PrefBlog

TXPR closed at 591.41, up 0.64% on the day after setting a new 52-week high. Volume today was 2.65-million, near the median of the past 21 trading days.

CPD closed at 11.67, up 0.34% on the day after setting a new 52-week high. Volume was 140,940, second-highest of the past 21 trading days.

ZPR closed at 10.09, up 0.20% on the day after setting a new 52-week high. Volume was 145,760, near the median of the past 21 trading days.

Five-year Canada yields were down to 3.84%.

The Fed did its thing today:

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities. 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; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.

The significant part of the decision is the slowdown of QT:

But some savvy traders are excited about another key decision. The Fed announced that it will significantly curtail its quantitative tightening (QT) program — that’s the selling off of its assets to decrease money supply and increase interest rates — beginning in June.

US Treasury yields fell on the news. Yields on the 10-year and 2-year both dropped by .05 percentage points.

What’s happening: The Fed bought a ton of government-backed bonds between 2020 and 2022 to help support economic recovery after the pandemic-induced recession. Those purchases ended up pushing down interest rates in certain parts of the economy, like housing and auto sales.

In mid-2022, as inflation soared higher, the Fed reversed that and began unloading those bonds.

The Fed currently lets up to $60 billion in Treasuries mature each month without replacing them, reducing the amount of money circulating in the economy. The idea is that QT can help exert some downward pressure on prices.

But there’s also some downside to the practice — changing the amount of liquidity in the economy and redirecting that money could have some major consequences.

As JPMorgan Chase CEO Jamie Dimon pointed out in his annual letter to shareholders last month, “we have never truly experienced the full effect of quantitative tightening on this scale.” The current pace of QT is draining more than $900 billion in liquidity from the system annually, he said, adding, “I am more worried [about it] than most.”

QT reduces the amount of money in the banking system, leading to higher interest rates and tighter monetary conditions, but last time the Fed implemented such a program in 2019, some banks fell very short of reserves.

That led to a “repo crisis”, where the interest rates for overnight loans between banks spiked unusually high. The Fed had to intervene and provide liquidity to bring down those repo rates.

PerpetualDiscounts now yield 6.75%, equivalent to 8.78% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.30% on 2024-4-19 and since then the closing price of ZLC has changed from 14.61 to 14.59, a decrease of 14bp in price, implying an increase of yields of 1bp (BMO reports a duration of 12.23, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.31%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 345bp from the 360bp reported April 24.

PerpetualDiscounts now yield 6.90%, equivalent to 8.97% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.21% on 2024-4-5 (? previously they were saying the YTM was 5.18% on 2024-4-5; what are they doing?) and since then the closing price of ZLC has changed from 14.79 to 14.52, a decrease of 183bp in price, implying an increase of yields of 15bp (BMO reports a duration of 12.30, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.36%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 360bp from the 350bp reported April 17.