Greenbook/Tealbook

Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Content last modified 6/05/2009. CONFIDENTIAL (FR) SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System March 28, 1969 SUPPLEMENTAL NOTES The Domestic Financial Situation Bank credit. Total loans and investments at all commercial banks are now estimated to have declined in March, bringing the annual rate of increase for the first quarter as a whole to 1.2 per cent. Continued liquidation of banks holdings of U.S. Government securities and a decline in total loans more than offset a small increase in holdings of other securities. The reduction in loans reflected large declines in security and nonbank financial loans and sharply reduced business loan growth, while real estate and consumer loans continued to expand at close to the advanced pace of recent months. NET CHANGE IN BANK CREDIT All Commercial Banks (Seasonally adjusted annual rates, in per cent) 1969 1968 4th Q. let Q. Total loans & investments- 10.4 1.2 2.5 4.4 U.S. Gov't. securities -14.4 -29.8 -25.3 -51.7 Other securities 20.9 5.1 8.5 -- Total loans 13.9 7.8 7.1 19.4 Business loans 12.2 13.9 22.8 14.9 All other loans 15.0 4.1 - 2.3 22.1 Jan. Feb. 1/ Mai r.- 3.1 -1l 4.5 5.8 - 3.3 3.7 - 7.5 1/ All March figures are preliminary e stimates based on incomplete data and are subject to revision. 2/ Last-Wednesday of the month series. Business loan expansion during the first half of March continued at about the rapid rate of recent months, but was much less than usual during the following tax week. The light business borrowing during that week probably reflected, among other things, pre-tax date borrowing to get funds ahead of the prime rate increase, a transfer of domestic loans by one bank to its foreign branch, large loan repayments by a large utility out of the proceeds of a capital market financing, and the run-off of liquid asset holdings. CHANGES IN SELECTED BALANCE SHEET ITEMS AT ALL WEEKLY REPORTING BANKS OVER THE MARCH TAX & DIVIDEND PERIOD(Millions of dollars, not seasonally adjusted) Item 1966 1967 1968 1969 Business loans Government security dealer loans Finance company loans Treasury bill holdings Negotiable CD's Total bank financing 1,309 125 1,039 161 - 429 3,063 1,261 891 469 1,381 125 3,877 1,135 - 397 264 - 447 - 455 1,010 - Corporate income tax payments (1969 estimated) 7,244 6,728 4,439 5,423 Ratio of business loans to tax payments (per cent) 18 19 26 16 Ratio of total bank financing to tax payments (per cent) 42 58 23 18 Tax bills outstanding 3,009 2,006 2,003 2,015 Tax bills turned in for taxes (1969 estimated) 2,157 1,124 884 817 30 17 20 15 841 116 135 392 788 986 Memo: Ratio of bills turned in for taxes to tax payments (per cent) 1/ Reporting weeks including March 10 and 15. A decline in CD's is considered as a source of financing and is added to the other components to obtain the total bank financing. KEY INTEREST RATES 1968 Lows Highs 1969 March 4 March 27 Short-Term Rates Federal funds (weekly average) 3-months Treasury bills (bid) Bankers' acceptances Euro-dollars Federal agencies Finance paper CD's (prime NYC) Highest quoted new issue Secondary market 6-months Treasury bills (bid) Bankers' acceptances Commercial paper Federal agencies 4.56 (1/3) 6.88 (3/26) 6.43 (2/26) 6.88 (3/26) 4.82 5.25 5.43 5.00 5.13 6.25 6.75 8.62 6.51 6.50 (2/21) (3/27) 6.19 6.62 8.21 6.44 6.38 5.94 6.62 8.48 6.08 6.50 5.20 (1/31) 6.00 6.70 (3/27) 6.00 6.55 6.00 6.70 4.98 5.38 5.50 5.25 6.42 6.88 6.75 6.59 (1/7) (3/12) (3/14) (1/3) 6.37 6.75 6.75 6.60 6.07 6.75 6.88 6.41 6.25 6.85 (3/27) 6.25 6.65 6.25 6.85 2.72 (8/8) 6.39 (2/27) 4.55 (3/21) 6.39 4.25 4.50 5.42 (1/12) 5.16 (8/1) 6.45 (3/17) 6.32 (3/18) 6.45 6.17 6.40 6.24 5.95 (9/5) 6.77 (10/3) 6.99 (3/27) 7.63 (3/27) 6.69 7.30 6.99 7.63 6.13 (8/29) 6.29 (2/2) 7.46 (3/27) 7.27 (3/7) 6.93 7.46 4.07 (8/8) 5.30 (3/27) 5.02 (3/27) 5.04 4.80 5.30 3.80 (8/8) 7.12 (5/6) 8.17 (3/3) 8.14 (2/24) 8.09 (3/24) (1/29) (3/7) (2/2) (2/9) (3/7) 5.25 (2/8) (1/29) (3/7) (3/7) (2/9) (1/7) (3/12) (3/18) CD's (prime NYC) Highest quoted new issue Secondary market 1-year Treasury bills (bid) Prime municipals 5.50 (3/7) 5.45 (1/31) 5.05 (8/1) 6.16 Intermediate and Long-Term Treasury coupon issues 5-years 20-years Corporate Seasoned Aaa Baa New Issue Aaa With call protection Without call protection Municipal Bond Buyer Index Moody'a Aaa Mortgage--implicit yield in FNMA weekly auction 1/ _/ 5.02 Yield on 6-month forward commitment after allowance for commitment fee and required purchase and holding of FNMA stock. Assumes discount on 30-year loan amortized over 15 years. -4International Developments New figures on U.S. balance of payments results in February are available. The liquidity balance for February is now given as a deficit of $773 million, compared with the $544 million "flash" report figure used in the Greenbook analysis (none of these figures are seasonally adjusted). This raises the January-February liquidity deficit to $1,043 million instead of the $800 million figure given on page IV - 1. However, the Greenbook estimate for March through the 19th may have been correspondingly too high; it was based on weekly figures and may include some large deficit days at the end of February. The seasonally adjusted liquidity deficit for January and February would be nearly $1.5 billion, and the estimated deficit range for the first quarter is still $1-1/2 to $2 billion. On the official settlements basis the February balance was a small surplus of $27 million (not seasonally adjusted), which is a somewhat better result than assumed in the Greenbook. The seasonally adjusted surplus on this basis through March 19 is still estimated to be near $1 billion. U.S. foreign trade data for February are shown below with comparative figures for earlier periods, all in millions of dollars. 1968 Monthly average Census basis: Exports Imports Balance Nov. 1968-69 Seasonally adjusted Feb. Dec. Jan. 2,841 3,000 2,886 2,082 2,3131 2771 + 70 2830 + 170 2.957 70 1.967 + 116 2.674 - 362- 2,781 2.773 9 + 2,945 2.815 + 130 2,810 2940 - 130 1,980 1.970 + 10 2,250 2,680 - 430 2/ Balance of payments basis:Exports Imports Balance 1/ 2/ Released March 27. Monthly adjustments from Census basis to balance of payments basis are our estimates. A major element in the adjustments is exclusion of military export sales. (Military aid exports are excluded from both series.) In the balance of payments, military sales appear as a separate component of goods and services. Corrections Page II - 5. The next to last sentence should read "Real growth in the second half of the year" would average . . . , etc. The page reference given on page IV - 11 should have been to page IV - 27 rather than to page IV - 12. the next line, insert French before francs. Also, on page IV - 11, in SUPPLEMENTAL APPENDIX A: LIFE INSURANCE COMPANIES IN 1968* Investment patterns of the life insurance industry during 1968 reflected the impact of high and rising interest rates and general inflationary expectations. As a result, there were effects on cash flows and industry expectations for future cash flows, the volume of new commitments--absolutely as well as relative to expected investable funds--and the composition of investment allocations. Cash Flows Available for Commitments The volume of loanable funds continued to be moderated by policy loan drains and by reduced optional mortgage repayments. Consequently, funds available for investment during 1968 were equivalent to the fairly modest 1967 volume, and information now available indicates that the industry expects this pattern to continue through the first half of 1969. LIFE INSURANCE COMPANIES* Funds for investment ($ millions) First half Second half Year 1965 1966 19671/ 1968-1/ industry 1969,projection 5,263 6,216 5,284 5,400 6,360 4,602 5,881 5,800 11,623 10,818 11,165 11,200 5,700 2/ Six-Month Projections-2 Commitment Takedowns as Per Cent of Funds for Investment 1965 1966 1967 1968 * 1/ 2/ * I II III IV 76 89 75 79 82 89 74 75 82 89 74 72 89 84 79 75 Companies represent approximately two-thirds of industry assets. Partially estimated to exclude the effect of increased sample size. This represents what the reporting companies project in takedowns of commitments and in funds available for investment. Prepared by Mrs. Barbara Negri Opper, Economist, Capital Markets Section, Division of Research and Statistics. SA - 2 In 1968, the industry--as it has since 1966--also maintained considerably more leeway between its scheduled commitment takedowns and its projected cash flow, leaving uncommitted a larger share of projected loanable funds in the event that they prove unavailable. The prevailing reason for this "cushion" apparently is the recognition that cash flow is not as stable as once was thought. New Commitments As a result of factors associated with cash flow, new commitment volume has shown very little growth. Commitments during 1968 were about $1 billion less than 1967, and remain below the 1964-65 pace. LIFE INSURANCE COMPANIESNew Commitment Activity Total New Commitments ($ billions) 1963 1964 1965 1966 1967 1968 1/ * 10.7 12.0 13.8 10.9 12.4 11.3* Securities 35 35 41 42 45 38 1/ As per cent of total Real Estate Mortgages 63 63 56 54 51 56* 2 2 3 4 4 6 Companies account for approximately two-thirds of industry assets. Includes commitments under the "$1 Billion" program to invest funds in inner-city areas. STRICTLY CONFIDENTIAL FRB Although the industry had been favoring securities over mortgages since 1964, during 1968 securities commitments suffered the largest cutback. In part, this change reflects the industry's "Billion Dollar Program" to invest in inner-city projects, a large share of which was committed as mortgages. Additionally, however, a growing share of income-property mortgages--which are by far the largest proportion of total mortgage commitments--included "contingent interest" clauses. These "equity kicker" clauses permit the mortgagee to enjoy a yield higher than the contract interest rate by participating in the property's future earnings. Although little data are available on the nature or extent of these clauses, we do know that they were included in at least one-fifth of the dollar volume of income property mortgage commitments SA - 3 made during the fourth quarter of 1968. Although the historic contract yield premium on mortgages had been so small during 1968 as to favor securities, the potential yield on mortgages with contingent interest features is not only higher, but is expected to provide an inflation hedge. Average Contract LIFE INSURANCE COMPANIES Interest Rates on New Forward Investment Commitments Mortgages- 1/ Direct 2/ Placements- Differential 1965 - III IV 5.91 5.93 5.36 5.48 .55 .45 1966 - I II III IV 6.08 6.25 6.63 7.01 5.70 5.97 6.28 6.56 .38 .28 .35 .45 1967 - I II III IV 6.88 6.79 6.90 7.06 6.51 6.39 6.64 6.73 .37 .40 .26 .33 1968 - I II III IV 7.35 7.58 7.84 7.87 7.14 7.36 7.60 7.60 .21 .22 .24 .27 1/ 2/ Commitments on multifamily and nonresidential properties of $100,000 and over made by 15 companies that represent 57 per cent of industry assets. Average is weighted by loan amount. Average, weighted by amount, of commitments on straight debt placements on which the issues correspond to publicly-offered quality grades of Aaa-Baa. STRICTLY CONFIDENTIAL FRB At the same time as the volume of securities commitments were reduced, there also was a distinct shift in its composition. Although total direct placement commitments were $1 billion below the 1967 volume, higher-quality issues ("classified") actually dropped by $1.5 billion. The emphasis--as with the mortgage contingent interest clauses--was away from fixed-income yields into issues with warrants and convertible features which permit "sharing in the action". SA - 4 VOLUME OF NEW DIRECT PLACEMENT COMMITMENTS Life Insurance Companies 1/ ($ millions) Unclassified Total 1966 1967 1968 Classified Warrants and convertibles 4,061 4,647 3,587 l r D /i As per cent of total 153 291 451 953 1,053 1,492 3,108 3,594 2,095 77 77 58 21 35 89 133 306 100 140 253 515 283 359 200 63 74 72 44 January-February total: 1966 1967 1968 1969 1/ 2/ 3/ 821 383 499 453 Companies represent two-thirds of industry assets. "Classified" consists of U.S. corporate straight-debt issues for which the quality of the issuer corresponds to the top form quality grades of publicly-offered bond issues. Includes acquisitions by companies not included in the sample reporting commitments, but these companies should represent a constant share of total activity. STRICTLY CONFIDENTIAL FRB Investments While commitments to acquire securities moderated in 1968, the industry's acquisitions of securities increased. Indeed, for the first time in many years, the volume of securities acquired from previous commitments was as large as the mortgage volume; as recently as 1966, securities acquired from prior commitments were nearly $2 billion less than mortgages similarly acquired. But acquisitions from commitments reflect investment decisions A picture made earlier--sometimes as much as several years in the past. of current investment allocations is given not only by new commitment activity, which is very responsive to changed conditions, but also by acquisitions from the "open market" (as distinguished from the commitment The table below presents derived estimates of the pattern of process). securities acquisitions made outside of the commitment process. Between 1963 and 1966, a constant volume--as shown by the insignificant changes SA - 5 since 1963--was acquired from the combined long-term public market and those companies outside of the commitments sample. A large increase in 1967, followed by another of similar magnitude in 1968, suggests that the industry became more active in the long-term publicly-offered securities market.1/ LIFE INSURANCE COMPANIES- 1 Long-Term Securities Acquired In Addition to Commitment Takedowns ($ billions) / 1963 4.1 1964 1965 1966 1967 4.3 4.2 4.0 5.3 1968 6.3 Industry datafor gross acquisitions from which was subtracted takedowns of securities commit- ments of a sample representing two-thirds of industry assets. Data exclude U.S. Government securities and issues maturing in one year or less; included are U.S. and foreign corporate, State and local issues. The increase in open market securities acquisitions represents an important shift in life insurance investment policies. For many years, direct placements represented practically the only source of longterm securities acquired. There are probably several reasons for the industry having turned to the public bond market, not the least of which is the added marketability publicly-offered issues are thought to have. Another reason probably stems from the previously mentioned cautious industry attitude toward their commitments relative to expected future cash flow; since 1966, only about three-fourths of projected six-months cash flow has been allocated to forward investment commitments, indicating 1/ It is less likely that those companies representing the one-third of the industry not included in the commitments sample suddenly accounted for a much larger share of total securities acquisitions; if they did so, it was in spite of their having gained only their proportionate share of industry assets. SA - 6 the leeway the industry has programmed for possible future disruptions in investable funds. The public bond market thus offered an alternative long-term investment outlet for uncommitted cash flow as it was received. With the record yields available on publicly-offered long-term debt--and the narrowing of the historic yield advantage of private placements over public issues--the industry thus acquired flexibility at probably little additional marginal loss of yield. (Thus, the $1.5 billion decrease in "classified" direct placements was probably compensated for by the industry's public acquisition of issues in this quality range.) The industry's emphasis on equity is also demonstrated by the volume of common stock acquired. Probably the most important influence on the pattern of common stock acquisitions is the growth of separate accounts.2/ But in the competition for funds, both within the industry and of the industry versus other "saving" media, the rate of investment return and the ability to keep pace with inflation has been the crucial variable; thus, companies with leeway have also turned to common stock investments for their own portfolio, as distinguished from the separate account portfolio.3/ LIFE INSURANCE COMPANIES* Gross Acquisitions of Common Stock ($ millions) 1963 1964 1965 1966 1967 1968 * 2/ 3/ 530 807 1,043 997 1,676 2,979 Entire industry data. Separate accounts are the vehicle by which life insurance companies offer variable annuities. They are invested primarily in common stocks, and thus they do not carry a typical insurance guarantee. Benefits are paid according to the performance of the separate account. These accounts are distinguished from the life company in that they--as separate entities--are registered with the SEC. But these assets and liabilities are included in industry data. Excluding separate account funds, life insurance companies may hold (generally) only up to 5 per cent of their assets in common stock. SA - 7 Summary In 1968--and to a lesser extent in 1967--the life insurance industry has taken several new turns in response both to the pattern of interest rates during the period and to their acknowledgment of the inflationary trend. There have been noticeable changes in the type of investments acquired and programmed to be acquired through new commitments. The direction appears to be away from fixed-income obligations, as witnessed by the growing importance of contingent interest clauses on mortgages and of securities with warrants or convertible features. The strong growth in common stock acquisitions also testifies to this change as it relates both to life company portfolios and to the growth of separate accounts. Moreover, investable funds continue to show very little growth, primarily as a result of depressed mortgage return flows and the continued policy loan volume. More than that, the industry appears to have learned to work with its recent recognition that fund flows are subject to significant disruption. New forward investment commitments not only reflect the lack of growth in loanable funds, but their growth has been inhibited further by the industry's recent policy of committing a smaller portion of projected funds for investment. There is evidence that the industry, counter to long-run trend, has been acquiring long-term bonds from the public market. This seems a logical outgrowth of their commitments-to-cash flow leeway, for it provides a method of investing long term with little advance planning; in this way, as and if additional funds are realized, they are directed to the public market. One additional feature cited as a benefit of purchasing bonds from the public market is the added marketability they are thought to have within the long-term framework. 

Federal Reserve (1969, March 31). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_19690401_part3

@misc{wtfs_greenbook_19690401_part3,
  author = {Federal Reserve},
  title = {Greenbook/Tealbook},
  year = {1969},
  month = {Mar},
  howpublished = {Greenbooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/greenbook_19690401_part3},
  note = {Retrieved via When the Fed Speaks corpus}
}