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.
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 | 0.1784 % | 2,170.2 |
FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1784 % | 4,162.5 |
Floater | 11.22 % | 11.31 % | 58,241 | 8.63 | 2 | 0.1784 % | 2,398.9 |
OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0736 % | 3,361.9 |
SplitShare | 5.02 % | 7.28 % | 40,229 | 2.26 | 7 | 0.0736 % | 4,014.8 |
Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0736 % | 3,132.5 |
Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.8948 % | 2,484.5 |
Perpetual-Discount | 6.88 % | 7.06 % | 44,901 | 12.44 | 33 | -0.8948 % | 2,709.2 |
FixedReset Disc | 6.09 % | 9.43 % | 100,626 | 10.48 | 55 | 0.0878 % | 2,065.8 |
Insurance Straight | 6.85 % | 6.90 % | 62,188 | 12.72 | 17 | -0.2863 % | 2,625.7 |
FloatingReset | 11.63 % | 11.76 % | 34,008 | 8.35 | 1 | -0.4193 % | 2,292.0 |
FixedReset Prem | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0878 % | 2,263.9 |
FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0878 % | 2,111.6 |
FixedReset Ins Non | 6.67 % | 8.57 % | 127,358 | 10.99 | 11 | -0.1273 % | 2,245.9 |
Performance Highlights | |||
Issue | Index | Change | Notes |
POW.PR.C | Perpetual-Discount | -4.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 20.33 Evaluated at bid price : 20.33 Bid-YTW : 7.16 % |
POW.PR.A | Perpetual-Discount | -3.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 19.65 Evaluated at bid price : 19.65 Bid-YTW : 7.15 % |
IFC.PR.C | FixedReset Disc | -2.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 16.10 Evaluated at bid price : 16.10 Bid-YTW : 9.57 % |
SLF.PR.E | Insurance Straight | -2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 16.60 Evaluated at bid price : 16.60 Bid-YTW : 6.82 % |
IFC.PR.A | FixedReset Ins Non | -2.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 15.48 Evaluated at bid price : 15.48 Bid-YTW : 9.14 % |
BN.PF.H | FixedReset Disc | -1.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 18.70 Evaluated at bid price : 18.70 Bid-YTW : 10.42 % |
POW.PR.G | Perpetual-Discount | -1.48 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 19.65 Evaluated at bid price : 19.65 Bid-YTW : 7.15 % |
RY.PR.N | Perpetual-Discount | -1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 20.60 Evaluated at bid price : 20.60 Bid-YTW : 6.02 % |
RY.PR.O | Perpetual-Discount | -1.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 5.98 % |
BN.PR.M | Perpetual-Discount | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 16.30 Evaluated at bid price : 16.30 Bid-YTW : 7.34 % |
CU.PR.G | Perpetual-Discount | -1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 16.40 Evaluated at bid price : 16.40 Bid-YTW : 6.95 % |
BN.PR.Z | FixedReset Disc | -1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 17.25 Evaluated at bid price : 17.25 Bid-YTW : 10.00 % |
POW.PR.B | Perpetual-Discount | -1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 7.06 % |
BN.PF.B | FixedReset Disc | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 16.50 Evaluated at bid price : 16.50 Bid-YTW : 10.39 % |
TD.PF.D | FixedReset Disc | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 17.45 Evaluated at bid price : 17.45 Bid-YTW : 9.49 % |
NA.PR.G | FixedReset Disc | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 21.61 Evaluated at bid price : 21.61 Bid-YTW : 8.32 % |
NA.PR.W | FixedReset Disc | 1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 16.20 Evaluated at bid price : 16.20 Bid-YTW : 9.81 % |
Volume Highlights | |||
Issue | Index | Shares Traded |
Notes |
TD.PF.D | FixedReset Disc | 90,200 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 17.45 Evaluated at bid price : 17.45 Bid-YTW : 9.49 % |
TD.PF.A | FixedReset Disc | 82,300 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 17.07 Evaluated at bid price : 17.07 Bid-YTW : 9.40 % |
RY.PR.J | FixedReset Disc | 81,825 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 17.32 Evaluated at bid price : 17.32 Bid-YTW : 9.56 % |
TD.PF.K | FixedReset Disc | 44,775 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 21.70 Evaluated at bid price : 22.09 Bid-YTW : 7.94 % |
BN.PF.J | FixedReset Disc | 25,060 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 18.22 Evaluated at bid price : 18.22 Bid-YTW : 9.67 % |
MFC.PR.K | FixedReset Ins Non | 19,793 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-09-21 Maturity Price : 19.57 Evaluated at bid price : 19.57 Bid-YTW : 8.41 % |
There were 13 other index-included issues trading in excess of 10,000 shares. |
Wide Spread Highlights | ||
Issue | Index | Quote Data and Yield Notes |
MFC.PR.I | FixedReset Ins Non | Quote: 20.08 – 24.24 Spot Rate : 4.1600 Average : 2.7781 YTW SCENARIO |
MFC.PR.L | FixedReset Ins Non | Quote: 17.40 – 18.40 Spot Rate : 1.0000 Average : 0.6019 YTW SCENARIO |
POW.PR.C | Perpetual-Discount | Quote: 20.33 – 21.30 Spot Rate : 0.9700 Average : 0.5955 YTW SCENARIO |
POW.PR.A | Perpetual-Discount | Quote: 19.65 – 20.38 Spot Rate : 0.7300 Average : 0.4523 YTW SCENARIO |
SLF.PR.G | FixedReset Ins Non | Quote: 12.51 – 13.20 Spot Rate : 0.6900 Average : 0.4410 YTW SCENARIO |
GWO.PR.S | Insurance Straight | Quote: 18.90 – 19.70 Spot Rate : 0.8000 Average : 0.5641 YTW SCENARIO |
ZPR: Serious Problems with Reset Date Bucketting
Friday, September 15th, 2023It looks like ZPR – BMO Laddered Preferred Share Index ETF, a $1.5-billion fund, has been operating contrary to the terms of its prospectus and the promises of its advertising for a significant period.
In the September PrefLetter I reviewed the salient characteristics of the fund as part of a (mostly!) regular series, in which I review the key investment characteristics of ZPR and CPD. This allows those interested to review the composition of their own portfolios – or of Malachite Aggressive Preferred Fund, which regularly reports the statistics in the same format – against those of the big funds, which may be taken as a reasonable approximation of the underlying indices. These articles may not be the most exciting things ever, but I found in November 2012 that the trading generated by the deletion of issues from the indices (due to insufficient trading volume) was sufficient to have the issues added back during the following revision. The index provider changed its rules the following month to stop this costly process (it appears that Solactive considered reinventing the wheel towards the end of 2017).
In the current review, an anomaly with ZPR was found with the ‘Reset Buckets’ of ZPR. These are supposed to be evenly weighted annually over the next five years, so that an equal value of the index resets over each year for the period, at which point the cycle begins again. This was not the case upon checking, though: in years measured from the evaluation date of 2023-7-31, PrefLetter’s table ZPR-6 showed that the highest weighted bucket was 1-2 years, with a weight of 26.46%, while the lowest weighted period, 3-4 Years, had a weight of 10.16%. That’s a lot of variance! Tabke ZPR-6A performed much the same calculation but with buckets defined by calendar years; issues resetting in 2024 had a weight of 27.15%, while 2027 came in at 11.55%.
The relative weights of the reset buckets were in much better alignment at the time of the 2020 ZPR Review: at that time the bucket weights ranged from a low of 16.72% to a high of 22.53%.
An analogous calculation is not available on ZPR’s main page, but fortuitously I found another report via another BMO page, which may be found by:
1. Go to the BMO ETF Dashboard at https://www.bmoetfs.ca
2. Type “Monthly Metrics” into the search box and search
3. The results page shows a link to “Monthly Metrics Summary – ZPR Canadian Preferred Shares”
4. Click to download the document.
This report shows the results of BMO’s analysis:
Note that minor differences are expected between my figures and theirs, because:
i) I calculated as of 2023-7-31; BMO claims their “Data as of September 6th, 2023”
ii) I use bid prices; I believe BMO uses closing prices.
I surmise that the relatively low weightings for the 2026 and 2027 buckets developed from the wave of redemptions in 2021 and 2022. A quick count of my records indicates that 23 FixedResets were redeemed in each of these two years which will, of course, have affected the weightings for the bucket in which the next reset was supposed to take place.
But it is clear from their own analysis that BMO is not delivering what it has promised:
From the prospectus for ZPR:
From BMO’s main page on ZPR:
We can also look at the Index Provider’s (Solactive) role in this affair:
From the Solactive Methodology:
But this is the Solactive announcement with respect to IAF.PR.I, which was redeemed effective 2023-3-31:
However, this announcement was not followed by the announcement of an “Extraordinary adjustment”, which would seem to be required by Section 2.3 quoted above. I have sent a query to Solactive.
But oddly enough, it’s hard to find anything that says explicitly that the so-called Maturity Buckets (they’re actually reset-date buckets!) are to be equally weighted and how this is to be accomplished, other than the general statement in the Index Specifications listed above. The closest I can find is:
A “Cap of 20% per Maturity Bucket” sounds pretty good, but does that refer to the issuer weight within each bucket or the weight of the bucket relative to the total index? It’s not clear at all. There are only six references to “Maturity Bucket” in the entire document and section 1.6 is the only one that refers to anything like a cap.
So I currently have inquiries in at both BMO and Solactive and we’ll see what comes of those in the coming weeks. I suspect that right now both parties are enthusiastically blaming each other; my own conclusion is that:
1. The index definition is flawed in that it is insufficiently precise regarding what they call “Maturity Buckets”, what their weighting should be, and what happens when their relative weights get distorted by new issues or redemptions. The parties are equally to blame for this.
2. If, as I surmise above, the problem developed due to the wave of redemptions in 2021 and 2022, then it is clear that, whatever one part of BMO was doing with its “Monthly Metrics” report, there was no internal monitoring happening by which a problem such as this could be caught early and corrected.
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