The recent US repo-market disruption continues to attract attention:
The Federal Reserve plans to pour cash into the U.S. banking system through early October in a bid to avert another market disruption, but analysts see the need for the central bank to come up with longer-term fixes.
…
Repo rates hit 10 per cent on Tuesday, propelling other short-term rates sharply higher.Analysts blamed huge cash demand to pay for quarterly corporate taxes and the prior week’s US$78-billion worth of coupon-bearing Treasury supply for the market ruction.
They also attributed the decline of excess reserves, to about US$1.4-trillion from US$2.3-trillion in 2017, to the Fed’s reduction of its bond holdings.
…
Since Tuesday, the Fed has held four rounds of repo operations, with banks and dealers borrowing from the central banks with their Treasuries and other bonds as collateral.On Friday, the New York Fed, which implements the central bank’s market actions, said it will conduct more repo operations into October.
…
While repo operations are expected to provide a temporary patch, analysts said the Fed needs to offer more permanent solutions.“The underlying conditions that gave rise to the funding stress are still in place,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.
Other analysts said policy-makers should consider launching a standing repo facility and/or increasing purchases of Treasuries.
I don’t think much of the proposed solutions in the final quoted paragraph. Both represent the Fed printing money.
The rationale behind the current bloated balance sheet of the Fed is that we are continuing to recover from the Credit Crunch. There was a huge shock to the system, so the Fed boosted the money supply, fine, I get it. But making this monetary expansion permanent – or even hinting that it could be permanent – looks like an open invitation to galloping inflation.
Look at the stresses that caused the episode! Tax payments and a big Treasury auction! Not at all unusual and totally forseeable. And yet the repo rate spiked to 10%.
Either the Fed screwed up by implementing ‘quantitative tightening’ too rapidly, or the financial system has become addicted to having all that cheap cash around. The first is an easy fix, the second is a little scary …. beating an addiction usually results in pain, as Canadian mortgage borrowers found out in 1981.
And through it all, Canadians are keeping up with the Joneses in the traditional way:
Canadian homeowners who accessed their home equity through a loan or refinancing helped fuel household spending in recent years, according to research by staff at the Bank of Canada.
…
In 2017, the researchers found Canadian homeowners extracted $89-billion in home equity through these two methods, with more money – $49-billion – coming through HELOCs.Borrowers used that money to pay for big-ticket items, such as cars and furniture, or to fund renovations, among other things, according to the research, which suggests this “has likely contributed materially” to this kind of spending in Canada in recent years.
The researchers found that by the end of 2017, this equity extraction could have added two per cent to consumer spending on durables and semidurables (goods that include cars and furniture), as well as 11 per cent to renovation spending.
The report found that translated into a 0.5-per-cent impact on the GDP level.
The source paper is titled Home Equity Extraction and Household Spending in Canada, by Anson T. Y. Ho, Mikael Khan, Monica Mow and Brian Peterson.
| 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 | -0.3196 % | 1,902.5 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3196 % | 3,491.0 |
| Floater | 6.33 % | 6.44 % | 53,638 | 13.29 | 4 | -0.3196 % | 2,011.9 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0507 % | 3,381.6 |
| SplitShare | 4.66 % | 4.48 % | 55,721 | 4.02 | 7 | -0.0507 % | 4,038.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0507 % | 3,150.9 |
| Perpetual-Premium | 5.61 % | -16.80 % | 66,658 | 0.09 | 6 | -0.0130 % | 2,984.9 |
| Perpetual-Discount | 5.41 % | 5.53 % | 65,854 | 14.51 | 28 | 0.1357 % | 3,168.0 |
| FixedReset Disc | 5.56 % | 5.63 % | 169,607 | 14.27 | 73 | 0.2267 % | 2,061.2 |
| Deemed-Retractible | 5.22 % | 5.79 % | 77,966 | 7.91 | 27 | 0.2755 % | 3,152.7 |
| FloatingReset | 4.53 % | 6.70 % | 61,298 | 8.00 | 3 | 0.2369 % | 2,348.4 |
| FixedReset Prem | 5.24 % | 3.99 % | 128,893 | 1.59 | 14 | 0.1004 % | 2,586.4 |
| FixedReset Bank Non | 1.98 % | 4.31 % | 87,959 | 2.28 | 3 | -0.4844 % | 2,659.2 |
| FixedReset Ins Non | 5.50 % | 8.18 % | 106,232 | 7.87 | 21 | -0.0760 % | 2,101.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| HSE.PR.A | FixedReset Disc | -2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 11.20 Evaluated at bid price : 11.20 Bid-YTW : 7.04 % |
| PWF.PR.P | FixedReset Disc | -1.80 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 12.52 Evaluated at bid price : 12.52 Bid-YTW : 6.16 % |
| PWF.PR.A | Floater | -1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 11.60 Evaluated at bid price : 11.60 Bid-YTW : 6.04 % |
| HSE.PR.C | FixedReset Disc | -1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 16.37 Evaluated at bid price : 16.37 Bid-YTW : 7.11 % |
| SLF.PR.G | FixedReset Ins Non | -1.15 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.95 Bid-YTW : 10.69 % |
| IFC.PR.G | FixedReset Ins Non | -1.07 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.55 Bid-YTW : 8.19 % |
| BAM.PR.X | FixedReset Disc | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 12.84 Evaluated at bid price : 12.84 Bid-YTW : 6.27 % |
| CM.PR.Q | FixedReset Disc | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 18.08 Evaluated at bid price : 18.08 Bid-YTW : 5.97 % |
| BIP.PR.F | FixedReset Disc | 1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 21.67 Evaluated at bid price : 22.00 Bid-YTW : 5.81 % |
| TRP.PR.B | FixedReset Disc | 1.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 10.95 Evaluated at bid price : 10.95 Bid-YTW : 6.33 % |
| GWO.PR.T | Deemed-Retractible | 1.63 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.73 Bid-YTW : 5.83 % |
| BAM.PF.B | FixedReset Disc | 2.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 17.33 Evaluated at bid price : 17.33 Bid-YTW : 6.12 % |
| CCS.PR.C | Deemed-Retractible | 2.32 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.21 Bid-YTW : 5.42 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| PWF.PR.P | FixedReset Disc | 386,800 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 12.52 Evaluated at bid price : 12.52 Bid-YTW : 6.16 % |
| TD.PF.I | FixedReset Disc | 72,500 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 20.93 Evaluated at bid price : 20.93 Bid-YTW : 5.47 % |
| SLF.PR.H | FixedReset Ins Non | 56,067 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.60 Bid-YTW : 9.20 % |
| CM.PR.Q | FixedReset Disc | 33,500 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 18.08 Evaluated at bid price : 18.08 Bid-YTW : 5.97 % |
| RY.PR.Z | FixedReset Disc | 32,334 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 17.25 Evaluated at bid price : 17.25 Bid-YTW : 5.44 % |
| BAM.PR.X | FixedReset Disc | 30,150 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-20 Maturity Price : 12.84 Evaluated at bid price : 12.84 Bid-YTW : 6.27 % |
| There were 27 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CU.PR.D | Perpetual-Discount | Quote: 22.99 – 23.48 Spot Rate : 0.4900 Average : 0.3015 YTW SCENARIO |
| BAM.PF.J | FixedReset Disc | Quote: 24.19 – 24.70 Spot Rate : 0.5100 Average : 0.3288 YTW SCENARIO |
| EML.PR.A | FixedReset Ins Non | Quote: 25.50 – 25.85 Spot Rate : 0.3500 Average : 0.2117 YTW SCENARIO |
| TRP.PR.G | FixedReset Disc | Quote: 17.44 – 17.89 Spot Rate : 0.4500 Average : 0.3121 YTW SCENARIO |
| RY.PR.J | FixedReset Disc | Quote: 18.46 – 18.81 Spot Rate : 0.3500 Average : 0.2411 YTW SCENARIO |
| BAM.PF.E | FixedReset Disc | Quote: 15.95 – 16.29 Spot Rate : 0.3400 Average : 0.2321 YTW SCENARIO |
Update, 2019-9-25, referred to in comments: From the report Combatting Money Laundering in BC Real Estate:
Click for Big
… and from a blog (I couldn’t find an actual Bank of Canada chart with this information, but this chart looks right):
Click for Big
james , you nailed it ..” Either the Fed screwed up by implementing ‘quantitative tightening’ too rapidly, or the financial system has become addicted to having all that cheap cash around.”… the fed did the q tightening at the same time as raising rates , so it was like a double tightening , and , the problems and excesses that caused the blow up in 2008/9 were not dealt with just papered over . so now it takes increasing amounts of cheap cash and the pain will be much worse when/if it happens then it would have been in 2008/9 .
Is there a reason that Maturity price for BAM.PF.J FixedReset is 23.02? My expectation was that it would be bid price of 24.19.
BAM.PF.J FixedReset Disc Quote: 24.19 – 24.70
Spot Rate : 0.5100
Average : 0.3288
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2049-09-20
Maturity Price : 23.02
Evaluated at bid price : 24.19
Bid-YTW : 4.86 %
“In 2017, the researchers found Canadian homeowners extracted $89-billion in home equity through these two methods, with more money – $49-billion – coming through HELOCs.”
This seems a feature not a bug. With housing prices too high and a social compact to keep them there, “house rich and cash poor” is more of “at least we’re in it with the Jones'” rather than just keeping up with them – i.e. Canadians have come to see this as normal. The natural result is that the only cash they have saved must be accessed through a lender, with interest.
And yet our leaders in many parts of Canada are bent on forcing real estate prices down in order to combat what they deem to be social injustices.
I suggest that have not seen any serious attempt to reduce house prices so far, except for BC’s provincial property tax. All other measures have simply been aimed at cooling the market and preventing blow ups. With 2/3 of Canadian national wealth in private property, we have a capital productivity crisis in this country not just a “social justice” problem (although we have that too).
If we seriously want to see our international competitiveness improve, we need to put capital to better use than creating beautiful private spaces for the 1%. Sign me up for wealth taxes in the form of higher property taxes at the local or provincial level (even better, make it surtax on higher priced property). Higher property taxes are coming anyway as transfers to municipalities will be cut with the austerity measures imposed by the wave of new conservative provincial (hello Jason Kenney) and, perhaps national, governments. These cuts will force municipalities to raise mill rates. We might as well be a bit more strategic about it.
When prices in the US sky-rocketed in 2000s, the “keeping up with the Jones” was very much a thing, with families buying boats/atv/etc.. Then everything came crashing down….
I hope it doesn’t happen here. I try to keep my investments outside of “real-estate” as much as I can.
https://www.thestar.com/vancouver/2019/09/25/jagmeet-singh-vows-to-ease-bc-housing-costs-by-fighting-money-laundering.html
… and here we go. Baby steps but all good ones.
Sign me up for wealth taxes in the form of higher property taxes at the local or provincial level (even better, make it surtax on higher priced property).
I quite agree … as we have agreed before.
Baby steps but all good ones.
The Globe mentioned this as well but the National Post story is better.
I’m not sure about this … talking about money laundering’s effect on house prices has a xenophobic, specifically Sinophobic, smell to it, as can be observed in practically any on-line discussion of Vancouver house prices. I added charts to the end of the main post, above; the first shows the estimates of money-laundering volume, the second shows much firmer reports of the amount of Canadian mortgage debt outstanding.
So my first observation is the the amount of dirty money coming from Eastern Asia is dwarfed by that from other sources; my second observation is that the amount of all dirty money possibly invested in BC real-estate (an upper limit of 5.3-billion in 2018 and a lower limit of 2.7-billion, according to the BC laundering report) is dwarfed by domestic mortgage growth of something like 70-billion annually.
As the BC committee stated “the price increase estimates presented here explain only a relatively small part of the housing affordability problem in the Lower Mainland and other BC markets”.
So, I’m a little apprehensive about this. It may well be that $20-million for anti-money-laundering enforcement staff is a Good Thing. It’s certainly not a big thing, in the context of the federal budget! But it’s got a whiff of pandering to it.
“It may well be that $20-million for anti-money-laundering enforcement staff is a Good Thing. It’s certainly not a big thing, in the context of the federal budget”
Good point James. Every little bit helps though and better information gathered in the process will help make plain where the real housing levers lie. Also, boosting anti-money-laundering efforts (beneficial owner tracking especially) will help clean up the larger tax system and are consistent with initiatives at the OECD.
http://www.oecd.org/ctp/new-beneficial-ownership-toolkit-will-help-tax-administrations-tackle-tax-evasion-more-effectively.htm
Lots of people don’t want housing to drop… Realestate agents are the immediate ones that come to mind… Think of all those people who have benefited by their existing homes rising in values !! Retirees (with homes) can all of sudden afford luxurious retirement accommodations. How many people have bought boats/suv’s on line-of credits that all of sudden were available to them because their houses doubled in price ? and the list goes on and on….
“Lots of people don’t want housing to drop”
Yup. That’s what I meant about the social compact to keep them up.