September 17, 2014

The big news of the day was the Fed’s announcement of policy normalization principles and plans:

All FOMC participants but one agreed on the following key elements of the approach they intend to implement when it becomes appropriate to begin normalizing the stance of monetary policy:
  • • The Committee will determine the timing and pace of policy normalization–meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve’s securities holdings–so as to promote its statutory mandate of maximum employment and price stability.
    • ◦ When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
    • ◦ During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.
    • ◦ During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.
  • • The Committee intends to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.
    • ◦ The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
    • ◦ The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.
  • • The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
  • • The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.

This was accompanied by the FOMC release:

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee’s stated forward guidance. President Plosser objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.

The news was largely a wash as far as North American markets were concerned:

Stocks briefly extended gains as the Fed’s statement said the economy is expanding at a moderate pace and inflation is below its goal. It maintained a commitment to keep interest rates near zero for a “considerable time” after asset purchases are completed in October. Fed officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June. The rate will be 3.75 percent at the end of 2017, the Fed said in its Summary of Economic Projections.

The Summary of Economic Projections shows that most FOMC members expect policy firming in 2015, with a longer-run (post 2017) Fed rate of 3.75-00%.

Meanwhile, here in Canada, the central planners are in charge:

The federal government is imposing a fine on Canadian National Railway Co. for failing to comply with an order that it move a minimum amount of grain each week.

The monetary penalty is the first levelled under the Fair Rail for Grain Farmers Act, which was passed in the spring to address agriculture industry complaints the country’s two major railways were providing poor service that left traders unable to meet demand from buyers and farmers facing cash shortages.

CN chief executive Claude Mongeau defended the company’s actions, telling a conference on Wednesday that there has not been enough demand from grain companies for the railway to supply the 5,000 railcars. He said that is an indication the backlog that gripped the rail network last winter has been cleared and the railway is having no trouble keeping up with the fall harvest.

“In fact, to be honest with you, the last several weeks, there has not been enough demand for us to meet the [government order], not enough demand, not enough deliveries in the farm country,” Mr. Mongeau said at an investors’ conference in Montreal. “So we can’t move what they don’t deliver or what they don’t order, and I think that’s a good sign.”

However, through a spokesman, Agriculture Minister Gerry Ritz said he was “concerned” the railway was not meeting the minimum volume requirements.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 26bp, FixedResets off 4bp and DeemedRetractibles down 10bp. Volatility was average and mostly negative. Volume was low.

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 -0.6355 % 2,640.7
FixedFloater 4.18 % 3.43 % 25,451 18.49 1 0.0000 % 4,154.7
Floater 2.92 % 3.04 % 52,283 19.62 4 -0.6355 % 2,730.7
OpRet 4.05 % 0.41 % 90,960 0.08 1 0.0000 % 2,728.2
SplitShare 4.30 % 3.77 % 111,163 3.91 5 -0.4708 % 3,147.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,494.6
Perpetual-Premium 5.47 % 2.07 % 70,423 0.09 20 -0.0667 % 2,437.4
Perpetual-Discount 5.26 % 5.20 % 101,294 15.14 16 -0.2555 % 2,595.1
FixedReset 4.27 % 3.82 % 187,031 8.09 74 -0.0385 % 2,554.4
Deemed-Retractible 5.01 % 2.29 % 102,126 0.29 42 -0.0970 % 2,562.0
FloatingReset 2.62 % 0.96 % 72,776 0.16 6 0.2230 % 2,530.0
Performance Highlights
Issue Index Change Notes
GWO.PR.R Deemed-Retractible -1.51 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.48
Bid-YTW : 5.59 %
BAM.PR.K Floater -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 17.08
Evaluated at bid price : 17.08
Bid-YTW : 3.07 %
FTS.PR.F Perpetual-Discount -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 23.46
Evaluated at bid price : 23.72
Bid-YTW : 5.20 %
BAM.PR.N Perpetual-Discount -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 21.24
Evaluated at bid price : 21.24
Bid-YTW : 5.62 %
BAM.PF.E FixedReset -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 22.97
Evaluated at bid price : 24.56
Bid-YTW : 4.27 %
IAG.PR.A Deemed-Retractible 1.25 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.75
Bid-YTW : 5.78 %
Volume Highlights
Issue Index Shares
Traded
Notes
NA.PR.Q FixedReset 114,575 Scotia crossed 103,700 at 25.77.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-11-15
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 2.93 %
BMO.PR.M FixedReset 104,030 Nesbitt crossed 100,000 at 25.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-08-25
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 3.14 %
ENB.PR.Y FixedReset 85,688 Scotia crossed 80,400 at 23.52.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 22.55
Evaluated at bid price : 23.50
Bid-YTW : 4.28 %
TD.PF.B FixedReset 82,389 Scotia crossed blocks of 37,000 and 15,800, both at 25.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 23.20
Evaluated at bid price : 25.08
Bid-YTW : 3.82 %
FTS.PR.K FixedReset 82,194 RBC crossed blocks of 42,000 and 15,400, both at 25.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 23.12
Evaluated at bid price : 24.75
Bid-YTW : 3.74 %
MFC.PR.M FixedReset 70,875 Scotia crossed 52,000 at 25.09.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-12-19
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 3.88 %
There were 23 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PVS.PR.C SplitShare Quote: 25.91 – 26.80
Spot Rate : 0.8900
Average : 0.7539

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-12-10
Maturity Price : 25.50
Evaluated at bid price : 25.91
Bid-YTW : 3.54 %

ENB.PR.B FixedReset Quote: 24.15 – 24.50
Spot Rate : 0.3500
Average : 0.2379

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 23.09
Evaluated at bid price : 24.15
Bid-YTW : 4.18 %

PWF.PR.A Floater Quote: 20.50 – 21.25
Spot Rate : 0.7500
Average : 0.6573

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 2.57 %

IAG.PR.F Deemed-Retractible Quote: 25.81 – 26.17
Spot Rate : 0.3600
Average : 0.2697

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.81
Bid-YTW : 5.13 %

BAM.PR.K Floater Quote: 17.08 – 17.30
Spot Rate : 0.2200
Average : 0.1322

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-17
Maturity Price : 17.08
Evaluated at bid price : 17.08
Bid-YTW : 3.07 %

GWO.PR.R Deemed-Retractible Quote: 23.48 – 23.74
Spot Rate : 0.2600
Average : 0.1753

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.48
Bid-YTW : 5.59 %

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