-26.37*
(9-11)
-27.21*
(8.50)
17.72
(20.57)

.878

50's & 60's

.741

18

46

1.68#

23

1.68#

24

1.6l#

.865

17

2.54#t

.867

60's

.715
.738

50's

18

2.48#

3.61*
(1.07)

-30.43*
(9-38)

2.42*
(.68)

3.90*

-26.96*
(8.4l)




.774

19

1.82#

'

-26.88*
(9-79)

(.64)

3

60's

-27-93*
(9-84)

2.24*

(1.01)
y

X,
_
_

1.47*

.098*

(-54)

(.013)

50's & 60's

.424

48

1.45

- .186*
(.043)

.032*
(.009)

50's

.380"

25

1.17

- .112
(.068)

.056*
(.019)

60's

.518

19

2.44#

- .248* ,022*

Significantly different from zero at %
#

No positive serial "correlation.
Theil and Nagar's table.)

t

Probable negative serial correlation.




(.066)

(.007)

level.

(Thp» hypothesis of serial correlation is rejected at Vfo significance level according

Table 11
Results of Multiple Regressions Explaining Trading
in U. S. Governments Maturing in 1-5 Years

Net regression coefficients and standard errors
variable
and period

R 2 adjusted

Degrees
of freedom

Durbin-Watson
ratio

x

8

X

15

x

X

l3

7

X

5

X

12

50's & 60's

• 552

44

1.83#

3-60*
(.70)

.043*
(.021)

30.51*
(15.15)

-11.74*
(5-9^)

6.36
(3.42)

.510

21

2.04#

.005
(.031)

.85
(9-52)

23

2.03#

61.85*
(23.47)
63.19*
(20.64)

-

• 552

4.08*
(1.12)
4.02*
(-90)

9-97*
(4.32)
10.11*
(3.81)

-97.04*
(30.10)
-99.80*
(24.06)

.291

15

1.73

1.39
(2.67)

3.92
(7.74)

-48.49
(58.34)

18

1.59#

22.68
(23.60)
52.06*
(18.67)

- 8.09
(9-10)

.1+98

.086
(.066)
. 119*
(•033)

Y2
50's & 60's

• 545

44

1.87#

3.49*
(.69)

.039
(.021)

31.27*
(1M8)

-11.62*
(5.87)

6.32
(3-38)

-40.65*
(20.10)

50's

• 505

21

2.05#

.006
(.031)

23

2.05#

61.00*
(23-46)
62.64*
(20.64)

- I.05
(9.52)

• 547

4.06*
(1.12)
3-99*
(-90)

9.96*
(U.32)
10.13*
(3.8-1)

-9^-97*
(30.09)
-93.36*
(24.07)

.276

15

1.73

1.76
(2.69)

3.88
(7.78)

-49.85
(58.70)

18

1.58#

24.44
(23.75)
54.39*
(18.91)

- 8.16
(9-15)

.481

.074
(-067)
.112*
(.034)

.592

18

1.26

4

-39-72
(20.33)

50's

X

60 's

60's

i

V»
—

i
v
3-41* T
(1-35)

3.49*
(1-36)

y

3
6o's




.086*

45.09*

(.022)

(12.11)

2.52*
(.87)

50's & 60's

.261

47

1.92

.00029*
(.00012)

.205*
( .088)

-•259*
(.121)

50's

.292

2k

2.15#

.00017
(.00018)

-.476*

.1+50

2k

.294
(.146)
.4-01*
(-131)

• 115

18

l.6o#

.252

60'

19

l-37#

*

No positive serial correlation.
Theil and Nagar's table).

• 155
(.096)
.252*
(.094)

(!l46)
-.116

(-251)

.016*
(•007) »
r>
\
V!
J

Significantly different from zero at 5% level.

#

.00026
(.00019)

.068*
(.024)




(The hypothesis of serial correlation is rejected at V o significance level according to
f

Table 12
Results of Multiple Regressions Explaining Trading
in U. S. Governments Maturing in 5-10 Ye-aa

Dependent
variable
and period

50Ts & 60's

50's

adjusted

of
freedom

DurbinWatson
ratio

.719

45

1.50

H2

• 723

22

2.13#

.815

60's

21

1.8l#

A90

16

.92

.615

Y2
50 ? s & 60 f s

60's

x5

2.84*

(M)

5-92*
(1.30)

3.05*
(-55)
2.25*
C-^2)

5.87*
(1.50)
3.90*
(1.37)

3.94*

5.78
(3-08)

1.24

1.50

19

• 705

2.84*

.715

22

2.13#

21

1.8l#

.473

8

x

(1.60)
7.83*
(1.47)

.809

50fs

Net regression coefficients and standard errors

16

• 92

.585

19

1.21

.511

19

1.30#

*L6

13

X

3

7.82*
(2.18)

24.24-X(7-51)

10.09*

21.14*
(8.68)
25.20*
(7-38)

6.10
(3.03)
19.34*
(^•69)

27.10
(16.13)

X

12

X

10

X

15

(1-75)

(3.51)

(4.77)

-2.16
(9-85)

4.69*

-58.52*
(20.03)

-16.53*
(4.67)

2.09
.122*
(.042)

5.92*
(1.30)

7.82*

24.24*

(2.18)

(7.51)
21.14*
(8.68)

3.05*
(-55)
2.25*
(.42)

5.87*
(1-50)
3.90*
(1-37)

10.09*
(4.77)

3.94*

5.78
(3.08)

-2.16
(9.85)

(1.60)

x

3.69*
(1.75)

(7.38)

5.10
(3.03)
18.34*
(^•69)

27.10
(16.13)

(3.51)

25.20*

-58.52*
(20.03)

-16.53*
(4.67)

1.09

7.46*
(1.50)

.114*
(.043)

4.13*
(.93)

(.026)

y

3
60 fs




.068*

Table 12-2

Dependent
variable
and period

R
adjusted

Degrees
of
freedom

50's & 60's

.600

U6

lAl

50's

.691

23

1.92#

.750

22

2.08#

60fs

p

Net regression coefficients and standard errors
Durbin-Watson
ratio

8

X

5

X

l6

X

13

X

3

.058*
(012)

.068*
(.020)

.235*
(.070)

.088*
(.036)

.221*
(.071)
.264*
(.067)

.055*
(.024)
.045*
(.021)

12

X

10

.037*
(.016)

.058*

X

(.012)

.047*
(.012)

-.413*
(.184)

-.145*
(.061)

None significant

*

Significantly different from zero at %

#

No positive serial correlation.
Tneil and Nagar's table.)




X

level.

(The hypothesis of serial correlation is rejected at 1$ significance level according to

Table 13
Results of Multiple Regressions Explaining Trading
in U. S. Governments Maturing After 10 Years

Dependent
variable
and period

R
adjusted

50's & 60's

.776

Net regression coefficients and standard errors
X^
X.
X
X*
*10
16
•15

DurbinWatson
ratio

1.19

.679

50's

Degrees
of
freedom

21

13.39*
(2.30)

-14.83*
(2.91)

2.61*
(.92)

2.86*
(1.02)

1.90#

12.03*

- 7.35
(7.67)

8.37*
(3.03)

2.13
(2.37)

(2.92)

6.50*
(2.53)

.857

60's

21

2.00#

12.27*
(2.39)

.690

15

2.04#

l4.8l*
(3.13)
14.77*
(2.97)

-16.30*
(3.80)

13.47*
(2.50)

-15.79*
(3.15)

1.87*
( -92)

11.52*
(2.84)
12.27*
(2.39)

- 7.78
(7.50)

(2.92)

14.91*
(2.74)
14.77*
(2.97)

-16.14*
(3.09)
-16.59*
(3.34)

.666

50's & 60's
50's

.578
.772

.850
60'

.675

18

46

23
21

17

1.53#

1.05
1.86#
2.00#

1.98#

.618

60's




18

1.53#

• 590

18

1.24

7-39*
(1.69)

-16.59*
(3.34)

1.76
(1.02)
2.08*

(1.90)

8

.0113*

(2.85) (.0046)
.086

.022*

(4.96) (.006)
.016*
(.004)

-19.92

17.51*
(6.44)

.695*
(.294)

-18.37J
(7.28

.695*

-18.37

-.020

(27.90) (.016)

(.949)

8.07*
5.50*

(2.53)

- 8.12*

1.84
(3.31)

- 7.58*

X

• 931

(.878)
1.08
(.949)
• 970
(-539)

.0185*
(.0044)
.024*
(.005)
.016*

(.004)

-.016
(.008)

17.51*

(6.44)

(.294)

(7.28)

50's & 60's

.3^0

46

50's

.600

23

1.23

• 715

23

1.20

• 585

17

1.37

.647

18

1.25

60 's

• 547

*

Significantly different from zero at %

#

No positive serial correlation.
Theil and Kagar's table.)




.339*
(.074)

-.346*
(-095)

-.085*
(.029)

.00033*
(.00014)

.445*
(.108)
.491*
(.089)

.080
(.283)

-.216*
(.069)

.0007*
(.0002)
.0002
(.0001)

.228*
(.045)
.190*
(-041)

-.242*
(•053)
-.204*
(.046)

-.022
(.045)

1.015*
(.231)

-.0003
(.0002)

.033*
.013)
'

level.

(The hypothesis of serial Correlation is rejected at 1$ significance level according to

h
ro
vo
i

-130-

Table 14
List of Independent: Variables for
Multiple Regressions of Dealers1 Positions

Variable

Symbol
X,

Change in the discount rate
Change in
quarterly
excluding
less than

Basis points
Millions of dollars

v

x5*

6 *




Change in interest rates in preceding
quarter (based on weekly averages for
last week in quarter, except for 5-10
year maturity yields which were
estimated from a constant maturity
yield series). Yield series are for
3-month bills, 9-12 month, 3-5 year,
5-10 year, and over 10 year coupon
issues

Basis points

Frequency of small daily price changes
in Governments--per cent of trading
days in quarter with a yield change of
1 basis point or less for Treasury
bills and with a price change of 1/32
or less for 1-5 year issues and of
2/32 or less for 5-10 and over 10
year issues

X *
3

X

free reserves (based on
averages of monthly averages),
all such quarterly changes
$50 million

Unit

Per cent

Uncertainty--measured by the number
of turning points in the level of
daily yields each weighted by the
size of the turnaround, i.e., the
summation over the quarter of the
absolute sizes of turning points.
Calculated for 3-month bills and
over-10 year bonds
Volume of trading (daily average
gross transactions in U. S. Government securities) during preceding
quarter

Millions of dollars

-131-

Table 14 - 2
Symbol

Variable

Unit

X?*

Volume of trading (daily average
gross transactions in U. S. Government securities) excluding financing periods (for cash financings from
the day after the books open through
the payment date and for rights
exchanges from the day after the
announcement date through the payment date)

Millions of dollars

X *

Marketable debt held by the public;
average of end-of-month data for
four months in and closest to the
quarter. Classified by call date
prior to mid-1960 and by final
maturity date thereafter

Billions of dollars

Marketable debt held by the public
during the preceding quarter;
average of end-of-month data for
four months in and closest to that
quarter. Classified by call date
prior to mid-1960 and by final
maturity date thereafter

Billions of dollars

8

V

X

10

*




Ratio of marketable Federal debt
holdings of commercial banks to
total marketable debt outstanding,
classified by final maturity; ratio
as of the end of preceding quarter.
For issues maturing in more than
10 years, the ratio is based on
commercial bank plus other large
financial institution holdings of
debt
Interest carry on dealers1 long
positions; estimated by subtracting
dealers1 financing costs from
market yields (based on quarterly
averages) or coupon rates (average
of coupon rates observed in mid-quarter).

Per cent

-132-

Table

Symbol

14-3

Variable

Unit

Several alternative series oa financing
costs were available thus forming a
variety of different variables measuring
interest carry. A positive number
indicates positive carry and a negative
number, negative carry:
X
A

*

Using average coupon rates and
an average of financing rates
in New York City and "out-oftown 11

Basis points

*

Using average coupon rates and
financing rates posted on new
loans in New York City

Basis points

*

Using market yields and average
financing costs in New York City

Basis points

*

Using market yields and an
average of financing costs
in New York City and "outof-towiV; entered only negative
carry values

Basis points

*

Using market yields and "outof-town" financing costs;
entered only negative carry
values

Basis points

11

X

12

X

X

X

13

14

15

Basis points

Dealer financing rates in New York
City and "out-of-town" averaged

Basis points

18
X

Dealer financing rates posted on new
loans in New York City, quarterly
average

17

v

Gross new bill issues, quarterly
total

Billions of dollars

Rights to Treasury financings held
by public, quarterly total

Billions of dollars

16

19

*




-133-

Table 14 - 4
Symbol
X

20

X

X

X

X

X

X

X

X

X

X

22

23

Billions of dollars

New issues sold in Treasury financings
to public in last month of preceding
quarter

Billions of dollars

*

New issues sold in Treasury financings
to public in last month of current
quarter

Billions of dollars

*

Official (Federal Reserve and Treasury)
transactions with dealers, quarterly
averages of daily data

Millions of dollars

Official transactions with dealers,
quarterly total

Millions of dollars

*

Official purchases from dealers,
quarterly total

Millions of dollars

*

Official sales to dealers, quarterly
total

Millions of dollars

*

Official net purchases (+) or sales
(-) with dealers, quarterly total

Millions of dollars

*

Federal Reserve transactions with
dealers, quarterly total

Millions of dollars

*

Federal Reserve purchases from dealers,
quarterly total

Millions of dollars

Federal Reserve sales to dealers,
quarterly total

Millions of dollars

Treasury transactions with dealers,
quarterly total

Millions of dollars

Treasury purchases from dealers,
quarterly total

Millions of dollars

24

25

26

27

28

29

30

31

Unit

New issues sold in Treasury financings
to public, quarterly total

*

L21

X

Variable

*

32*




- 5 -

Table 14 - 2
Symbol
X

33

*

Dummy variable for seasonal:
+1 in first quarters

35

- - in second quarters
f1

36

+1 in third quarters

37

*

Treasury sales to dealers, quarterly
total
Dummy variable-H-1 in all quarters
2'60--3f66 to measure the effect
of the increase in the number of
reporting dealers and other less
important revisions in the dealer
position series

34

X

Variable

Variable uses data for appropriate maturity class.




Unit
Millions of dollars

Table

15

Results of Multiple Regressions Explaining Dealers'
Positions in U. S. Treasury Bills

_2
R

DurbinWatson
ratio

Constant

.94

.93

1.62

-787.99

.59

.39

1.50

-1,332.17

Dependent
variable
and period

Net regression coefficients and standard errors
15

34

18

14

23

24

35

36

37

Net Positions
50's & 60's

50's

9. 63**
(2.45)

1/

.8
2
(.15)

.54

.49

1.32#

7.32*
(2.87)

62.03**
(17.78)

-7.81*
(3.76)

-156.74 -40.06
42.56
(104.82)(102.46)(103.27)

3.12
(2.71)

1,101.23** .51*
(114.32) (.24)

-1.68
(2.70)

83.12**
(24.24)

-2.64
(5.60)

1.29 230.89* 137.59
(86.39) (88.01) (81.71)

-1. 68**

-623.95

58.30**
(17.38)

(.41)

S1
>
J
Y

.82

.73

1.48

1,318.66

.75

60's

.2
6

1.43

985.05

1.60
(.91)

-3.06

(2.22)

8.91
85.58*
(4.64) (37.16)

-.21*
(.09)

-520.38**408.79 -144.65
(178.20) (218.94) (181.80)

.75

.67

1.27

732.12

1.57*
(.73)

-2.65
(1.85)

7.81
92.55**
(3.78) (28.69)

-.17*
(.07)

-397.33*
(139.52)

.85

.0
8

1.85#

22.29

-2.10**

.05**
(.01)

46.55*
(21.49)

1/

-.06
(• 71)

15.06
(37.08)

4.00
(7.48)

17.03**
(5.68)

-5.34
(4.85)

-435.96* -346.45 -164.89
(151.00) (188.91) (153.35)

Gross Long
Positions
60's
Gross Short
Positions
60's

Footnotes in. Table 20




-.27**
(.09)

(.35)

-24.43 11.57
(22.44)(20.80)

Table 16
Results of Multiple Regressions Explaining Dealers' Positions
in U. S. Governments (coupon issues) Maturing inl^l Year

Dependent
variable
and period

DurbinWatson
ratio

_rL

Constant

h

h

h

Net regres sion coefficients and standard errors
X

10

In

^16

^20

^25

X

26

^27

Net Positions

60's

.60

1.71#

- 24.94

-1.33**
(.40)

8.89**
(2.00)

6.66**
(1.60)

-.11*
(.04)

.71

.65

1.56#

42.51

-1.68**
(.53)

7.46
(4.90)

5.09*
(2.26)

-.12
(.06)

.65

1.42

79.85

-1.55**
(.53)

11.17*
(4.41)

.67

.61

1.88#

-120.43

.38
(1.02)

16.30**
(5.06)

.80

50's

.63

.71

50's & 60's

.77

2. 34#

- 24.75

1.30**
(.41)

7.15*
(3.00)

36.91**
(10.51)

.84

.81

2.54#

22.61

1.29**
(.37)

7.22*
(2.66)

35.97**
(9.32)

.46

.38

1.62#

- 56.21

.52*
(.23)

-.15*
(.06)

4.59
(5.27)

-.05
(.07)

Gross Long
Positions
60's

Gross Short
Positions
60's

Footnotes in Table 20




.24**
(.06)

.08*
(.03)

.05*
(.02)

Table

17

Results of Multiple Regressions Explaining Dealers' Positions
in U. S. Governments Maturing in 1-5 Years
Dependent
variable
and period

2

DurbinWatson
ratio

Net regression coefficients and standard errors

r!

r

.57

.52

1.81#

22.70

.39

.26

2.25#

234.95

xg

Constant

x9

X

10

X

12

X

20

X

21

X

19

X

25

X

26

X

32

35

36

37

Net Positions
50*s 6 60's
c

50's

• 31**

4.52*
(U71)

(.08)

.20**

-.95

(2.12)

(.07)
.68

1.82#

.54

.42

1.78#

.79

60'

.63

.68

2.10

.70

.57

2.55y.

. 44**
(.14)

35.65** 8.12*
(12.18) (3.05)

.08
(.18)

29.42
(15.35)

182.38 -1,91**
(.31)
-198.59

29.06

2/

9.52 27.16*
(4.86)(11.56)

.34
(.29)

9.27
(8.15)
-2.52*
(.95)

.47
(.29)

23.16
6.80
(22.51) (4.03)

2.23*
(.78)

.92**
(.27)

-.35 -1.98*
(.17) (.89)

-179.26* -182.41* -53,85
(79.10) (72.47) (55.15)

2.22**

1.09**
(.25)

-.46**-2.24*
(.15) (.83)

-187.43* -159.81* -42.91
(70.65) (71.31) (55.11)

Gross Long
Positions
60'

230.69

(.73)
Gross Short
Positions
60'

.77

Footnotes in Table 20




.69

1.74

- 69.84

1.78** 2.18**
(.36) (.64)

8.99* -8.16**
(3.41) (2.32)

10.97*
(3.92)

-.12
(.06)

Table 18
Results of Multiple Regressions Explaining Dealers' Positions
in U. S. Governments Maturing in 5-10 Years

Dependent
variable
and period

—2
2 R
R

DurbinWatson
ratio

Constant

Net regression coefficients and standard errors
X
10
12
16
20
22
24

x2

29

35

36

37

-26.97
(25.05)

13.91
(22.31)

Net Positions
.55

1.51

30.89

- .40
(.26)

1.26*
(.51)

13.26** -14.34*
(3.86)
(6.12)

.54

1.27

12.68

- .29
(.28)

.91
(.70)

11.27*
(4.44)

.69

50* s

.59

.64

50's & 60's

.65

1.19

55.53

.68

.59

1.25

.80

.73

1.81#

-2.05** 2.23**
(.65) (.65)

-109.65

-24.91*
(8.86)

.12
(.10)

-21.17**
(7.22)

(.11)

17.34** -21.32**
(4.94)
(6.77)

(.10)

22.89** -21.56*
(5.25)
(7.59)

.27*
(.10)

8.55*
(3.84)

-1.38
2.09*
(. 77) (.84)

75.11

.16
(.12)

13.64*
(5.30)

.27**
(.09)

1.39
(8.19)

15.27*
(6.43)

„ 10*
(»05)

60'

.18**
(.07)

-.43**
(.15)

.30*

Gross Long
Positions
60'

a)

.87

.82

2.5\f

b)

.82

.77

2.09#

.61

.43

1.73

-247.67

-1.19
(.61)

3.05**
(.61)

-1.56*
(.70)

-139.82

.50**
(.11)
10.31**
(1.75)

.31**

Gross Short
Positions
60's

Footnotes in Table




20

3 ^ 6 . 26

-.25*
(-11)

1.04**
(.27)

-12.31*
(4.97)

.19

(.10)

-10.78
(23.99)

Table

19

Results of Multiple Regressions Explaining Dealers' Positions
in U. S. Governments Maturing After 10 Years

R

—2
R

DurbinWatson
ratio

.48

.42

1.03

- 33.19

-.56*
(.27)

1.30**
(.43)

33.95*
(12.92)

-46.04** .87
(16.23) (.51)

.60

.50

1.34

- 14.90

-.65**
(.19)

.89
(.50)

22.69
(11.94)

46.20
1.34
(26.66) (1.11)

.64

.59

1.08

-

7.43

-.43*

.52

.39

1.02

- 60.53

-.08
(.91)

.85

Dependent
variable
and period

.77

2.42/

-785.60

-3.12* 1.72**
(1.11) (.53)

36.02**
(8.92)

-.71**
(.15)

29.93*
(11.73)

1.14* .21*
(.52)(.08)

-8.74*
(3.25)

.91

.85

2.24/

-713.98

-2.46* 1.70**
(.99) (.45)

34.17**
(7.56)

-.66**

51.48** -35.44
(11.26) (17.83)

1.29* .16*
(.45)(.07)

-6.23*
(2.77)

2

Net regression coefficients and standard errors
10

Constant

20

"11

22

X

X

29

32

X

33

X

35

X

36

Net Positions
50's & 60's

50's

60's

.95**
(.32)

(.16)

34.70**
(9.72)

1.53
(.78)

39.44
(21.48)

-74.87* 1.25
(32.58) (1.86)

Gross Long
Positions
60's

(.13)

Gross Short
Positions
60'

.84

Footnotes in Table 20




.72

2.73/

-366.71

.31*

(.11)

.49**-.79**
(.13) (.19)

9.71**

(1.88)

.31**
(.05)

16.35**
(2.95)

-.033*
(.015)

-.67 22.69** -2.50
(6.15) (5.98) (5.66)

Table 20
FOOTNOTES

*

Significantly different from zero at 5 per cent level.

#

No positive serial correlation. (Theil and Nagar's Table, 1 per cent significance level for rejecting
null hypothesis of residual independence.)

i*

Probable negative serial correlation.

1/

Not appropriate for the sub-periods.

2/

Didn't exist during the 50's.




** At 1 per cent level.