The U.S. labor market leaped forward in January, capping the greatest three-month jobs gain in 17 years and delivering the biggest wage increase since 2008.
Payrolls advanced by 257,000 last month following increases in December and November that were even bigger than previously reported, figures from the Labor Department showed Friday in Washington. The unemployment rate rose to 5.7 percent from 5.6 percent as more than a million Americans streamed into the labor force seeking work.
…
Average hourly earnings jumped 0.5 percent, the most since November 2008, from the prior month. They were up 2.2 percent over the past year, the biggest advance since August.
…
A striking aspect of the report was a revision that added 147,000 jobs to the payroll tally for the previous two months, which also incorporated adjustments back to 2010.Employment in November was revised up to a 423,000 gain, the most since May 2010. Private payrolls, which exclude government agencies, soared 414,000 that month, the biggest advance since September 1997.
Job gains in January were led by retailers, construction firms and health-care companies.
So, previously scheduled deflation has been cancelled:
After the jobs report, traders pulled forward their expectations for when the Fed will raise borrowing costs from near zero, where they’ve been since 2008. Futures contracts show a 27 percent chance of a June rate increase, up from 18 percent on Thursday.
It’s not just the labor market that’s giving ammunition to to the view that higher rates are coming. Oil is also headed for its biggest two-week rally since March 1998, alleviating concerns that the commodities drop will ruin the U.S. outlook.
The bond market is now pricing in annual inflation of 1.49 percent for the next five years, up from 1.07 percent just a month ago, according to break-even rates on Treasury Inflation Protected Securities. That’s a lot closer to the Fed’s 2 percent target.
At the same time, derivatives traders still don’t see the economy strengthening enough to compel the Fed to raise its benchmark rate above 2 percent by the end of 2018. The Fed’s longer-run forecast for rates is about 4 percent.
Canada was not left out – McJobs, McJobs, McJobs!
The Canadian economy created a greater-than-expected 35,400 jobs last month, fuelled by growth in part-time positions, the self employed and Alberta’s non-energy sector.
The country’s unemployment rate fell to 6.6 per cent in January from 6.7 per cent a month earlier, Statistics Canada said Friday.
The gains topped forecasts and show some resilience in the face of lower oil prices and weakening business investment. But some of the details were weaker, showing part-time work and self employment led last month’s gains while the country’s participation rate remains at its lowest level since 2000.
…
In the last year, full-time employment has risen 0.8 per cent and part-time climbed 0.6 per cent. The total number of hours worked is slightly higher, up 0.3 per cent.The numbers come after Statscan recently revised its estimates for job growth in 2014. Employment gains were the slowest since 2009 last year, at 121,000, a third lower than the originally estimated increase of 186,000.
Canada’s participation rate was unchanged at 65.7 per cent last month.
So, given that future Canadian jobs will depend on demand for domestic staff in the States, the dollar fell:
The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, declined 0.8 percent to C$1.2529 per U.S. dollar at 2:52 p.m. in Toronto. One loonie buys 79.82 U.S. cents.
…
Canada’s currency depreciated 1.8 percent on Jan. 21 after the central bank trimmed its main rate to 0.75 percent from 1 percent. On Jan. 30 it touched C$1.2799 per U.S. dollar, the lowest level in nearly six years, part of the currency’s worst monthly start to a year in Bloomberg records going back to 1971.Bank of Canada policy makers next meet March 4, with swaps traders seeing 60 percent chance they will cut the rate to 0.5 percent, according to Bloomberg calculations based on trading in overnight index swaps. Yesterday, the odds were 64 percent.
But we’re doing better than Greece!
Standard & Poor’s cut Greece’s long-term sovereign credit rating to B– from B on Friday, warning that liquidity restraints on Greek banks would limit the time the new government has to clinch a deal with its creditors.
…
“Liquidity constraints have narrowed the time frame during which Greece’s new government can reach an agreement with its official creditors.”The rating agency said both Greece’s long and short-term ratings remained on creditwatch negative, meaning they could be lowered again, and warned that drawn out talks could produce a worsening economic situation in the country.
“A prolongation of talks with official creditors could also lead to … deposit withdrawals and, in a worst-case scenario, the imposition of capital controls and a loss of access to lender-of-last-resort financing, potentially resulting in Greece’s exclusion from the Economic and Monetary Union.”
I couldn’t find a news story on it – stories on Canada bonds are rare – but yields popped today CBID:
2 Year 0.49%
5 Year 0.78%
10 Year 1.45%
30 Year 2.03%
Which can be compared to the BoC’s numbers as of yesterday:
2 Year . 0.43%
5 Year 0.68%
10 Year 1.35%
30 Year 1.94%-ish
The Canadian preferred share market did very well again today, with PerpetualDiscounts and DeemedRetractibles both gaining 4bp and FixedResets up 65bp. The Performance Highlights table is suitably lengthy, suitably dominated by winning FixedResets. Volume was slightly below average.
For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.
Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread
Here’s TRP:
Click for Big
TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.32 to be $0.75 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is bid at 16.90 to be $0.57 cheap.
Click for Big
Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).
Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.20 to be $0.41 rich, while MFC.PR.H, resetting at +313 on 2017-3-19, is bid at 25.80 to be $0.49 cheap.
Click for Big
Here’s another good fit to reasonable numbers (it’s the scale that makes it look so awful!). I hope this market doesn’t start making sense, or I’ll be out of work!
The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.63 to be $0.45 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.25 and appears to be $0.57 rich.
Click for Big
This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.00, looks $0.87 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.73 after poor performance on the day, and is $1.11 rich.
Click for Big
All the break-even rates are scattered around zero – which is at least somewhat more reasonable than being negative!
On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:
Click for Big
Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?
| 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 | -0.5927 % | 2,181.9 |
| FixedFloater | 4.41 % | 3.57 % | 21,300 | 18.30 | 1 | 0.2325 % | 4,011.2 |
| Floater | 3.30 % | 3.47 % | 59,355 | 18.56 | 4 | -0.5927 % | 2,319.6 |
| OpRet | 4.05 % | 2.02 % | 97,968 | 0.36 | 1 | -0.0789 % | 2,752.0 |
| SplitShare | 4.28 % | 4.06 % | 34,232 | 3.57 | 5 | 0.0424 % | 3,194.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0789 % | 2,516.4 |
| Perpetual-Premium | 5.32 % | -3.22 % | 59,216 | 0.08 | 24 | 0.0131 % | 2,515.5 |
| Perpetual-Discount | 4.95 % | 4.81 % | 128,875 | 15.28 | 10 | 0.0376 % | 2,788.5 |
| FixedReset | 4.38 % | 3.35 % | 217,895 | 17.26 | 79 | 0.6487 % | 2,438.9 |
| Deemed-Retractible | 4.92 % | 1.37 % | 109,984 | 0.15 | 39 | 0.0404 % | 2,645.0 |
| FloatingReset | 2.52 % | 2.98 % | 87,785 | 6.42 | 7 | 0.2984 % | 2,308.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FTS.PR.G | FixedReset | -2.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.39 Evaluated at bid price : 23.02 Bid-YTW : 3.16 % |
| FTS.PR.K | FixedReset | -1.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.72 Evaluated at bid price : 23.73 Bid-YTW : 3.01 % |
| PWF.PR.A | Floater | -1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 2.87 % |
| BMO.PR.S | FixedReset | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 23.20 Evaluated at bid price : 24.94 Bid-YTW : 3.00 % |
| TRP.PR.D | FixedReset | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.80 Evaluated at bid price : 23.93 Bid-YTW : 3.23 % |
| TRP.PR.C | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 16.90 Evaluated at bid price : 16.90 Bid-YTW : 3.30 % |
| MFC.PR.F | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.25 Bid-YTW : 4.83 % |
| BAM.PF.B | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 23.02 Evaluated at bid price : 24.41 Bid-YTW : 3.42 % |
| POW.PR.G | Perpetual-Premium | 1.31 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-04-15 Maturity Price : 26.00 Evaluated at bid price : 27.04 Bid-YTW : 3.64 % |
| BMO.PR.Q | FixedReset | 1.33 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.90 Bid-YTW : 3.58 % |
| ENB.PR.T | FixedReset | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 21.28 Evaluated at bid price : 21.28 Bid-YTW : 3.93 % |
| BNS.PR.Y | FixedReset | 1.59 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.35 Bid-YTW : 3.39 % |
| GWO.PR.N | FixedReset | 1.63 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.32 Bid-YTW : 5.03 % |
| ENB.PR.J | FixedReset | 1.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.24 Evaluated at bid price : 22.84 Bid-YTW : 3.75 % |
| BNS.PR.Z | FixedReset | 1.76 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.15 Bid-YTW : 3.41 % |
| ENB.PF.E | FixedReset | 1.78 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.53 Evaluated at bid price : 23.50 Bid-YTW : 3.76 % |
| ENB.PR.N | FixedReset | 1.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.03 Evaluated at bid price : 22.48 Bid-YTW : 3.79 % |
| PWF.PR.P | FixedReset | 1.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 19.09 Evaluated at bid price : 19.09 Bid-YTW : 2.99 % |
| TRP.PR.B | FixedReset | 2.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 15.05 Evaluated at bid price : 15.05 Bid-YTW : 3.19 % |
| ENB.PF.A | FixedReset | 2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.55 Evaluated at bid price : 23.50 Bid-YTW : 3.74 % |
| ENB.PR.D | FixedReset | 2.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 20.60 Evaluated at bid price : 20.60 Bid-YTW : 3.85 % |
| ENB.PR.B | FixedReset | 2.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 20.55 Evaluated at bid price : 20.55 Bid-YTW : 3.85 % |
| ENB.PF.G | FixedReset | 2.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.51 Evaluated at bid price : 23.49 Bid-YTW : 3.80 % |
| SLF.PR.G | FixedReset | 2.48 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.01 Bid-YTW : 5.24 % |
| HSE.PR.A | FixedReset | 2.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 17.75 Evaluated at bid price : 17.75 Bid-YTW : 3.46 % |
| SLF.PR.H | FixedReset | 2.84 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.99 Bid-YTW : 3.01 % |
| MFC.PR.L | FixedReset | 2.98 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.20 Bid-YTW : 3.75 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.J | FixedReset | 304,493 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 23.16 Evaluated at bid price : 25.06 Bid-YTW : 3.25 % |
| RY.PR.Z | FixedReset | 80,920 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 23.23 Evaluated at bid price : 25.03 Bid-YTW : 2.88 % |
| BMO.PR.R | FloatingReset | 61,610 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.66 Bid-YTW : 2.98 % |
| ENB.PF.C | FixedReset | 58,250 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 22.44 Evaluated at bid price : 23.31 Bid-YTW : 3.77 % |
| TD.PR.T | FloatingReset | 43,700 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.80 Bid-YTW : 2.85 % |
| BMO.PR.T | FixedReset | 39,475 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-06 Maturity Price : 23.13 Evaluated at bid price : 24.82 Bid-YTW : 2.93 % |
| There were 28 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| FTS.PR.G | FixedReset | Quote: 23.02 – 23.81 Spot Rate : 0.7900 Average : 0.5416 YTW SCENARIO |
| ENB.PR.T | FixedReset | Quote: 21.28 – 21.89 Spot Rate : 0.6100 Average : 0.3815 YTW SCENARIO |
| PWF.PR.T | FixedReset | Quote: 25.00 – 25.59 Spot Rate : 0.5900 Average : 0.4119 YTW SCENARIO |
| CGI.PR.D | SplitShare | Quote: 25.30 – 25.80 Spot Rate : 0.5000 Average : 0.3421 YTW SCENARIO |
| PWF.PR.A | Floater | Quote: 17.35 – 17.90 Spot Rate : 0.5500 Average : 0.4052 YTW SCENARIO |
| BMO.PR.W | FixedReset | Quote: 24.60 – 24.95 Spot Rate : 0.3500 Average : 0.2252 YTW SCENARIO |
If we knew the value of TRP.PR.C on the next exchange date it would be easy to calculate the yield. We know, based on the current value of TRP.PR.F, that TRP.PR.C will then be exchangeable to a new share that will be worth around 15.49 if rates stay as they are. If you apply half the difference to the time remaining you get a yield of 2.96% not 3.43% as shown on your graph. Why the difference?
Thanks for your openness to share your knowledge.
Exchanging is voluntary. The graph assumes that the price of TRP.PR.C will remain constant at 16.90 and that the GOC-5 yield is constant at 0.78%. Thus it is assumed that TRP.PR.C will reset at (0.78%+154bp) = 2.32%, or $0.58 p.a., implying an Expected Future Current Yield of $0.58/$16.90 = 3.43%.
I was assuming that TRP.PR.C being part of a strong pair would converge untill the conversion date toward the same price as the other future half . I understand that results depend on assumption one make.
Thanks
Ah, I see.
You can say that the elements of Strong Pair will converge to a price, X, but you cannot make any predictions about what X might be (unless you make other assumptions). It could be higher than the current price of either element, lower, or in between – it will all depend on market conditions at the next Exchange Date.
TRP.PR.F a floating reset (.52+1.92) is worth 18.35. The future floating reset companion to TRP.PR.C (.52+1.54) should be around 15.49 if interest rate stay the same . The meeting price would then be somewhere between the actual value of TRP.PR.C (16.70) and the value of the companion (15.49). Unless I am missing something…
Where we differ is “if interest rate stay the same .”
That is not required for the prices to converge; it’s an additional assumption.
In addition, some difference in price is to be expected due to the different yields on the different bases of calculation. At the moment, FixedReset/FloatingReset Strong Pairs are indicating that the break-even average three-month bill yield until the next Exchange Date will be 0% (with some scatter, as shown in the chart). One would normally expect bill yields to be more volatile than five-year yields, and the expectations of these yields to be more volatile yet.
Given that exchange is an option available to the holder, I would expect – even in the absence of any changes in market yields – the lower price to increase until it reached the higher price on the Exchange Date.