PrefBlog

I don’t usually mention NCIB notices because they’re so often meaningless, but Assiduous Reader PL sent me a note about the FFH NCIB today, so why not post it?

PerpetualDiscounts now yield 7.08%, equivalent to 9.20% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.63% on 2023-9-15 [BMO is now reporting a different number for the same date than the one they reported last week … this worries me] and since then the closing price has changed from 14.33 to 13.90, a decrease of 300bp in price, with a Duration of 11.99 [again, different from last week’s report for the same day] (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 25bp since 9/15 [?] to 5.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 330bp from the 350bp reported September 20.

TXPR closed at 512.37, up 1.45% on the day. Volume today was 3.64-million, the highest by far of the past 21 trading days. The price index has recovered all the ground it has lost since 2023-8-24!

CPD closed at 10.16, up 0.69% on the day. Volume was 133,110, second-highest of the past 21 trading days. It hasn’t closed this high since 2023-9-6!

ZPR closed at 8.57, up 1.66% on the day. Volume was 486,320, highest by far of the past 21 trading days. We haven’t seen a close like this since 2023-8-28!

Five-year Canada yields were up to 4.33%.

Equities were flattish, with the pundits looking at bonds:

Canada’s main stock index rose on Monday as energy shares rallied, but the market was still trading near its lowest level in four weeks as investors worried about interest rates being kept at elevated levels for longer than previously expected. The Canadian 10-year bond yield climbed above the 4% threshold to its highest in nearly 16 years.
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The Canadian five-year bond yield – closely watched because of its influence on popular terms of fixed mortgage rates – also rose to a 16-year high on Monday, reaching 4.33%.

It’s very tempting to ascribe today’s market pop to the surprise redemption of TD.PF.K, particularly given the fine performances of TD.PF.A, TD.PF.B and TD.PF.C. But who knows? Those eager to bet on a wave of uneconomic bank pref redemptions are urged to remember that TD’s enormous amount of excess equity make it an outlier in terms of financial condition.

Higher for longer?:

For now, policymakers are forecasting that the pop in interest rates will eventually fade. They kept their estimate of the rate setting that will keep the economy chugging along at a steady and sustainable pace in the longer run — something economists often call the “neutral rate” — unchanged in their projections, at 2.5 percent.

Asked on Wednesday why Fed officials expect rates to remain higher through 2026, Mr. Powell pointed to recent strong economic activity, which he said generally suggested “we have to do more with rates.”

But the Fed chair was not yet ready to conclude that the economy has undergone a lasting shift.

“It may of course be that the neutral rate has risen,” Mr. Powell said. “You do see people raising their estimates.”

Seven of the Fed’s 19 policymakers on Wednesday predicted that rates could hover above 2.5 percent in the longer run — the same number as in the last set of forecasts, in June. But four officials said they expected interest rates to settle above 3 percent in the long term, up from two members in June and zero a year ago.

This all arises from the famous dotplot:

Well, it took 13-odd years to come to the view that a 3% mortgage was normal. It might take a little while to decide that it ain’t.

So anyway, five-year Canadas hit 4.30% today and the equity guys decided to pay off their mortgages instead:

An unexpected 9% drop on Thursday in initial U.S. jobless claims, to the lowest level in eight months, played into the Fed’s notion that the labour market remains too tight, putting upward pressure on wages, and the economy is resilient enough to withstand higher rates for longer.

“Higher for longer” has become a common credo among the central banks of the world’s biggest economies as global policy tightening, in order to tame inflation, reaches its peak.

That includes Canada. Data on Tuesday showed that Canadian inflation climbed more than expected to 4% in August. Money markets are now pricing in about a 40% chance the Bank of Canada will hike interest rates by another quarter percentage point at its next policy meeting Oct. 25.

The Canadian 10-year bond yield on Thursday touched a 15-year high at 3.98%. Some have warned that Canada’s record of declining productivity over the past three years is likely to make it more difficult for the Bank of Canada to tame inflation, raising the prospect of additional interest rate hikes even as the economy slows. Declining productivity tends to hold back economic growth. It also stands to add to unit labor costs, a key measure of inflation pressures coming from higher wages.

All 10 of the Toronto market’s major sectors lost ground on Thursday, including a decline of 2.4% for materials, which includes precious and base metals miners and fertilizer companies, as copper and gold prices fell.

The FOMC held steady today:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.

… but bond yields rose anyway:

The TSX ended nearly unchanged, but both U.S. and Canadian bond yields rose sharply. U.S. two-year yields reached 5.152%, the highest since 2006, and the Canadian two-year bond yield rose more than 10 basis points to above 5%, its highest since 2001. The Canadian five-year bond yield – influential on fixed mortgage rates – climbed to 16-year highs for the second day in a row.
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Fed funds futures traders are still pricing in only a partial chance of a further rate hike, with a 29% probability in November and 43% chance by December, according to the CME Group’s FedWatch Tool.
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The Bank of Canada has also kept the door open to further tightening. It wanted to send the message that interest rates would not be coming down soon when it left them at a 22-year high after a policy meeting on Sept. 6, minutes showed Wednesday.

Data on Tuesday showed Canada’s annual inflation rate jumping to 4.0% in August from 3.3% in July.

Implied interest rate probabilities in credit markets now suggest almost a 50% chance the Bank of Canada will hike interest rates again at its next meeting in October. That’s up from about 40% on Tuesday and 20% prior to this week’s inflation report.

This follows yesterday’s announcement of Canadian inflation:

Canada’s annual inflation rate accelerated sharply for the second month in a row, raising the odds that the Bank of Canada could deliver at least one more interest rate increase this year despite hitting pause on monetary policy tightening earlier this month.

The Consumer Price Index rose 4 per cent in August from a year earlier, up from 3.3 per cent in July and the highest annual inflation rate since April, Statistics Canada said Tuesday. Bay Street analysts were expecting inflation to clock in at 3.8 per cent.

The larger-than-expected increase was driven by gasoline prices, which have surged in recent months after oil-production cuts by Saudi Arabia and Russia. But it was more than just energy prices pushing up headline inflation.

Shelter costs accelerated for both renters and homeowners facing higher mortgage payments. While grocery prices grew less quickly in August than in July, food inflation remains far above most other components of the Consumer Price Index.

PerpetualDiscounts now yield 7.01%, equivalent to 9.11% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.48% on 2023-9-15 and since then the closing price has changed from 14.33 to 14.12, a decrease of 147bp in price, with a Duration of 12.08 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 12bp since 9/15 to 5.60%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed sharply to 350bp from the 375bp reported September 13.