The Bank of Canada statement held no surprises:
Canada’s economy grew by 0.6 per cent at annual rates in the fourth quarter of 2012, with solid growth across most domestic components of GDP offset by a sharp reduction in the pace of inventory investment. The Bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment. With a more constructive evolution of imbalances in the household sector, residential investment is expected to decline further from historically high levels. The Bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels. Despite the expected recovery in exports, they are likely to remain below their pre-recession peak until the second half of 2014 owing to restrained foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.
Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs, which were only partially offset by higher gasoline prices. Low core inflation reflects muted price pressures across a wide range of goods and services, consistent with material excess capacity in the economy. Core and total CPI inflation are expected to remain low in the near term before rising gradually to reach 2 per cent over the projection horizon as the economy returns to full capacity and inflation expectations remain well-anchored.
Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.
The Financial Post points out:
In their statement, policymakers said that given the “continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”
That replaces the phrase “the timing of any such withdrawal is less imminent than previously anticipated,” which has accompanied recent rate announcements.
ETFs are a marvellous way for liquidity seeking investors to invest in illiquid markets. But friction works both ways:
Exchange traded funds have transformed the gold market. Since the first fund was launched nearly a decade ago, the products have become so successful in offering a simple way for investors to buy physical gold that they have acquired the nickname “the people’s central bank.”
But what happens when the people’s central bank decides to sell?
That is the question now haunting the bullion market. Since the start of January, gold ETFs have dumped 140 tonnes of gold. February saw the largest monthly outflow of gold from ETFs on record.
The sell-off is partly a reflection of broader negative sentiment towards gold, as investors become more confident in the global economy and put their money into riskier assets such as equities. Prices have slid 12 per cent since October to less than $1,580 (U.S.) an ounce, and are down 18 per cent from their record nominal high in 2011.
This taxonomy of sales traders made me laugh:
5.) Low Man –If I sneezed he’d say “bless you,” if I was tired and hung over he’d worry he’d done something wrong. He worked extremely hard, but the problem was he didn’t get a lot of respect from his own desk.
6.) The Man – He’d answer the phone “250k up – what do you want to do?” Management loved him—he was the busiest guy on Wall Street. All you had to do was ask him. He’d get business done and wears his firm’s crest on his sleeve. He worked for one of the white-shoe investment banks and had gone to one of the best schools. He wound up as an equity sales trader because he wasn’t smart enough to do something more difficult, but he always spun it that it was his choice to trade.
7.) Family Man – He’d been passed over for several promotions, and was often caught off the desk calling his wife to discuss the twins’ science project. He’d accepted the ceiling in his career; Family Man was honest, calm and genuinely cared about doing the right thing. He tended to whisper.
8.) Script Man – Every morning he’d call at the exact time using the exact voice from the day before. Early in his career he’d been confused about the business, so he decided to keep it simple. He never cracked a joke in his entire career
This characterization of entrepreneurs was interesting:
Some of the common characteristics that “turn out to be accurate predictors of entrepreneurial success” go back to when they were teenagers, said the release about the study, which looked at longitudinal data of more than 12,000 men and women.
Among them: the entrepreneurs had high IQs, came from stable families, had parents earning higher than average salaries, and they showed greater self-esteem, the release said.
But they also “exhibited aggressive behaviour and got in trouble as teenagers,” said one of the researchers, Ross Levine, a professor at the Haas School of Business at the University of California at Berkeley, in the release about the study, which he carried out with Yona Rubinstein of the London School of Economics and Political Science.
“This is the person who wasn’t afraid to break the rules, take things by force or even be involved in minor drugs.”
I mentioned BNS.PR.Y BNS.PR.P yesterday with reference to its imminent Exchange Date and the lack of guidance in the bank’s earnings release. The Financial Post has more:
John Nagel, head of the preferred share trading group at Desjardins Securities the firm that help design the rate reset pref, is also waiting anxiously, though he believes BNS should call the deal. “Half the people I have spoken to think they will call the issue; the other half think BNS will leave it out there because the rate [for the bank] is reasonable.”
If BNS doesn’t redeem, Nagel argues for investors there is better value in opting for the floating rate prefs, both from an initial absolute yield and the expectation that rates will rise over the next five years.
Nagel does have a point about floating rate: three month bills are averaging 0.96% while five-year Canadas are currently at 1.31% – it won’t take much of a nudge for the bills to average more than 1.31% over the next five years. Nagel has been previously quoted as favouring the Floating Rate option.
It was a mixed day for the Canadian preferred share market, with PerpetualPremiumgs gaining 3bp, FixedResets off 5bp and DeemedRetractibles down 7bp. Volatility was minor. Volume was quite high.
PerpetualDiscounts now yield 4.87%, equivalent to 6.33% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.25%, so the pre-tax interest equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, unchanged from February 27.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2035 % | 2,607.5 |
| FixedFloater | 4.09 % | 3.42 % | 27,054 | 18.44 | 1 | -0.8529 % | 3,980.2 |
| Floater | 2.55 % | 2.86 % | 90,821 | 20.01 | 5 | -0.2035 % | 2,815.4 |
| OpRet | 4.80 % | 2.48 % | 47,285 | 0.31 | 5 | -0.0155 % | 2,596.3 |
| SplitShare | 4.59 % | 4.59 % | 53,191 | 4.24 | 2 | 0.2803 % | 2,934.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0155 % | 2,374.1 |
| Perpetual-Premium | 5.21 % | 1.29 % | 89,789 | 0.15 | 31 | 0.0275 % | 2,356.5 |
| Perpetual-Discount | 4.82 % | 4.87 % | 136,618 | 15.63 | 4 | 0.1114 % | 2,656.0 |
| FixedReset | 4.90 % | 2.72 % | 286,016 | 3.54 | 80 | -0.0524 % | 2,504.6 |
| Deemed-Retractible | 4.86 % | 1.72 % | 139,379 | 0.22 | 44 | -0.0722 % | 2,445.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| MFC.PR.F | FixedReset | -1.84 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 3.20 % |
| PWF.PR.A | Floater | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-06 Maturity Price : 23.48 Evaluated at bid price : 23.75 Bid-YTW : 2.19 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TRP.PR.D | FixedReset | 130,521 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-06 Maturity Price : 23.24 Evaluated at bid price : 25.45 Bid-YTW : 3.49 % |
| BAM.PR.G | FixedFloater | 102,140 | Nesbitt crossed 100,000 at 23.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-06 Maturity Price : 23.43 Evaluated at bid price : 23.25 Bid-YTW : 3.42 % |
| RY.PR.T | FixedReset | 92,183 | CIBC sold 50,000 to TD and 28,700 to Desjardins, both at 26.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-24 Maturity Price : 25.00 Evaluated at bid price : 26.50 Bid-YTW : 2.24 % |
| CM.PR.L | FixedReset | 88,244 | RBC bought blocks of 10,000 and 25,000 from TD and blocks of 10,000 and 12,700 from CIBC, all at 26.49. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.49 Bid-YTW : 1.81 % |
| BAM.PR.K | Floater | 78,025 | Scotia crossed blocks of 48,200 and 25,000, both at 18.40. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-06 Maturity Price : 18.39 Evaluated at bid price : 18.39 Bid-YTW : 2.88 % |
| BNS.PR.T | FixedReset | 71,540 | RBC bought 33,700 from CIBC at 26.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-25 Maturity Price : 25.00 Evaluated at bid price : 26.30 Bid-YTW : 2.12 % |
| There were 53 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.H | FixedReset | Quote: 26.55 – 27.00 Spot Rate : 0.4500 Average : 0.2730 YTW SCENARIO |
| MFC.PR.F | FixedReset | Quote: 25.02 – 25.38 Spot Rate : 0.3600 Average : 0.2170 YTW SCENARIO |
| HSB.PR.D | Deemed-Retractible | Quote: 25.79 – 26.07 Spot Rate : 0.2800 Average : 0.1738 YTW SCENARIO |
| W.PR.J | Perpetual-Premium | Quote: 25.59 – 25.94 Spot Rate : 0.3500 Average : 0.2549 YTW SCENARIO |
| NA.PR.N | FixedReset | Quote: 25.21 – 25.50 Spot Rate : 0.2900 Average : 0.2002 YTW SCENARIO |
| RY.PR.I | FixedReset | Quote: 25.51 – 25.74 Spot Rate : 0.2300 Average : 0.1430 YTW SCENARIO |
Regarding possible conversion of BNS preferred to floating rate preferred you have to keep in mind that the average three month bill rate for the last five years is only .95. If we assume that the next five years will look like the last five you should stay with a fixed rate of 1.30…..Leo
True enough, and it’s also true that (contrary to Nagel) I suggest that going for the five-year fixed rate is typically better than going for the floaters because of the term premium – long term issues will generally (not always) yield more to their full term than a series of rolled shorter investments.
In this case, however, it’s not very clear cut. Yes, the going-in rate is only about 0.95% on the bills and about 1.30% on the bonds, and yes, this implies that the five-year fixed rate will win by about 35bp.
However, in making predictions you shouldn’t just predict a single rate, you have to look at the distribution of possible outcomes. I suggest that if you pick the floaters, your maximum loss is that predicted 35bp: while bill yields certainly can be lower than current over the next five years, it doesn’t seem to me to be very likely. But your winnings in a rising rate environment could be more than 35bp – perhaps considerably more.
So you pays your money and you takes your chances!
I am afraid that if the three month bill rate increase so fast as to give you a large gain the issuer will call the shares. So if the bill rate stay the same you loose and if the bill rate increase too fast you do not gain!
Yes, according to the prospectus the Floating Resets may be redeemed at :
But there are two more things to think about:
a) The issuer would presumably have to find funds elsewhere in its operations to redeem the issue; refunding the series at a rate that’s enough lower to make the redemption worthwhile might be problematic.
b) In such a rapidly rising rate environment, what would you rather have? $25.50 in cash or a fixed rate instrument with some time to go before possible redemption at par?
[…] PerpetualDiscounts now yield 4.82%, equivalent to 6.27% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.35%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, unchanged from the figure reported on March 6. […]