PrefBlog

It was a good day for oil:

Canada’s main stock index rose on Thursday, led by energy shares as crude prices posted their biggest-one day gains on record on Thursday.

The Toronto Stock Exchange’s S&P/TSX Composite index finished unofficially up 221.39 points, or 1.72%, at 13,097.76.

Nine of the index’s 11 major sectors were higher, led by the energy sector, which climbed 9.3%.
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Crude prices posted their biggest-one day gains on record on Thursday after President Donald Trump said he expects Russia and Saudi Arabia to announce a major oil production cut, and Saudi state media said the kingdom was calling an emergency meeting of producers to deal with the market turmoil.

Trump said he had spoken to Saudi Crown Prince Mohammed bin Salman, and expects Saudi Arabia and Russia to cut oil output by as much as 10 million to 15 million barrels, as the two countries signaled willingness to make a deal.
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Brent soared as much as 47% during the session, its highest intraday percentage gain ever. WTI jumped as much as 35%, its second highest ever, after an intraday gain of 36% on March 19.

Oil prices pulled back from those highs as traders questioned whether Russia and Saudi Arabia could actually agree on such a big production cut.

A senior administration official told Reuters the United States does not know formal details of Saudi Arabian and Russian plans to reduce oil supply yet and will not ask U.S. domestic oil producers to chip in with their own cuts.

An article in the Globe is titled Why Canada’s banks have no plans to suspend dividends despite a global trend of cuts which has been a hot topic lately:

Canadian bank CEOs insist they will keep paying dividends, even as banks around the world have axed payouts under pressure from regulators to preserve capital within the banking system.
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On Wednesday, the United Kingdom’s largest banks bowed to pressure from Britain’s financial regulator and suspended dividend payments. Several large European Banks, including Italy’s UniCredit and Dutch bank ING Group have also halted after a request from the European Banking Authority, and Mexico’s financial regulator followed suit on Thursday, saying that “it’s impossible to estimate how deep and how long the economic effects of the pandemic will be.”

Canada’s Office of the Superintendent of Financial Institutions, has told domestic banks not to increase dividends or buy back shares, but has made no effort to reduce payouts. And so far, bank executives are telling investors not to worry.
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Banks are facing significant pressure from an anticipated spike in loan losses in the long run, as well as widespread demand from companies to draw down funds on credit lines immediately. But bankers and regulators are keenly aware that bank stocks are widely held by millions of Canadians, some of whom depend on them as retirement income. Some worry that cutting off dividends could worsen the economic hardship from the crisis.

“About 77 [per cent] to 80 per cent of our shareholders are Canadian, either institutional or retail, so the construct of our shareholder base is very different than would be a European bank,” said Bank of Nova Scotia CEO Brian Porter on Tuesday. Mr. Porter and Bank of Montreal CEO Darryl White both said they have no plans to slash their banks’ dividends.
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And Canadian banks are in a different position politically, after some British banks needed government bailouts in the last crisis, said Laurence Booth, professor of finance at the University of Toronto’s Rotman School of Management.

“The Canadian banks do not have the bad reputation that the European and the U.K. banks have got, so it’s not like the government can lean on them and say, ‘Look, we’ve bailed you out, you’re bad guys, do what we say, you’ve got to rebuild your reputation,'” Mr. Booth said. “So that moral suasion component is missing in Canada.”

For what it’s worth, here was my response to a client inquiry:

I don’t think a governmentally requested suspension of bank dividends is in the cards.

Firstly, I don’t really see a good reason for it.

Secondly, bank stocks are the bedrock of a great many retirement portfolios and conniving at a suspension of the income would bring the government a great deal of grief.

Thirdly, the TSX/S&P index is about 32% Financials (see LINK ) compared to about 20% for the FTSE (see LINK ), a paltry 1.6% (!) in NZ, and 9.4% banks in Europe (with an additional 5.9% in insurance; see LINK ). You have probably read some of my rants about the harmful effects on Canada of having such a bloated financial sector … there’s a global comparison for you! And in this instance, bank dividends are ‘too big to fail’!

I’m not going to say it won’t ever happen. But I will say that we are not even close to the point where the possibility of mass suspension needs to be taken seriously.

I forgot to give him the link for the New Zealand data; such is life. I believe that in New Zealand they settle payments with sacks of wool and quarts of milk (“That’ll be three sacks and two quarts, ma’am”), but I may be wrong on that.

TXPR closed at 463.03, up 1.07% on the day. Volume today was 3.26-million, low in the context of the past thirty days but highest since March 26.

CPD closed at 9.21, up 2.22% on the day. Volume was 93,827, second-lowest of the past 30 trading days and only slightly more than the low set on April 1.

ZPR closed at 7.25, up 2.84% on the day. Volume of 364,785 was fourth-lowest of the past 30 trading days.

Five-year Canada yields were up 4bp to 0.58% today.

Well, now that the horrors of March are done with, I’m sure we’re all very happy to start off a bright and shiny new … well, never mind:

Faced with grim new projections of the potential scale and economic ramifications of the coronavirus pandemic, investors dumped stocks on Wednesday. The S&P 500 fell more than 4 percent, bringing its decline over two days to 6 percent.

The drop, which followed a sell-off in Europe and Asia, came after President Trump said at a news conference on Tuesday that the United States would face a “very, very painful two weeks.” U.S. government scientists projected that the outbreak could kill up to 240,000 people in the country. On Wednesday, the United Nations warned of “enhanced instability, enhanced unrest and enhanced conflict.”
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Airlines were the worst performing sector in the S&P 500 as government data showed a staggering drop in passenger traffic through airports. United Airlines fell 19 percent, and American Airlines dropped 12 percent.

Cruise operator Carnival was the worst performing stock in the S&P 500, with a decline of 33 percent, while rival Royal Caribbean fell 20 percent.

And in Canada:

The S&P/TSX Composite Index fell about 22 per cent in the first quarter, its biggest decline since 2008, but had showed some signs of steadying in recent days.

On Wednesday, the index closed down 3.8 per cent at 12,876.37, in a broad-based selloff that left only the gold sector with gains, as investors fled to the perceived safety of assets such as bullion, bonds and the U.S. dollar. Canadian banks were down about 5 per cent, with shares of security software company BlackBerry Ltd falling nearly 18 per cent after dismal quarterly results.
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Automakers also reported sharp drops in U.S. sales for March, including a 43% plunge for Hyundai. Mortgage applications tumbled 24% from year-ago levels as open houses are all but shut down.
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On this side of the border, the IHS Markit Canada Manufacturing Purchasing Managers’ index (PMI) fell to a seasonally adjusted 46.1 in March, the lowest in at least nine years. It indicated a contraction in factory activity.

The rugged free-marketers of Texas, well-known for their aversion to anything that smacks of socialism are clamouring for production quotas:

The U.S. shale industry is more worried about its future than ever. The unprecedented demand from the Texan companies to curtail production says as much. They have good reason to be fearful, because this downturn is not like the last one. Of course, prices will reverse course once economies reopen, but anyone betting on a quick leap to US$65 oil – the price before the COVID-19 crisis started – might be in for a rude shock.

There are very interesting real-estate negotiations going on:

Commercial property landlords are balking at requests for rent relief from big companies, saying they need to focus on helping vulnerable smaller tenants such as independent restaurants, clothing stores and barbershops that may not survive the huge losses from the coronavirus pandemic.
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But many commercial landlords object strongly to those sort of requests from large tenants. “When a company that is well capitalized that has a legal obligation to pay rent, doesn’t pay rent, I think it is bad behaviour,” said Michael Cooper, chief executive with Dream Office REIT, which owns 32 office properties, mostly in Toronto.

“They hurt landlords’ ability to be able to help people that need it the most. If companies have the money, they have the legal obligation,” Mr. Cooper said. “If they don’t pay the rent, they are taking advantage of people in a very dire situation and that really is unseemly.”

Canadian Tire and other big names are able to flex their muscle because they are considered top tenants that can withstand economic downturns. Their tenancy often makes it easier for property owners to get lower mortgage rates and they can make a shopping centre more desirable because they draw more traffic to the property.

In return, landlords often ask for less rent and give into their demands, which they do not do with smaller businesses.

Speaking of Canadian Tire, they got downgraded by S&P yesterday:

• S&P Global Ratings’ economists believe that due to the COVID-19 pandemic, a global and Canadian recession in 2020 is likely and, therefore, we expect consumer discretionary spending to slow.
• As a result, at Toronto-based general merchandiser Canadian Tire Corp Ltd. (CTC), the COVID-19 pandemic is directly responsible for current store closures (except Canadian Tire Retail where store hours are curtailed) and government-mandated social distancing, which we believe will negatively affect revenue and EBITDA.
• Therefore, S&P Global Ratings lowered its long-term issuer and issue-level ratings on CTC to ‘BBB’ from ‘BBB+’. At the same time, it affirmed the ‘A-2’ commercial paper rating on the company.
• We also lowered our issuer credit rating on CT Real Estate Investment Trust (REIT) to ‘BBB’ from ‘BBB+’.
• Finally, we forecast the company’s leverage to deteriorate close to 3.5x for the next 18-24 months, and have revised our financial risk profile on CTC to significant from intermediate.
• The negative outlook reflects our expectation that, despite management’s steps to reduce costs and protect its balance sheet, there is increased risk that the company’s debt-to-EBITDA deteriorates above 3.5x, which we consider weak for our ratings, over the next 18-24 months.

But everybody with a business should be going after that government lolly:

Canada’s banks are preparing to start offering government-backed loans to small businesses as soon as next week amid a flood of requests for relief from business owners.

Banks have been rushing to roll out a program by which the federal government will guarantee loans of up to $40,000 interest-free until the end of 2022.
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The federal government has promised $25-billion to guarantee the loans, removing the risk for banks. One quarter of each loan, up to $10,000, will be forgiven if businesses repay their balance before Dec. 31, 2022. If the loans aren’t repaid by that date, they can be converted into three-year term loans charging 5-per-cent interest, according to a CIBC statement.

TXPR closed at 458.15, down 2.25% on the day. Volume today was 2.25-million, lowest of the past thirty days, just a little lower than March 5.

CPD closed at 9.01, down 3.84% on the day. Volume was 89,774, lowest of the past 30 trading days and significantly lower than the previous low of March 5.

ZPR closed at 7.05, down 3.29% on the day. Volume of 203,971 was lowest of the past 30 trading days much lower than second place March 5.

Five-year Canada yields were down 5bp at 0.54% today.

PerpetualDiscounts now yield 6.92%, equivalent to 9.00% interest (!) at the standard equivalency factor of 1.3x. Long corporates continue to yield 3.87%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 515bp from the 500bp reported March 25. But we’re still way over the old record set on November 26, 2008 when trouble with the BCE buyout caused a short-lived spike in PerpetualDiscount bid yields, moving the Seniority Spread to 445bp.

Assiduous Reader Carrie will be pleased to note that the “Premium” indices are no longer populated!

A nice day, for some:

The decimated energy sector has rallied hard off of 20-year lows, pushing Canadian stocks to a decent gain on a day that saw the U.S. market slip.

For the first time since the COVID-19 pandemic consumed global financial markets starting in early March, the S&P/TSX Composite Index meaningfully diverged from U.S. equity benchmarks, with a gain of 2.6 per cent on Tuesday. The S&P 500 index dropped by 1.6 per cent.

Canada’s biggest oil sands players led the advance, adding to a rebound that started on Monday. Over just two trading days, Canadian Natural Resources Ltd. shares have surged by 45 per cent, and Suncor Energy Inc. by 37 per cent.

Potential catalysts for the sudden reversal include expanded federal wage subsidies that would apply to energy sector employees, as well as Tuesday’s announcement that the long-delayed Keystone XL pipeline would go ahead with support from the province of Alberta.
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For energy companies facing a liquidity crunch, there is hope that lenders will be flexible. “We’re seeing the banks be somewhat understanding,” Mr. Stelmach said. In some cases, lenders are offering extensions and renewals rather than calling in loans.

Loan guarantees are also expected to be included in a multibillion-dollar aid package for the oil patch, which Finance Minister Bill Morneau said last week was coming soon. These incremental developments are insufficient to explain the magnitude of the move in Canadian energy stocks so far this week, with the S&P/TSX Capped Energy Index rising by 30 per cent.

There was some talk in trading circles that a big U.S. investor has accumulated shares of Suncor and Canadian Natural Resources over the last couple of days.
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Wall Street’s three major indexes tumbled on Tuesday, with the Dow registering its biggest quarterly decline since 1987 and the S&P 500 suffering its deepest quarterly drop since the financial crisis on growing evidence of massive economic damage from the coronavirus pandemic.

In one of the fastest turns into a bear market, the S&P 500 and the Dow both ended the first quarter more than 20% below the end of 2019, as the health crisis worsened in the United States and brought business activity to a standstill.

It was also the S&P’s biggest first-quarter decline on record as consumers were advised to stay at home, leading businesses to announce temporary closures and massive staff furloughs.
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The Dow Jones Industrial Average fell 410.32 points, or 1.84%, to 21,917.16, the S&P 500 lost 42.06 points, or 1.60%, to 2,584.59 and the Nasdaq Composite dropped 74.05 points, or 0.95%, to 7,700.10.

Nevertheless:

Amid draconian efforts to contain the spread of the novel coronavirus, the avalanche of pink slips stemming from the COVID-19 pandemic has only begun. Some economists predict job losses will be nearly three times greater than they were during the Great Recession of 2008-09, and Canada’s unemployment rate could reach 9 per cent by summer.

The jarring disruptions caused by COVID-19 threaten to send many Canadian households into financial tailspins. In that scenario, a crisis many policymakers hoped would cause just a sharp but brief economic interruption could morph into a more painful, long-lasting collapse in aggregate demand, reverberating long after pandemic control measures have ended.

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And quantitative easing is on the way:

The Bank of Canada is likely to buy about $200 billion of government debt after announcing its first quantitative easing program, which would nearly triple the amount of assets on the central bank’s balance sheet, bond strategists estimate.

Just a few weeks ago, Canada’s central bank was defying the global trend of monetary policy easing. But in a series of emergency interest rate cuts this month it has slashed its key interest rate to 0.25 per cent, the level it regards as the floor.

Quantitative easing, or large-scale buying of assets, is now the policy measure favored by the BoC to ease the economic impact of the coronavirus pandemic.

The bank plans to buy at least $5 billion a week of Government of Canada securities, starting on April 1, with the purchases continuing “until the economic recovery is well underway.”

Regrettably, easing is targetted on liquidity. It does not directly address solvency.

But there’s at least one group with no worries:

A tentative deal between Ontario’s public elementary school teachers and the government comes with an annual wage increase of just 1 per cent but allows boards to hire 434 more educators across the province to support students with special learning needs.

The Elementary Teachers’ Federation of Ontario (ETFO) shared details Monday evening of its recently negotiated deal, which includes a 4-per-cent bump in benefits in each year of the three-year offer – higher than the government originally wanted.

Now, if that’s not the classic contract in the education monopoly, I don’t know what is. A nice tough headline number for the politicians to brag about; a boatload of money slipped in through the back-door for the union to snicker about.

TXPR closed at 468.69, up 2.17% on the day. Volume today was 2.40-million, second-lowest of the past thirty days, ahead of only March 5.

CPD closed at 9.37, up 2.18% on the day. Volume was 161,128, below the average of the past 30 trading days.

ZPR closed at 7.29, up 1.96% on the day. Volume of 674,913 was low in the context of the past 30 trading days.

Five-year Canada yields were down 4bp at 0.59% today.

Oil action is in the news today:

Energy stocks led Canada’s main stock index higher on Monday, despite a plunge in crude prices as the market waits for news of support from Ottawa for the oil and gas industry.

The Toronto Stock Exchange’s S&P/TSX composite index was unofficially up 350.76 points, or 2.76%, at 13,038.50 The index fell as low as 12,548.96 in morning trading.

Nine of the index’s 11 major sectors were higher, paced by the energy sector, which rose 11.9%.

Global oil benchmark Brent crude plunged to its cheapest in almost 18 years on Monday and U.S. crude briefly tumbled below $20 per barrel on growing fears the global coronavirus shutdown could last months and demand for fuel will decline further.
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Brent futures fell $2.17, or 8.7%, to settle at $22.76 a barrel, their lowest close since November 2002, while U.S. West Texas Intermediate (WTI) crude fell $1.42, or 6.6%, to $20.09, the lowest close since February 2002.
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Economists expect a number of weak reports on the economy to come in through the week. The lowlight will likely be Friday’s jobs report, where economists expect to see the largest fall in the nation’s payrolls since the Great Recession.

But who knows? Maybe Trump will join OPEC with his pals MBS and Putin:

U.S. President Donald Trump and Russian President Vladimir Putin agreed during a phone call on Monday to have their top energy officials meet to discuss slumping global oil markets, the Kremlin said, as Trump called Russia’s price war with Saudi Arabia “crazy.”

The agreement marks a new twist in global oil diplomacy since a failed deal earlier this month between the Organization of the Petroleum Exporting Countries and Russia to cut production ignited the price war between Russia and OPEC’s de facto leader Saudi Arabia.
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Shortly before Monday’s phone call, Trump said Saudi Arabia and Russia “both went crazy” in their oil-price war and that “I never thought I’d be saying that maybe we have to have an oil (price) increase, because we do.”

“The price is so low now they’re fighting like crazy over, over distribution and over how many barrels to let go,” Trump said in an interview on Fox News.

It would seem worthwhile to do something about US coronavirus testing costs:

The coronavirus bills passed so far — and those on the table — offer inadequate protection from a system primed to bill patients for all kinds of costs. The Families First Coronavirus Response Act, passed this month, says that the test and its related charges will be covered with no patient charge only to the extent that they are related to administering the test or evaluating whether a patient needs it.

That leaves hospital billers and coders wide berth. Mr. Cencini went to the E.R. to get a test, as he was instructed to do. When he called to protest his $1,622.52 for hospital charges (his insurer’s discounted rate from over $2,500 in the hospital’s billed charges), a patient representative confirmed that the E.R. visit and other services performed would be “eligible for cost-sharing” (in his case, all of it, since he’d not met his deductible).

This weekend he was notified that the physician charge from Emergency Care Services of New York was $1,166. Though “covered” by his insurance, he owes another $321 for that, bringing his out-of-pocket costs to nearly $2,000.

By the way, his test came back negative.

TXPR closed at 458.72, up 2.66% on the day. Volume today was 2.82-million, second-lowest of the past thirty days, ahead of only March 5.

CPD closed at 9.17, up 1.78% on the day. Volume was 140,404, well below the average of the past 30 trading days.

ZPR closed at 7.15, up 2.88% on the day. Volume of 803,406 was low in the context of the past 30 trading days.

Five-year Canada yields were unchanged at 0.63% today.

So the markets did not have a nice time today:

Canada’s main stock market resumed its slide after a three-day winning run as investors grew more nervous about the spread of the coronavirus pandemic and the Bank of Canada slashed interest rates to nearly zero.

The Toronto Stock Exchange’s S&P/TSX composite index was unofficially down 5.11%, or 683.43 points, at 12,687.74, while shares globally declined in a sign investors were focusing once more on the spread of the virus despite hopes for further stimulus measures to combat its economic impact.

The heavyweight energy and financial sectors led losses, falling 9.4% and 5.2%, respectively. Industrials were down 4.4%, while materials slid 6 per cent.
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The Dow Jones Industrial Average fell 915.39 points, or 4.06%, to 21,636.78, the S&P 500 lost 88.6 points, or 3.37%, to 2,541.47 and the Nasdaq Composite dropped 295.16 points, or 3.79%, to 7,502.38.

The pan-European STOXX 600 index lost 3.26%, and MSCI’s gauge of stocks across the globe shed 1.56%. Emerging market stocks lost 0.90%.
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U.S. Treasury yields were headed for a weekly decline, though the range of trading was far less volatile than in the previous two sessions.

Benchmark 10-year notes last rose 21/32 in price to yield 0.7424%, from 0.808% late on Thursday. The 30-year bond last rose 1-26/32 in price to yield 1.3291% from 1.395%.

Gold market participants remained concerned about a supply squeeze after a sharp divergence between prices in London and New York. The virus has grounded planes used to transport gold and closed precious metal refineries.

Spot gold dropped 0.8% to $1,615.92 an ounce. The metal was on track to post its largest weekly advance since 2008.

David Chang has some grim thoughts on the restaurant business:

More than anything, David, I do not want to incite panic and hysteria, but I think for restaurants and the service industry, there is going to be a morbidly high business death rate. My fear is the restaurants that survive are going to be the big chains, and we’re going to eradicate the very eclectic mix that makes America and going out to eat so vibrant and great. And there is a lot of feeling that even in good times, if chefs can’t make their numbers, they’re going to lose everything, so imagine what they must be feeling now. When the economy is booming, it’s hard for restaurants to get loans from the bank because there’s no assets to back them. I don’t know if it’s going to be feasible for the government to give out a stimulus loan to a restaurant or restaurant groups the way they were able to do in 2008 to the auto companies. So I’m trying to figure out what the best way is. The government should give a greater bailout package to real estate owners so that there can be relief for restaurant owners. It has to move up the chain.

S&P slashed Cirque de Soleil’s rating:

• Cirque Du Soleil Group faces significant liquidity pressure from the sudden shutdown of all of its shows in reaction to the coronavirus pandemic.
• In our view, a default, distressed exchange, or restructuring appears inevitable in the next six months absent a successful refinancing or unanticipated significantly favorable changes in the company’s circumstances.
• Therefore, S&P Global Ratings is lowering its issuer credit rating on Cirque Du Soleil Group to ‘CCC-‘ from ‘B-‘. The outlook is negative.
• We are also lowering the rating on the company’s first-lien facility to ‘CCC’ from ‘B’ and on its second-lien term loan to ‘C’ from ‘CCC’.
• The negative outlook reflects the possibility that Cirque could default, initiate a distressed exchange, or restructure its debt over the next several months absent unanticipated significantly favorable changes in the company’s circumstances.

Russia’s making noises about ending the oil price war:

A new OPEC+ deal to balance oil markets might be possible if other countries join in, Kirill Dmitriev, head of Russia’s sovereign wealth fund said, adding that countries should also co-operate to cushion the economic fallout from coronavirus.

A pact between the Organization of the Petroleum Exporting Countries and other producers, including Russia (known as OPEC+), to curb oil production to support prices fell apart earlier this month, sending global oil prices into a tailspin.

“Joint actions by countries are needed to restore the [global] economy … They [joint actions] are also possible in OPEC+ deal’s framework,” Mr. Dmitriev, head of the Russian Direct Investment Fund (RDIF), told Reuters in a phone interview.

Mr. Dmitriev and Energy Minister Alexander Novak were Russia’s top negotiators in the production-cut deal with OPEC. The existing deal expires on March 31.

TXPR closed at 446.85, down 3.34% on the day. Volume today was 3.05-million – well below the average of the past three weeks.

CPD closed at 9.01, down 1.96% on the day. Volume was 151,711, below the average of the past 30 trading days.

ZPR closed at 6.95, down 2.80% on the day. Volume of 411,645 was the third-lowest of the past 30 trading days, ahead of only March 4 and March 5.

Five-year Canada yields were down 12bp to 0.63% today.