There’s a bit more colour about the effect of the US jobs number, discussed March 6 on the treasury long bond:
Since hitting an all-time low of 2.22 percent on Jan. 30, Treasury 30-year bond yields have posted the biggest five-week jump in six years as better-than-forecast employment growth led investors to pull forward wagers for the Federal Reserve to raise interest rates.
…
The 30-year bond yield rose 25 basis points, or 0.25 percentage point, this week to 2.84 percent, according to Bloomberg Bond Trader prices.That pushed the yield increase to 62 basis points since January. The move is the biggest since a 1 percentage point rise in the five weeks ended Jan. 30, 2009, after the Fed said it was considering buying Treasuries to help stimulate economic growth.
…
Yields soared March 6 after the Labor Department reported the U.S. added 295,000 jobs last month, compared with a forecast for a 235,000 gain in a Bloomberg survey. The unemployment rate fell to 5.5 percent, an almost seven-year low, from 5.7 percent.It was 12th straight month payrolls have increased by at least 200,000, the best run since March 1995. Payrolls rose 3.1 million in 2014, the most in 15 years.
And some colour on the effect of the suspension of Canadian forward guidance:
Pacific Investment Management Co.’s Ed Devlin is getting out of Canadian government bonds, and Bank of Canada Governor Stephen Poloz is the reason why.
Mr. Devlin, who oversees about $17-billion (U.S.), including the Canadian portfolios for the world’s biggest manager of bond funds, said higher yields are needed to compensate for the risk of buying debt whipsawed by Mr. Poloz’s policy pronouncements.
“Investors should require a bigger risk premium to invest in these bonds,” Mr. Devlin said by phone from Los Angeles on Friday. “If you don’t know what they’re going to do, you should get paid more money to invest in them than if they were fairly predictable.”
And there are the usual arguments about this:
Gluskin-Sheff chief economist David Rosenberg said last week the confusion was putting the Bank of Canada’s credibility at risk.
“The fact that they decided to stop offering guidance and start serving up confusion makes me gun-shy about making a call,” Rosenberg told Bloomberg. “If you’re trying to promote economic growth, you probably don’t want to generate too much volatility in the financial markets to achieve that goal.”
But [Dominion Lending Centres Chief Economist Sherry] Cooper says Bay Street should spend more time watching the data, instead of obsessing about what the bank will do.
“What caused this hissy fit on Bay Street was the economists were wrong,” Cooper wrote in a note. “No one expected the rate cut, so caught with their proverbial pants down, the pundits dumped on Poloz for having misled them.”
Cooper said not only was Poloz right to cut rates, but she also sees no reason why the central bank should “telegraph rate moves in advance.”
“The lamentation over the loss of ‘forward guidance’ is pathetic .… Everyone knows that central bank action is data dependent. When the data surprise, all bets are off,” she wrote.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 15bp, FixedResets down 21bp and DeemedRetractibles gaining 3bp. Volatility was down from the levels we’ve generally seen for the past three months. Volume was low.
For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.
Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread
Here’s TRP:
Click for Big
TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.14 to be $1.20 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.07 cheap at its bid price of 24.75.
Click for Big
Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).
Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.91 to be $0.34 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.91 to be $0.38 cheap.
Click for Big
The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.
The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 25.26 to be $0.45 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.42 and appears to be $0.61 rich.
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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.66, looks $1.56 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.77 and is $1.04 rich.
Click for Big
The cancellation of the previously announced deflationary environment had an immediate effect on the implied three month bill rate, with investment-grade pairs predicting an average over the next five years of a whopping 0.10%.
Not shown is the DC.PR.B / DC.PR.D pair, which implies an average rate of negative 1.77% until its exchange date 2019-9-30.
Click for Big
Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?
| 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 | -0.4777 % | 2,408.7 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4777 % | 4,211.5 |
| Floater | 3.12 % | 3.16 % | 73,188 | 19.26 | 3 | -0.4777 % | 2,560.6 |
| OpRet | 4.07 % | 0.83 % | 105,283 | 0.28 | 1 | 0.0000 % | 2,765.8 |
| SplitShare | 4.48 % | 4.60 % | 56,172 | 4.45 | 5 | 0.0080 % | 3,207.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,529.1 |
| Perpetual-Premium | 5.29 % | -0.36 % | 56,628 | 0.08 | 25 | -0.0454 % | 2,520.9 |
| Perpetual-Discount | 4.96 % | 5.03 % | 154,171 | 15.08 | 9 | -0.1531 % | 2,804.3 |
| FixedReset | 4.42 % | 3.64 % | 233,557 | 16.51 | 80 | -0.2081 % | 2,423.9 |
| Deemed-Retractible | 4.90 % | 0.02 % | 105,071 | 0.14 | 37 | 0.0277 % | 2,656.5 |
| FloatingReset | 2.53 % | 2.91 % | 87,195 | 6.33 | 8 | -0.0854 % | 2,335.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| CIU.PR.C | FixedReset | -4.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-09 Maturity Price : 15.74 Evaluated at bid price : 15.74 Bid-YTW : 3.79 % |
| BAM.PR.Z | FixedReset | -1.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-09 Maturity Price : 23.50 Evaluated at bid price : 25.26 Bid-YTW : 3.92 % |
| TRP.PR.A | FixedReset | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-09 Maturity Price : 19.62 Evaluated at bid price : 19.62 Bid-YTW : 3.76 % |
| PWF.PR.P | FixedReset | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-09 Maturity Price : 18.65 Evaluated at bid price : 18.65 Bid-YTW : 3.53 % |
| VNR.PR.A | FixedReset | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-09 Maturity Price : 23.30 Evaluated at bid price : 24.61 Bid-YTW : 3.84 % |
| BAM.PR.X | FixedReset | 1.93 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-09 Maturity Price : 19.04 Evaluated at bid price : 19.04 Bid-YTW : 3.95 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| CM.PR.G | Perpetual-Premium | 352,980 | Called for redemption 2015-4-30 YTW SCENARIO Maturity Type : Call Maturity Date : 2015-04-08 Maturity Price : 25.00 Evaluated at bid price : 25.28 Bid-YTW : -1.38 % |
| RY.PR.W | Perpetual-Premium | 85,708 | Nesbitt crossed 85,000 at 25.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-04-08 Maturity Price : 25.00 Evaluated at bid price : 25.24 Bid-YTW : -4.58 % |
| OSP.PR.A | SplitShare | 66,500 | Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2020-03-31 Maturity Price : 10.00 Evaluated at bid price : 10.21 Bid-YTW : 4.60 % |
| RY.PR.A | Deemed-Retractible | 35,817 | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-04-08 Maturity Price : 25.25 Evaluated at bid price : 25.56 Bid-YTW : -8.38 % |
| RY.PR.J | FixedReset | 33,480 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-09 Maturity Price : 23.14 Evaluated at bid price : 24.98 Bid-YTW : 3.55 % |
| BAM.PR.X | FixedReset | 30,317 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-09 Maturity Price : 19.04 Evaluated at bid price : 19.04 Bid-YTW : 3.95 % |
| There were 20 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CIU.PR.C | FixedReset | Quote: 15.74 – 16.64 Spot Rate : 0.9000 Average : 0.5670 YTW SCENARIO |
| ENB.PF.G | FixedReset | Quote: 22.21 – 22.70 Spot Rate : 0.4900 Average : 0.3279 YTW SCENARIO |
| SLF.PR.G | FixedReset | Quote: 17.95 – 18.42 Spot Rate : 0.4700 Average : 0.3253 YTW SCENARIO |
| PWF.PR.P | FixedReset | Quote: 18.65 – 18.98 Spot Rate : 0.3300 Average : 0.2528 YTW SCENARIO |
| TRP.PR.A | FixedReset | Quote: 19.62 – 19.90 Spot Rate : 0.2800 Average : 0.2046 YTW SCENARIO |
| PVS.PR.C | SplitShare | Quote: 25.07 – 25.30 Spot Rate : 0.2300 Average : 0.1589 YTW SCENARIO |