The Fed is forging ahead with tapering:
The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.
And when the Fed speaks, Emerging Markets listen:
India’s central bank got the ball rolling with its surprise decision Tuesday to raise its main interest rate by a quarter of a percentage point to 8 per cent. Though it justified the move in terms of keeping a lid on inflation pressures, protecting the rupee is widely considered to have been a key motive.
Those considerations were clearly behind the decisions in Turkey and South Africa. The Central Bank of Turkey said it was raising its main overnight lending rate to 12 per cent from 7.75 per cent and more than doubling its one-week rate to 10 per cent from 4.5 per cent.
…
South Africa’s central bank was clear that the falling rand had a key role in its decision to raise its main interest rate by a half percentage point to 5.50 per cent despite concerns over growth.
…
“The history of using interest rates to defend a currency usually ends in tears,” said Neil MacKinnon, global macro strategist at VTB Capital.MacKinnon pointed to the experience of Europe before the launch of the euro in 1999. Many currencies had been pegged to each other in the so-called Exchange Rate Mechanism and when markets became volatile in the early 1990s, central banks raised their interest rates to support their currencies.
However, that came at a cost, most notably in Britain. The government there left the currency pact after the Bank of England splashed out billions of pounds and raised its main interest rate a massive 5 per cent in one day in a last-ditch — and ultimately futile — effort to defeat the speculators.
The ERM example is not, I think, the best; there you had interest rate policy essentially being set in isolation with little regard for other problems:
Britain entered under conditions of high inflation, huge balance of payments deficits, a growing PSBR [Public Sector Borrowing Requirement, the government’s cash deficit], and political uncertainty.
Still, Black Wednesday remains vivid in my memory as one of the most fun days I’ve ever had in the market. The Canadian yield curve flattened like hell ‘n’ gone and I was trading all day in big size.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets down 15bp and DeemedRetractibles off 3bp. A surprisingly lengthy Performance Highlights table is dominated by losers. Volume was at the high end of average.
PerpetualDiscounts now yield 5.63%, equivalent to 7.32% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.55% (maybe a little bit more?) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, the same as in the January 22 report.
| 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 | -1.0329 % | 2,455.6 |
| FixedFloater | 4.46 % | 3.71 % | 27,859 | 17.99 | 1 | 0.0000 % | 3,801.4 |
| Floater | 3.04 % | 3.06 % | 69,971 | 19.57 | 3 | -1.0329 % | 2,651.4 |
| OpRet | 4.61 % | 1.32 % | 77,112 | 0.33 | 3 | -0.0384 % | 2,678.0 |
| SplitShare | 4.88 % | 5.03 % | 62,202 | 4.38 | 5 | -0.3375 % | 3,005.3 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0384 % | 2,448.8 |
| Perpetual-Premium | 5.61 % | 2.41 % | 116,252 | 0.10 | 13 | -0.1556 % | 2,332.0 |
| Perpetual-Discount | 5.56 % | 5.63 % | 169,352 | 14.43 | 25 | 0.0071 % | 2,389.1 |
| FixedReset | 4.94 % | 3.68 % | 221,879 | 6.73 | 83 | -0.1542 % | 2,485.9 |
| Deemed-Retractible | 5.13 % | 4.15 % | 177,205 | 1.97 | 42 | -0.0332 % | 2,413.8 |
| FloatingReset | 2.66 % | 2.58 % | 197,759 | 4.44 | 6 | -0.2266 % | 2,445.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| CGI.PR.D | SplitShare | -1.86 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2023-06-14 Maturity Price : 25.00 Evaluated at bid price : 24.25 Bid-YTW : 4.22 % |
| CIU.PR.C | FixedReset | -1.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-01-29 Maturity Price : 20.85 Evaluated at bid price : 20.85 Bid-YTW : 3.73 % |
| MFC.PR.F | FixedReset | -1.23 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.51 Bid-YTW : 4.54 % |
| BAM.PR.R | FixedReset | -1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-01-29 Maturity Price : 23.49 Evaluated at bid price : 25.00 Bid-YTW : 4.03 % |
| BAM.PR.B | Floater | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-01-29 Maturity Price : 17.28 Evaluated at bid price : 17.28 Bid-YTW : 3.06 % |
| BAM.PR.K | Floater | -1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-01-29 Maturity Price : 17.14 Evaluated at bid price : 17.14 Bid-YTW : 3.08 % |
| CU.PR.E | Perpetual-Discount | 1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-01-29 Maturity Price : 22.89 Evaluated at bid price : 23.19 Bid-YTW : 5.36 % |
| CIU.PR.A | Perpetual-Discount | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-01-29 Maturity Price : 21.65 Evaluated at bid price : 21.65 Bid-YTW : 5.41 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| NA.PR.Q | FixedReset | 454,624 | Resets at +243bp, so is probably hedging today’s new issue even though it’s not NVCC compliant.
TD crossed 216,700 at 24.90 and 174,700 at 24.95. RBC crossed 19,700 at 25.00. YTW SCENARIO |
| RY.PR.L | FixedReset | 275,335 | Will reset at 4.26%. Yield to Deemed Maturity 2022-1-31 at 25.00 is 3.85%. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 25.75 Bid-YTW : -15.64 % |
| RY.PR.I | FixedReset | 122,490 | Will reset at 3.52%. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.69 Bid-YTW : 3.73 % |
| BMO.PR.N | FixedReset | 69,826 | Will be redeemed 2014-2-25 at $25.00 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-27 Maturity Price : 25.00 Evaluated at bid price : 25.37 Bid-YTW : 2.64 % |
| CM.PR.L | FixedReset | 64,110 | Virtually certain to be called, with reset of +447. TD crossed two blocks of 20,000 each, both at 25.28. Desjardins crossed 14,800 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 25.28 Bid-YTW : 1.92 % |
| FTS.PR.J | Perpetual-Discount | 54,051 | TD crossed 50,000 at 22.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-01-29 Maturity Price : 22.24 Evaluated at bid price : 22.56 Bid-YTW : 5.34 % |
| There were 37 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| ENB.PR.A | Perpetual-Premium | Quote: 25.22 – 25.56 Spot Rate : 0.3400 Average : 0.2078 YTW SCENARIO |
| CU.PR.F | Perpetual-Discount | Quote: 21.40 – 21.78 Spot Rate : 0.3800 Average : 0.2529 YTW SCENARIO |
| BAM.PR.K | Floater | Quote: 17.14 – 17.43 Spot Rate : 0.2900 Average : 0.1729 YTW SCENARIO |
| RY.PR.X | FixedReset | Quote: 25.41 – 25.70 Spot Rate : 0.2900 Average : 0.1777 YTW SCENARIO |
| HSE.PR.A | FixedReset | Quote: 22.66 – 22.90 Spot Rate : 0.2400 Average : 0.1509 YTW SCENARIO |
| SLF.PR.C | Deemed-Retractible | Quote: 20.87 – 21.09 Spot Rate : 0.2200 Average : 0.1381 YTW SCENARIO |