Category: Market Action

The Globe and Mail remarks:

Canadians are particularly exposed to higher borrowing costs owing to high levels of household debt. At the same time, household finances actually have improved on average through the pandemic, according to central bank research, and interest rate increases will happen against the backdrop of brisk economic growth.

Well, given inflation and high levels of household debt that’s going to have a pretty good effect at the margins.

PerpetualDiscounts now yield 5.48%, equivalent to 7.12% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.24%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 290bp from the 275bp reported April 6.

So US inflation was exciting:

Inflation soared over the past year at its fastest pace in more than 40 years, with costs for food, gasoline, housing and other necessities squeezing American consumers and wiping out the pay raises that many people have received.

The Labor Department said Tuesday that its consumer price index jumped 8.5 per cent in March from 12 months earlier – the biggest year-over-year increase since December 1981. Prices have been driven up by bottlenecked supply chains, robust consumer demand and disruptions to global food and energy markets worsened by Russia’s war against Ukraine.

The government’s report also showed that inflation rose 1.2 per cent from February to March, up from a 0.8 per cent increase from January to February.

Current and projected future increases in the five-year Canada rate imply a greater cost of carry on mortgages. Well, the implications will be fun!

New data from Statistics Canada shows multiple-property owners held between 29 and 41 per cent of the housing stock in Ontario, British Columbia, Nova Scotia and New Brunswick in 2019 and 2020.

The data from the Canadian Housing Statistics Program, which includes both residential and recreational holdings, reveal multiple-property ownership accounted for 41 per cent of Nova Scotia’s housing stock, 39 per cent of New Brunswick’s, 31 per cent of Ontario’s and 29 per cent of British Columbia’s.

Multiple-property owners totalled 22 per cent of all owners in Nova Scotia, 20 per cent in New Brunswick, 16 per cent in Ontario and 15 per cent in British Columbia.

Tomorrow will bring the long-awaited Bank of Canada policy rate announcement, widely expected to take the policy rate to 1.00%. But three month bills are trading at about 0.86%, roughly halfway between a 25bp increase and one of 50bp, which does not seem to indicate a similar level of conviction in the markets. As ratchetrick observes, we’ll see. But it seems that one way or another there will be fireworks as all the bond-market-timers incur immense transaction costs during the ten minutes on either side of the announcement.

TXPR closed at 650.53, up 0.96% on the day. Volume today was 3.07-million, second only to March 31 in the past 21 trading days, which shows just how anemic trade has been lately.

CPD closed at 12.92, up 0.62% on the day. Volume was 274,190, behind March 22 and April 7 in the past 21 trading days.

ZPR closed at 10.75, up 0.09% on the day. Volume of 288,360 was near the median of the past 21 trading days.

Five-year Canada yields were up 7bp to 2.61% today.

Apparently there will be a tax change with respect to shorting dividend-paying stocks:

The budget released Thursday calls it the “double-deduction loophole,” which allows some Canadian financial institutions to use “hedging and short selling arrangements in aggressive tax planning strategies.” By closing the loophole, the government says, it can add $635-million to federal coffers over five years starting in 2022-23, and $150-million annually afterward.

Here’s what happens: A financial institution shorts a stock, which means they borrow it, sell the shares, and keep the proceeds with a promise to repay the shares later. At the same time, the financial institution owns the same number of shares and collects the dividends.

An entity that shorts a stock can deduct the interest it pays for borrowing as an expense. And a corporation that collects dividends from another corporation can offset its income with those dividends.

Budget 2022 proposes to amend the Income Tax Act to deny the deduction for a dividend received where the taxpayer has entered into these paired short-sale transactions.

I didn’t understand that, so I looked at the budget itself:

Some Canadian financial institutions have been using hedging and short selling arrangements in aggressive tax planning strategies. Put simply, two different parts of an institution take different positions in relation to a Canadian dividend-paying stock—one short, or betting against the stock; one long, or betting on the stock—to take advantage of special treatment that those Canadian stocks receive.

Budget 2022 proposes to amend the Income Tax Act to deny the deduction for a dividend received where the taxpayer has entered into such transactions.

This measure would increase federal revenues by $635 million over five years starting in 2022-23, and by $150 million ongoing.

So I don’t think this will have any effect on market efficiency, since market-makers will still be able to short stock without any changes to the tax treatment – but if anybody thinks differently, let me know in the comments!

Meanwhile, in the real world of working for a living:

Canada’s unemployment rate hit a record low in March as employers bulked up their staffing levels, the latest sign of rapid expansion in the country’s labour market.

The economy added 73,000 positions last month, following a blowout return of 337,000 in February, Statistics Canada said Friday. The unemployment rate fell to 5.3 per cent, which is the lowest in nearly five decades of comparable data from the country’s Labour Force Survey.

The job gains in March were entirely in full-time positions, paced by Ontario (35,000) and Quebec (27,000), and with the private sector accounting for more than half the increase.

Several analysts said the upbeat job numbers reinforced their view that the Bank of Canada will raise its benchmark interest rate by 50 basis points next week. (A basis point is 1/100th of a percentage point.) The central bank has not hiked rates by that magnitude since 2000.
…
Those tight conditions are leading to better pay for employees. Average hourly wages rose 3.4 per cent in March on an annual basis, accelerating from 3.1 per cent in February. That said, the country’s inflation rate recently hit a three-decade high of 5.7 per cent, meaning the average worker is effectively seeing a pay cut and the loss of purchasing power.

Huge volume in EMA.PR.L today was driven by a cross done through Scotia of 1,797,200 shares. It looks like somebody somewhere panicked and really really really wanted to sell. Trades in sequence reported by the Toronto Exchange are:

RBC sold 500 shares to Anonymous at 21.45, time 1:41pm
Scotia sold 100 shares to TD at 21.28, time 2:25pm
Scotia sold 500 shares to RBC at 21.01, time 2:25pm
Scotia crossed 1,797,200 shares at 20.50, time 2:25pm

So, transaction costs on the trade amounted to about 1.8-million + commission; but at a nickel a share, commission is a mere bagatelle. On Monday, before all the excitement started, EMA.PR.L traded 5,500 shares at a VWAP of about 22.50, so Assiduous Readers are welcome to do their own complicated calculations of just what the transaction cost for this monster actually was. According to HIMIPref™ EMA.PR.L now has an Average Daily Trading Value (which dampens the effect of isolated large trading days) of about $140,000; up from Monday’s $127,000.

TXPR closed at 644.34, down 2.61% on the day. Volume today was 2.87-million, second only to March 31 in the past 21 trading days, which shows just how anemic trade has been lately.

CPD closed at 12.84, down 1.53% on the day. Volume was 261,300, second only to March 22 in the past 21 trading days.

ZPR closed at 10.74, down 1.47% on the day. Volume of 791,770 was the highest of the past 20 trading days.

Five-year Canada yields were up 2bp to 2.54% today.

I am at a loss to explain this collapse, which is affecting FixedReset Discounts in the same mannner as PerpetualDiscounts. Rising rates have been fingered in the comments as the culprit, but we blamed declining rates for the awful period of late 2018 to early 2020. We can’t have it both ways, can we?

But Holy Smokes, you can now get about 5.50% on investment-grade FixedReset Discounts (admittedly on what seem to be very poor quality quotes). It’s true that the 5.50% figure depends on five-year bonds remaining at current levels in the 2.50% area forever, but frankly that isn’t an assumption that bothers me too much. Have people forgotten that FixedResets are so-called because they Reset?

It is interesting, however, that the Median YTW of the PerpetualDiscount and FixedReset Discount subindices remain very close to each other, a phenomenon briefly discussed in the post MAPF Performance: March 20022. It would be rational to expect that the yield on FixedReset Discounts would move in accordance with the GOC-5 yield, without prices moving too much, while the yield on PerpetualDiscounts would move in lockstep with prices moving a lot … but we haven’t actually observed this behaviour yet!

Another possibility is that investors are assuming that the BoC is so far behind the inflation curve that it will never catch up; therefore they are marking down FixedReset Discount prices in order to boost their real yield from recent levels. That seems credible in light of the recent jump in long-term real yields, but we’re not seeing much of that mindset in long-term nominal yields.

The federal budget came out today, much as expected – everything was pretty well telegraphed. The only significant new taxes were:

The planned bank tax has been altered from the initial proposal outlined in the Liberal Party’s 2021 election platform. Rather than a three percentage point surtax on earnings over $1-billion, the budget announces a 1.5 percentage point increase on taxable income over $100-million. That brings the tax rate on those earnings from 15 per cent to 16.5 per cent.

While that tax increase will be permanent, the budget also includes a temporary Canada Recovery Dividend, in the form of a one time 15 per cent tax on taxable income for the 2021 tax year, payable over five years. The two budgeted tax hikes are projected to bring in a little over $6-billion, down from the roughly $11-billion estimated in the Liberal platform.

Nice to see that the tax man is sticking it to the common shareholders and leaving us coupon-clippers alone!

PerpetualDiscounts now yield 5.36%, equivalent to 6.97% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.24%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened dramatically to 275bp from the 230bp reported March 30.

I’m not quite sure what to make of today’s collapse – volume was still fairly low and there were quite a few ‘disappearing bids’ in the not-very-good data supplied at great expense by the Toronto Exchange. While the yields of PerpetualDiscounts have unquestionably increased from the 5.19% recorded March 30, spreads on issues included in the PerpetualDiscount index that might be the ‘median’ issue used for measurement are in the 20bp range, mostly, so this week’s data point is not exactly of the most reliable quality.