The FOMC statement was of interest:
Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
…
The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased.
…
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points.
In an implementation note they stated:
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $15 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.
This represents a change from the previous implementation note:
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.
So ‘Quantitative Tightening’ has been loosened! The NYT notes:
The decision to hold rates steady came despite ongoing pressure from President Trump, who on Monday suggested he might demote Mr. Powell if the central bank did not move toward easing rates.
Investors seemed to find little new information in the Fed’s policy statement at 2 p.m. Shortly after the central bank announced its decision to leave rates unchanged, the S&P 500 was up 0.3 percent. Yields on government bonds — which are closely tied to monetary policy — declined, with the yield on the 10-year Treasury note falling to 2.04 percent.
…
The central bank is independent of the White House and Mr. Trump appointed Mr. Powell as its head, but the president regularly criticizes the central bank for lifting rates too many times last year. Mr. Trump ramped up those attacks this week, saying that Fed policy was putting the United States on an uneven playing field and hinting that he could consider the unprecedented move of attempting to demote Mr. Powell.“They’re going to be making an announcement pretty soon, so we’ll see what happens,” Mr. Trump said, when asked by a reporter whether he would try to strip Mr. Powell of his chairmanship. “I want to be given a level playing field, and so far I haven’t been.”
A Fed spokesperson noted that the chairman can only be removed “for cause.” Mr. Powell said in a “60 Minutes” interview earlier this year that “the law is clear that I have a four-year term. And I fully intend to serve it.”
Canadian headline inflation jumped:
Canadians may be feeling a price pinch as inflation rose to 2.4 per cent in May from the same month one year ago, led by higher prices for food.
That compares to a rise of two per cent in April, according to Statistics Canada’s consumer price index (CPI) released Wednesday.
Year-over-year prices rose in all eight categories of the index, with notable increases in food prices, up four per cent in the 12 months leading up to May 2019 after increasing three per cent in April.
…
But that headline inflation number is notoriously volatile, easily skewed by individual factors. So the data agency also comes up with a so-called “core” inflation rate by tabulating the average of three other sub-rates with a lot of sectors stripped out.The core inflation rate came in at 2.1 per cent, the highest on record since 2012.
Despite this, the Five-Year Canada Yield was down 1bp to 1.31%; but preferreds had a good day. Fergal Smith writes in the Globe:
At 4:07 p.m., the Canadian dollar was trading 0.7 per cent higher at 1.3281 to the greenback, or 75.30 U.S. cents.
The currency, which was boosted on Tuesday by the revival of trade talks between the United States and China, touched its strongest level since June 12 at 1.3282.
The price of oil, one of Canada’s major exports, fell despite a larger-than-expected decline in U.S. crude inventories. U.S. crude oil futures settled 0.3 per cent lower at $53.76 a barrel.
Canadian government bond prices were lower across a steeper yield curve, with the two-year down 1 cent to yield 1.408 per cent and the 10-year falling 11 cents to yield 1.435 per cent.
PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.44%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now an incredible 390bp, a widening from the 380bp reported June 12.
| 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 | -0.6269 % | 1,900.6 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.6269 % | 3,487.5 |
| Floater | 6.23 % | 6.51 % | 67,839 | 13.20 | 3 | -0.6269 % | 2,009.8 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0284 % | 3,319.3 |
| SplitShare | 4.69 % | 4.60 % | 72,445 | 4.21 | 7 | -0.0284 % | 3,964.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0284 % | 3,092.9 |
| Perpetual-Premium | 5.62 % | -8.68 % | 75,004 | 0.08 | 7 | 0.1125 % | 2,941.5 |
| Perpetual-Discount | 5.52 % | 5.65 % | 60,191 | 14.33 | 26 | 0.3881 % | 3,055.6 |
| FixedReset Disc | 5.60 % | 5.47 % | 164,587 | 14.60 | 70 | 0.4086 % | 2,041.4 |
| Deemed-Retractible | 5.31 % | 6.00 % | 79,978 | 8.02 | 27 | 0.3929 % | 3,062.7 |
| FloatingReset | 4.09 % | 4.91 % | 46,986 | 2.51 | 4 | 0.3743 % | 2,324.8 |
| FixedReset Prem | 5.12 % | 4.05 % | 199,088 | 1.84 | 16 | 0.1045 % | 2,578.7 |
| FixedReset Bank Non | 1.99 % | 4.20 % | 156,043 | 2.53 | 3 | 0.2239 % | 2,636.1 |
| FixedReset Ins Non | 5.40 % | 7.74 % | 98,502 | 8.11 | 22 | 0.1140 % | 2,104.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IFC.PR.G | FixedReset Ins Non | -2.13 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.75 Bid-YTW : 7.23 % |
| NA.PR.S | FixedReset Disc | -1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 16.95 Evaluated at bid price : 16.95 Bid-YTW : 5.71 % |
| BAM.PR.B | Floater | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 10.63 Evaluated at bid price : 10.63 Bid-YTW : 6.52 % |
| TRP.PR.B | FixedReset Disc | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 10.82 Evaluated at bid price : 10.82 Bid-YTW : 6.03 % |
| GWO.PR.I | Deemed-Retractible | 1.03 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.62 Bid-YTW : 6.87 % |
| SLF.PR.E | Deemed-Retractible | 1.03 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.60 Bid-YTW : 6.88 % |
| CM.PR.Q | FixedReset Disc | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 18.19 Evaluated at bid price : 18.19 Bid-YTW : 5.71 % |
| NA.PR.G | FixedReset Disc | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 20.72 Evaluated at bid price : 20.72 Bid-YTW : 5.28 % |
| TD.PF.C | FixedReset Disc | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 16.92 Evaluated at bid price : 16.92 Bid-YTW : 5.40 % |
| PWF.PR.T | FixedReset Disc | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 17.90 Evaluated at bid price : 17.90 Bid-YTW : 5.47 % |
| TRP.PR.A | FixedReset Disc | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 13.30 Evaluated at bid price : 13.30 Bid-YTW : 6.16 % |
| NA.PR.W | FixedReset Disc | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 15.75 Evaluated at bid price : 15.75 Bid-YTW : 5.79 % |
| NA.PR.E | FixedReset Disc | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 19.10 Evaluated at bid price : 19.10 Bid-YTW : 5.40 % |
| CU.PR.D | Perpetual-Discount | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 22.20 Evaluated at bid price : 22.50 Bid-YTW : 5.48 % |
| MFC.PR.H | FixedReset Ins Non | 1.21 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.10 Bid-YTW : 7.12 % |
| TD.PF.I | FixedReset Disc | 1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 21.40 Evaluated at bid price : 21.73 Bid-YTW : 5.10 % |
| BMO.PR.S | FixedReset Disc | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 17.64 Evaluated at bid price : 17.64 Bid-YTW : 5.33 % |
| TRP.PR.C | FixedReset Disc | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 11.92 Evaluated at bid price : 11.92 Bid-YTW : 6.01 % |
| BAM.PR.R | FixedReset Disc | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 14.30 Evaluated at bid price : 14.30 Bid-YTW : 6.26 % |
| PWF.PR.K | Perpetual-Discount | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 21.72 Evaluated at bid price : 21.97 Bid-YTW : 5.71 % |
| SLF.PR.D | Deemed-Retractible | 1.33 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.62 Bid-YTW : 6.81 % |
| TD.PF.A | FixedReset Disc | 1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 16.93 Evaluated at bid price : 16.93 Bid-YTW : 5.39 % |
| EMA.PR.F | FixedReset Disc | 1.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 16.74 Evaluated at bid price : 16.74 Bid-YTW : 6.02 % |
| SLF.PR.H | FixedReset Ins Non | 1.52 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.41 Bid-YTW : 9.05 % |
| BIP.PR.D | FixedReset Disc | 1.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 21.81 Evaluated at bid price : 22.06 Bid-YTW : 5.79 % |
| MFC.PR.B | Deemed-Retractible | 1.66 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.44 Bid-YTW : 6.57 % |
| SLF.PR.B | Deemed-Retractible | 1.74 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.23 Bid-YTW : 6.26 % |
| SLF.PR.G | FixedReset Ins Non | 1.80 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.55 Bid-YTW : 9.73 % |
| TD.PF.J | FixedReset Disc | 1.90 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 20.34 Evaluated at bid price : 20.34 Bid-YTW : 5.23 % |
| MFC.PR.I | FixedReset Ins Non | 1.93 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.02 Bid-YTW : 7.62 % |
| RY.PR.M | FixedReset Disc | 1.96 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 18.72 Evaluated at bid price : 18.72 Bid-YTW : 5.31 % |
| TRP.PR.F | FloatingReset | 2.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 13.34 Evaluated at bid price : 13.34 Bid-YTW : 6.71 % |
| GWO.PR.N | FixedReset Ins Non | 2.44 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 13.88 Bid-YTW : 9.21 % |
| PWF.PR.P | FixedReset Disc | 2.80 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 12.85 Evaluated at bid price : 12.85 Bid-YTW : 5.67 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| GWO.PR.G | Deemed-Retractible | 349,312 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.22 Bid-YTW : 6.14 % |
| TD.PF.L | FixedReset Disc | 183,556 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 23.03 Evaluated at bid price : 24.60 Bid-YTW : 4.82 % |
| TD.PF.J | FixedReset Disc | 88,300 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 20.34 Evaluated at bid price : 20.34 Bid-YTW : 5.23 % |
| CM.PR.R | FixedReset Disc | 70,862 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 21.40 Evaluated at bid price : 21.40 Bid-YTW : 5.53 % |
| RY.PR.J | FixedReset Disc | 68,201 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 5.33 % |
| BMO.PR.D | FixedReset Disc | 47,500 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-06-19 Maturity Price : 21.28 Evaluated at bid price : 21.28 Bid-YTW : 5.33 % |
| There were 52 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BMO.PR.Y | FixedReset Disc | Quote: 18.64 – 19.15 Spot Rate : 0.5100 Average : 0.3005 YTW SCENARIO |
| SLF.PR.G | FixedReset Ins Non | Quote: 13.55 – 14.10 Spot Rate : 0.5500 Average : 0.3546 YTW SCENARIO |
| CIU.PR.A | Perpetual-Discount | Quote: 20.75 – 21.48 Spot Rate : 0.7300 Average : 0.5352 YTW SCENARIO |
| GWO.PR.H | Deemed-Retractible | Quote: 21.86 – 22.30 Spot Rate : 0.4400 Average : 0.2674 YTW SCENARIO |
| NA.PR.C | FixedReset Disc | Quote: 21.10 – 21.59 Spot Rate : 0.4900 Average : 0.3282 YTW SCENARIO |
| MFC.PR.K | FixedReset Ins Non | Quote: 18.05 – 18.51 Spot Rate : 0.4600 Average : 0.2988 YTW SCENARIO |
The adjective “incredible” stood out for me in this post, namely:
from today’s post (June 19, 2019):
PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.44%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now an incredible 390bp, a widening from the 380bp reported June 12.
I made use of the extensive archives in this site (thank you James!) to see how the spread compared to the two other times in the last decade preferred shares have had substantial drops in market price.
from a February 24, 2016 post:
PerpetualDiscounts now yield 5.86%, equivalent to 7.62% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 340bp, a slight (and perhaps spurious) widening from the 335bp reported February 18.
and from a February 27, 2009 post:
PerpetualDiscounts closed the month on a sour note, losing nearly 80bp to close yielding 7.29%, equivalent to 10.21% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 7.5%, so the pre-tax interest-equivalent spread now stands at 271bp – another updraft!
There’s a recent chart of the Seniority Spread vs. time at MAPF Performance : May, 2019.
The Seniority Spread hit 391 on December 24, 2018, when PerpetualDiscounts hit 6.16% when long corporates were at 4.1% (tax-loss selling!), but apart from that the only time this level has been exceeded was December 2008 – a very grim time during the credit crunch, when the world was about to end.
Seems there is a low risk arbitrage opportunity here. If the preferred market goes any lower I’m thinking about taking out a mortgage (< 3% interest), to invest in more floating and rate reset preferreds (most based on recommendations from prefletter, and maybe a few lower rated issues like ala, bpo, and ta, to boost the yield a bit). Seems like the potential downside is pretty limited, especially if I'm content to maintain the position. Am I missing anything? Love to hear your thoughts.
I’m thinking about taking out a mortgage (< 3% interest), to invest in more floating and rate reset preferreds
I don’t think anybody in his right mind would comment on this idea without more information about your personal finances than anybody in his right mind would publish on the internet.