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MONTHLY REVIEW o f C r e d i t a n d B u s i n e s s C o n d i t i o n s S e c o n d F e d e r a l R e s e r v e D i s t r i c t F eder al Reser ve Bank, New Yor k ________________ J anuar y 1, 1941 Money Market in December In the money market, the month of December was characterized on the one hand by a sharp, though tem­ porary, reduction in excess reserves of the member banks, and on the other by further expansion in member bank credit. Meanwhile, a further net declin
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  MONTHLY REVIEW of Credit and Business Conditions Second Federal Reserve District Federal Reserve Bank, New York     ________________    January 1 , 1941  Money Market in December In the money market, the month of December was characterized on the one hand by a sharp, though tem- porary, reduction in excess reserves of the member banks, and on the other by further expansion in member bank credit. Meanwhile, a further net decline occurred in yields on United States Government and municipal secur-ities, attributable at least in part to the issuance of a fully taxable Treasury note issue and to further indications that efforts will be made in the near future to eliLjua^ tax exemptions from future issues of long term United States Government securities, as both developments tended to increase investment interest in outstanding United States Government and municipal issues.Excess reserves of all member banks were reduced by a net amount of $490,000,000 from $6,930,000,000 on  November 27 to $6,440,000,000 on December 24, owing to two principal factors—an increase of $282,000,000 in Treasury deposits in the Reserve Banks and a further increase of $352,000,000 in the amount of currency out-standing. Absorption of reserve funds from these causes considerably exceeded an increase in the gold stock amounting to $175,000,000, which, although the principal factor of gain to member bank reserves during the four week period, represented the smallest rise in the gold stock in many months. The increase in Treasury balances at the Reserve Banks was due largely to payments to the Treasury for the $531,000,000 Treasury note issue of the  National Defense series, about three fourths of which was paid for in cash on December 18, and one fourth  by credits to the War Loan Deposit accounts on the  books of subscribing banks. The increase of $352,000,000 in the amount of currency outstanding between November 27 and December 24 was considerably in excess of the usual seasonal rise at this time of year, continuing the tendency for currency circulation to rise to progressively higher levels. Ordinarily, a substantial amount of cur-rency returns to the Reserve Banks after Christmas, and the resultant additions to member bank reserves, supple-mented by Treasury disbursements and increases in the gold stock, should cause a renewed accumulation of excess reserves in the member banks in January.The accompanying diagram indicates the changes which have occurred during each of the past four yearsin the amount of currency outstanding through the Federal Reserve Bank of New York, cumulated from the last Wednesday of the preceding year. As the diagram shows, the increase during 1940 was even larger than in 1939, and on December 24 approximately $325,000,000 more currency was outstanding through this bank than on the last weekly reporting date in1939. This net outflow of currency followed an out-flow of more than $250,000,000 during 1939. A number of factors are believed to have been responsible for the continued ‘°e in currency circulation, although 11° relative importance of these factors, such as bank service charges, low level of interest rates on savings accounts, foreign demands for United States currency manifested  both in this country and abroad, and the level of busi-ness activity, is not known. It is of some significance, however, that in the latter part of 1937, when business activity was undergoing a sharp reduction, the amount of currency called into use showed only a slight sea-sonal rise in the closing months of the year. In 1940, with business activity rising sharply, a substantial in-crease in currency circulation was to be expected from this factor, quite aside from other influences. millions OFDOLLARS + 350 + 300 + 250 +200 + <50 + 100 + 50 0 - 50 - too - 150 Changes in Volume of Currency Outstanding through Federal   Reserve Bank of New York (Weekly data for each year   cumulated from last Wednesday of preceding year) JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC  2 MONTHLY REVIEW, JANUARY 1, 1941 Owing in part to loan expansion and in part to pur-chases of securities, total loans and investments of the weekly reporting banks in 101 cities increased $700,000,000 further during the four weeks ended De-cember 24, to reach a new high level, approximately $1,200,000,000 above the 1929 peak. With respect to loans, those classified as commercial, industrial, and agricultural increased $105,000,000 further at a time when there is usually some seasonal reduction; this expansion was fairly widespread throughout the country. Loans to brokers and dealers in securities, although still at very low levels, rose by a net amount of $78,000,000, of which nearly two thirds occurred at New York City  banks, the increase apparently being only partly ac-counted for by borrowings by dealers in Government securities in connection with December Treasury financing.The investment holdings of the reporting banks showed an increase of $476,000,000 which was about twice the rise in their loans. To a considerable extent the increase in investment holdings reflected acquisition of United States Treasury notes, holdings of which rose $276,000,000 dur-ing the four weeks ended December 24; $234,000,000 of this increase occurred in the week ended December 18, presumably indicating that a substantial part of the $531,000,000 new issue of National Defense notes was taken by the reporting banks for their own account. The United States bond holdings of the reporting banks also showed an increase of $61,000,000 during the four weeks ended December 24, which was entirely accounted for by increases in holdings of such obligations by New York City banks. Holdings of Government guaranteed securities and of miscellaneous securities by New York City banks likewise increased during this period, and holdings of miscellaneous securities by banks in 100 other cities also tended to rise.Adjusted demand deposits of the reporting banks rose to new high levels in December. Domestic inter- bank deposits in New York City banks stood at $3,800,000,000 on December 24, an increase of $400,000,000 during the past year. G overnment  S ecurities Government bond price fluctuations were indecisive in the first five trading sessions of December but, sub-sequently, prices moved higher both in anticipation of, and after, the Treasury’s announcement on December 10 that the Treasury’s midmonth financing would be confined to a cash offering of $500,000,000 of taxable notes. The notes, dated December 18, carrying a %  per cent coupon, and maturing in five years, comprised the first issue of National Defense securities other than bills under the authorization of the (first) Revenue Act of 1940, and they were also the first Treasury notes that have been issued which are subject to all Federal income, estate, and gift taxes. The new Defense notes, heavily oversubscribed on December 11, were allotted on the R ise   in  M ember  B ank  C redit  basis of 13 per cent of individual subscriptions but not less than $100 on any one subscription. Total subscrip-tions allotted amounted to $530,838,700, of which about half was allotted in the Second Federal Reserve District.After establishing a new record high on December 10, the average price of long term Treasury bonds declined % of a point by December 20, but subsequently showed a net recovery of about % point. The medium term Treasury issues acted in much the same way.Treasury note prices moved up slightly from the  beginning of December to the 9th, the average yield on 3 to 5 year Treasury notes declining from 0.35 per cent to 0.31 per cent (a new low). Through most of the remainder of the month prices held at a somewhat lower level.Treasury bill financing during December consisted of four weekly issues in the National Defense Series, each in the amount of approximately $100,000,000 and each a replacement of similar maturities. The accepted bids for the issue dated December 4 were awarded at 0.002  per cent and those for the December 11 issue at 0.001  per cent. Except for $30,000 tendered at slightly above  par, the bids accepted for the December 18 issue were tendered at par; those for the December 26 issue were at prices slightly above par and at par. Money Rates in New YorkDec. 30, 1939Nov. 30, 1940Dec. 30, 1940Stock Exchange call loans......................111Stock Exchange 90 day loans................ *1H*1H*1H  Prime commercial paper 4-6 months. .  M-*Att-Vsy2-% Bills—90 day unindorsed........................ %We  Average yield on Treasury notes (3-50.460.350.36# Average yield on Treasury bonds (notcallable within 12 years) ............... .. 2.302.041.98 Average rate on latest Treasury billsale, 90 day issue..................................0.0070.004 t Federal Reserve Bank of New Yorkdiscount rate..........................................111Federal Reserve Bank of New Yorkbuying rate for 90 day indorsed bills  HH  H  * Nominal.  X  Negative yield.# Change of +0.03 per cent from previous yields due to dropping from the average the 1 Y% per cent Treasury note issue of December 15, 1943, which matures within three years. C ommercial  P aper    and  B ills During December the limited supply of paper remained the primary influence restricting transactions in the com-mercial paper market. Rates previously in effect were maintained. The amount of paper outstanding through reporting commercial paper houses at the end of Novem- ber was $231,800,000, or approximately $20,000,000 less than a month earlier—a decline sufficient to cancel the increases of the preceding three months. A year ago outstandings aggregated $214,400,000.The bill market continued during December in the same dormant condition that has prevailed for some time  past, and quoted rates held steady. The total amount of bankers acceptances outstanding at the end of No-vember was approximately $196,700,000, a further   FEDERAL RESERVE BANK OF NEW YORK3 monthly increase of $10,000,000. This increase was ac-counted for by moderate rises in outstandings of import  bills and domestic warehouse credits. As compared with  November, 1939, bills outstanding were down $26,000,000,  principally because of a decline in export bills. New FinancingDuring December a total of $560,000,000 of corporate and municipal new security issues was publicly offered or privately sold; more than two thirds of the total financ-ing was concentrated in the first half of the month. This was the largest total for any month since June, 1939, with the exception of October, 1940. Corporate financing, which amounted to $380,000,000, exceeded that of any month during the last three and onehalf years with the exception again of October, 1940. However, the amount representing new capital, $55,000,000, was below the aver-age of recent months.The principal corporate and municipal new security issues marketed during December were as follows: C orporate $101,800,000 Appalachian Electric Power Company securities consisting of $70,000,000 of 3%  per cent first mortgage bonds of 1970, priced at 107 to yield 2.90 per cent; and 300,000 shares ($31,800,000) of 4:Y2   per cent preferred stock priced at 106; for refunding purposes70.000.000 National Dairy Products Corporation securitiesconsisting of $55,000,000 3%  per cent term de bentures of 1960, priced at 104% to yield 2.93 per cent; and $15,000,000 0.375-2.10 per cent serial debentures maturing 1941-50, priced at par; $2,600,000 of the above for new capital purposes53.000.000 Boston Edison Company 2%  per cent first mort gage bonds of 1970, priced at 105 to yield 2.51 per cent; for refunding purposes50.000.000 Detroit Edison Company 3 per cent general andrefunding bonds of 1970, priced at 107*4 to yield 2.65 per cent; for refunding purposes. M unicipal $55,000,000 City of New York 2%  per cent serial bonds of 1941-70, priced to yield 0.30-2.85 per cent; for new capital purposes27,750,000 Port of New York Authority 3 per cent bonds of 1975, priced at 102% to yield 2.875 per cent; for refunding purposes25.000.000 New York State 1V2   per cent serial bonds maturing 1941-80, priced to yield 0.15-1.56 per cent; for new capital purposes. Short term State and municipal awards not included in the $560,000,000 total accounted for an additional $105,000,000. Included in this classification were $45, 000,000 New York City 0.25 per cent revenue bills matur-ing in March and April, 1941, and $25,000,000 Common-wealth of Pennsylvania 1% per cent tax notes maturing in April, 1941. The latter were reoffered to yield 0.15  per cent.Public announcements made during December indicate the following forthcoming issues: $35,000,000 Phillips Petroleum Company debentures and notes, $12,570,000 Union Pacific Railroad Company equipment trust certifi-cates, and $11,500,000 Southern Counties Gas CompanyYEARQUARTERQUARTER 1939 1940 Monthly Average Volume of Domestic Corporate Security Issues   for Refunding and for New Capital (In millions of    dollars; fourth quarter 1940 data preliminary)  bonds. A substantial amount of other new security flota-tions is reported to be under consideration by various companies, but few of the issues have yet progressed to the point of registration with the Securities and Exchange Commission.As indicated in the accompanying chart, the monthly average of corporate new security issues during the final quarter of 1940 was the largest for any quarter in more than two years. For the calendar year as a whole, cor- porate financing averaged $225,000,000 a month, which with the exception of 1936 was the highest level reached since 1930. Corporate flotations representing new capital averaged $60,000,000 a month in 1940 or almost double the average for 1939. The portion of corporate financing arranged through the private placement of securities represented about one third of the grand total, approxi-mately the same proportion that prevailed in 1938 and1939.Security MarketsStock prices, which had been declining in the latter  part of November, continued to ease early in December. Slightly firmer quotations prevailed between December 6 and 13, however, owing in part perhaps to news of Greek and British military successes. Subsequently,  prices again weakened and at the month ’s low on Decem- ber 23 the average price of common stocks included in Standard Statistics 90 stock index showed a cancellation of 42 per cent of the JuneNovember rise and was 19  per cent below the year’s high reached on January 3,1940. As the month neared its close a stronger tone was in evidence. In contrast to the experience in November,  public utility stocks were steadier in December than in-dustrial or railway issues. The volume of stock trading  picked up somewhat after the first week of December  but did not approach the early November level.Prices of high and medium grade bonds reached new highs during December. The price average of the prime corporate bonds constituting the Aaa list of Moody's Investors Service advanced about % point between  November 30 and December 12 to another record level,  but, subsequently, this gain was lost. The average price  4MONTHLY REVIEW, JANUARY 1, 1941 of Moody’s Baa (medium grade) corporate bonds moved up % of a point between December 2 and 17, again estab-lishing a new high, which, in turn, was slightly exceeded on the 30th, after an intervening period of somewhat low-er quotations. High grade municipal bonds, as measured  by the Standard Statistics price index, moved irregularly after setting another record high on December 11. As in  November, the possibility that tax exemption features of municipal bonds might be eliminated from future issues apparently had a bearing on the strong showing of the municipals early in December.Gold MovementsImports of gold into the United States during Decem- ber were considerably smaller than in other recent months, and the increase of about $195,000,000 in the gold stock of the United States was the smallest for any month since October, 1939. The amount of gold held under earmark for foreign account at the Federal Reserve Banks was reduced about $5,000,000 during December to a total of approximately $1,810,000,000. For the year 1940, the rise in the gold stock was far greater than in any  previous year, amounting to about $4,350,000,000, as compared with the previous record of $3,130,000,000 in 1939. Earmarked gold holdings for foreign account rose $650,000,000 during the past year.In the five weeks ended December 25, the Department of Commerce reported the receipt of $200,800,000 of gold in the following principal amounts: $142,300,000 from Canada, $15,000,000 from Australia, $13,000,000 from Argentina, $9,100,000 from British India, $4,200,000 from Japan, $4,100,000 from the Philippines, $3,200,000 from South Africa, $2,800,000 from Colombia, $1,500,000 from Portugal, and $1,100,000 from Chile.Foreign ExchangesDuring the month of December trading in the New York foreign exchange market continued inactive and exchange rate fluctuations were insignificant. The low volume of turnover in the exchange market is, of course, the result not only of the various legal obstructions to capital movements, both here and abroad, but also of the greatly increased tendency for exports and imports to be invoiced in terms of dollars instead of foreign currencies.The Canadian monetary authorities have issued sev-eral additional regulations, at least one of which should have the effect of restricting further the demand for the Canadian dollar in the free market. The regulations have  been revised to prevent the use by nonresidents of “free market” Canadian dollars in payment for various busi-ness services rendered in Canada, although certain small services are exempt from this order. In the New York market, the unofficial discount on Canadian dollars widened from 13 per cent at the beginning of the month to 14% per cent on December 10, but narrowed again to close the month at 13% per cent.Some movement occurred in the rate for the Shanghai dollar during the past month. Following the announce-ment that $100,000,000 was to be made available to the Chinese authorities by United States Government agen-cies, the quotation for the Chinese currency appreciated somewhat to 6 cents in the early part of December. Sub-sequently, however, a weaker tendency developed, ap- parently in anticipation of the early establishment of a new central bank in the area controlled by the Nanking Government. The prospect of the substitution of a new currency for National Chinese dollars now circulating in this area may have stimulated a speculative demand for foreign exchange in the Shanghai market* The Chinese dollar was quoted as low as 5% cents on Decem- ber 23. By the end of the month, however, the rate had recovered slightly.The discount on the Cuban peso temporarily widened somewhat on December 10, but showed no net change for the month as a whole. A temporary reaction also oc-curred in the Swiss franc in midDecember, when the rate declined to $0.2318, but a recovery to around $0.2321 occurred shortly afterward.Foreign TradeExports of merchandise from the United States, at a value of $328,000,000 during November, showed a de-crease of about 5 per cent from the previous month, though exceeding the figure of a year earlier by 12 per cent. On the other hand, imports, valued at $223,000,000, were 8 per cent larger than in October but 5 per cent less than in November, 1939. The resulting excess of exports of $105,000,000 in the past November was nearly double that of a year previous but was smaller than the export balance in most months of 1940.The decline between October and November in the value of exports was due in part to decreases of a sea-sonal nature in exports of agricultural products, and in  part to reductions in shipments abroad of a number of nonagricultural products. Cotton exports were valued at approximately $3,000,000 less than in October and were equal to only about onefourth the November, 1939, figure. Shipments abroad of aircraft—largely to Great Britain—declined to $26,738,000 in November from $31,389,000 in the previous month, but were four times as large as in November, 1939. There was also a sizable drop between October and November in exports of iron and steel semimanufactures. On the other hand, exports of automobiles (both passenger cars and motor trucks), gasoline, metalworking machinery, and firearms exceeded those of October, and the majority of these exports showed exceptionally large gains over November, 1939.Among the imports, the principal factors in the increase  between October and November were considerably larger receipts of silk, ferromanganese, furs, newsprint paper, coffee, and hides and skins. Imports of copper, burlap, fruits and nuts, and tobacco, however, were somewhat smaller than in the previous month. Compared with  November, 1939, large dollar gains were recorded in receipts of such commodities as rubber, silk, tin, sugar, wool, and copper, while considerable reductions were shown in imports of woodpulp, coffee, diamonds, and expressed vegetable oils.
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