11 Responses to “May 11, 2022”

1. skeptical says:

   May 12, 2022 at 11:53 am

   The market is now demanding a higher yield from every issuer and issue. Perpetuals, floaters, fixed…these are all ‘micro optimizations’ now.
   CU.PR.C yields above 6%, but more is demanded.
   ENB.PR.B yields above 6.85%, but more is demanded.
   For perpetuals, well, 6% is the baseline now. Will it go to 7%? Seems very plausible, if the rate hikes keep on going as expected.

   Risk premium is increasing while we still have smooth functioning credit markets. And let’s not forget the FFR and BoC overnight rates are still at 1%. If/When cracks appear in the credit markets, expected yields from preferreds will be even higher.

   Consider that TRP’s long bonds now yield close to 6%. If these jump to 7%, how much yield should a preferred holder seek?

2. paradon says:

   May 12, 2022 at 1:00 pm

   Will be interesting to see how rates fare from here on. Some evidence that inflation may be tapering as economic growth slows. I am in the camp that there is so much consumer and Government debt that the Fed will tamp down on rates even if it means inflation growth above expectations.

3. skeptical says:

   May 12, 2022 at 1:12 pm

   I am in the camp that there is so much consumer and Government debt that the Fed will tamp down on rates even if it means inflation growth above expectations.
   Possibly, but I think the central banks can’t just walk from their own official mandate of low inflation. Plus there’s the political risk from too high an inflation print.
   IMHO, they’ll keep on raising and force a recession which will cause inflation to tumble and bond yields to fall. It seems improbable how this could happen, but the way bond/stock/startup/crypto carnage is progressing, there’s going to be a massive demand destruction across all asset classes and commodities. And then at some point, the Central banks can do the only thing they are capable of doing- lower rates and QE.
   Of course, there are so many alternative paths possible, but based on the flimsiness of the recent ‘boom’, this is a plausible scenario.

4. stusclues says:

   May 12, 2022 at 1:39 pm

   “IMHO, they’ll keep on raising and force a recession which will cause inflation to tumble”

   I’m with paradon here, forward guidance seems to be doing the job of actual increases. I doubt we get more than one or two more increases out of the Fed and BoC before measured inflation crashes and we are back to disinflation/deflation narratives. Avoiding a recession is plausible but seems unlikely.

5. ratchetrick says:

   May 12, 2022 at 1:49 pm

   The only thing that can get inflation in check is a “fix” to the so-called supply chain issue. The oil situation via Saudi and Russia manipulation needs to be brought under control as well. Neither of those items have any kind of solution in sight, so central banks can raise rates until the end of time . . . it’ll have “zero” effect in solving the issue.

   skeptical, on the subject of the markets “demanding” higher yield . . . that’s not the reason for the carnage either. Investors simply don’t want to invest in anything today . . . because they know it’ll be cheaper to buy tomorrow. It’s not a “yield” thing . . . it’s a “fear” thing.

   Until there’s a unified belief that downside has some kind of floor . . . there will be no compelling reason to buy anything . . . no matter what the yield.

6. ratchetrick says:

   May 12, 2022 at 1:55 pm

   I forgot to mention . . . with the TSX sitting around 19,500, and losing on average 400 points per day over the last week or so . . . it would only take 48 more days of this for the index to be at “0”. That’s obviously not going to happen, so the bottom of this capitulation cycle is somewhere within that time frame . . . maximum. In the meantime, shortsellers are getting more nervous by the day, margin holders are getting wiped out by the day, and those who are able to selectively add to quality positions will look back on this spring as one of the better “buying opportunities” in recent history. Thanks to all the central bankers, and their ongoing mantra of fear for making this possible!

7. paradon says:

   May 12, 2022 at 2:10 pm

   Inflation benefits the Fed as long as there continues to be economic growth. I wouldn’t count on them making decisions that are best for the average Jane.

8. skeptical says:

   May 12, 2022 at 2:18 pm

   Inflation benefits the Fed as long as there continues to be economic growth. I wouldn’t count on them making decisions that are best for the average Jane.
   Yes, but only so long as it’s the proverbial boiling frog @ 2 to 4% with hedonistic adjustments. Once the inflation genie is out of the bottle, they can no longer pretend and things fall apart. Listen to what Charlie Munger had to say about inflation a little while ago.
   Remember, last year they were not even ‘thinking about thinking about raising rates.’ and here we are.
   Don’t underestimate the need for a functioning society.

9. stusclues says:

   May 12, 2022 at 2:46 pm

   “so central banks can raise rates until the end of time . . . it’ll have “zero” effect in solving the issue.”

   just a bit of hyperbole? 🙂

   There is the small matter of demand and its impact on prices. Supply chain problems are exacerbated by raging demand and lessened by weakening demand. Recessions and fear of recessions weaken demand.

10. skeptical says:

    May 12, 2022 at 4:18 pm

    Here’s an excerpt from recent Powell’s interview:

    Ryssdal: What keeps you up more at night: the prospect of inflation sticking around? Or the idea that you’re going to cause a recession?

    Powell: Well, look, I think it’s a very challenging environment to make monetary policy. And we certainly, our goal, of course, is to get inflation back down to 2% without having the economy go into recession, or, to put it this way, with the labor market remaining fairly strong. That’s what we’re trying to achieve. I think the one thing we really cannot do is to fail to restore price stability, though. Nothing in the economy works, the economy doesn’t work for anybody without price stability.

    https://www.marketplace.org/2022/05/12/fed-chair-jerome-powell-controlling-inflation-will-include-some-pain/amp/

11. May 18, 2022 « PrefBlog says:

    May 18, 2022 at 8:41 pm

    […] PerpetualDiscounts now yield 5.89%, equivalent to 7.66% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.97%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 270bp from the 280bp reported May 11. […]