So, yesterday there was encouraging news on US inflation:
Inflation remains unusually rapid for now: Tuesday’s 7.1 percent reading is an improvement, but it is still much faster than the roughly 2 percent that prevailed before the pandemic.
The details of the report suggested that further cooling is likely in store.
Many of the categories in which price increases are now slowing are tied more to the pandemic and supply chains than to Fed policy. For instance, food and fuel price jumps are moderating after climbing rapidly earlier this year, an effect of transportation issues and fallout from the war in Ukraine. Used car prices, which were severely elevated by a collision of consumer demand and parts shortages, are now falling sharply.
And today the FOMC announced:
Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.
The New York Times commented:
- The Fed’s rate move was widely expected by economists, and raised rates at a slower pace from the previous four meetings, when rates increased in three-quarter-point increments.
- The central bank emphasized that it would do more to restrain the economy than previously expected. Rates are expected to rise to 5.1 percent next year, officials projected, up from 4.6 percent when they last issued forecasts, in September. The next Fed decision will come Feb. 1. “We have more work to do,” the Fed chair, Jerome H. Powell, said at a news conference. He also dismissed the idea of rate cuts next year, which some traders have been predicting.
- The forecasts showed that Fed officials expect inflation to remain higher for longer than they thought a few months ago. They now expect consumer prices to rise 3.1 percent next year and 2.5 percent in 2024. Mr. Powell said that, despite some recent moderation in price pressures, “inflation risks are to the upside.”
- Officials also projected that economic growth would fall sharply and that unemployment would rise notably, nudging the economy to the brink of recession. The unemployment rate is predicted to remain elevated in 2024 and 2025, a clear sign of how the Fed’s efforts to control inflation will take a toll on workers and the broader economy.
- Stocks fluctuated after the rate announcement, as investors assessed Mr. Powell’s determination to tame inflation and the Fed’s forecasts for rates that remain higher for longer than previously expected. Investors expected the 0.5-percentage-point rise in interest rates but were not betting on increases to the Fed’s forecasts for rates next year alongside a higher inflation forecast. The S&P 500 dipped shortly after the rate announcement, eventually closing 0.6 percent lower.
OSFI has updated its definition of capital for Limited Recourse Capital Notes – issuance caps are as follows:
- Deposit-Taking Institutions : Greater of $150 million, 0.75% Risk Weighted Assets (RWA), or 50% of the institution’s aggregate net AT1 capital
- Life Insurers, and fraternal benefit societies: Greater of $150 million or 12.5% of Net Tier 1 capital
- P&C and Mortgage Insurers: Greater of $150 million or 20% of Total Capital Available, excluding accumulated other comprehensive income (AOCI)
Issuance FLOORS are:
- Deposit-Taking Institutions : Lesser of 0.30% RWA or 20% of the institution’s aggregate net AT1 capital
- Life Insurers, and fraternal benefit societies: 5.0% of Net Tier 1 capital
- P&C and Mortgage Insurers: 8.0% of Total Capital Available, excluding AOCI
The issuance floors were added in March, 2021 after the introduction in July, 2020.
PerpetualDiscounts now yield 6.55%, equivalent to 8.52% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.02% on 2022-11-30 and since then the closing price has changed from 15.13 to 15.56, an increase of 264bp in price, with a Duration of 12.37 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 21bp since 11/30 to 4.81%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 370bp from the 380bp reported December 7.
| 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 | -1.2016 % | 2,449.7 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -1.2016 % | 4,698.5 |
| Floater | 8.86 % | 8.83 % | 61,812 | 10.59 | 2 | -1.2016 % | 2,707.8 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3670 % | 3,251.2 |
| SplitShare | 5.23 % | 7.85 % | 55,727 | 2.74 | 8 | -0.3670 % | 3,882.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3670 % | 3,029.4 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3018 % | 2,650.6 |
| Perpetual-Discount | 6.43 % | 6.55 % | 103,210 | 13.14 | 35 | -0.3018 % | 2,890.4 |
| FixedReset Disc | 5.51 % | 7.46 % | 94,940 | 12.20 | 62 | -0.2993 % | 2,181.6 |
| Insurance Straight | 6.43 % | 6.53 % | 107,112 | 13.22 | 20 | -0.4170 % | 2,792.8 |
| FloatingReset | 9.56 % | 9.99 % | 44,000 | 9.60 | 2 | -0.6421 % | 2,512.1 |
| FixedReset Prem | 6.58 % | 6.48 % | 191,021 | 12.79 | 2 | -0.0987 % | 2,386.6 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2993 % | 2,230.0 |
| FixedReset Ins Non | 5.51 % | 7.61 % | 57,669 | 12.42 | 14 | -0.2197 % | 2,279.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IFC.PR.C | FixedReset Disc | -18.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 14.00 Evaluated at bid price : 14.00 Bid-YTW : 9.11 % |
| MFC.PR.M | FixedReset Ins Non | -2.82 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 16.52 Evaluated at bid price : 16.52 Bid-YTW : 7.92 % |
| PVS.PR.J | SplitShare | -2.55 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2028-02-29 Maturity Price : 25.00 Evaluated at bid price : 21.05 Bid-YTW : 8.26 % |
| BIP.PR.E | FixedReset Disc | -2.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 20.35 Evaluated at bid price : 20.35 Bid-YTW : 7.48 % |
| BIP.PR.F | FixedReset Disc | -1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 18.81 Evaluated at bid price : 18.81 Bid-YTW : 7.92 % |
| BN.PR.K | Floater | -1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 12.64 Evaluated at bid price : 12.64 Bid-YTW : 8.98 % |
| BMO.PR.E | FixedReset Disc | -1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 21.11 Evaluated at bid price : 21.11 Bid-YTW : 6.82 % |
| TRP.PR.G | FixedReset Disc | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 16.41 Evaluated at bid price : 16.41 Bid-YTW : 8.32 % |
| CM.PR.Y | FixedReset Disc | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 24.01 Evaluated at bid price : 24.35 Bid-YTW : 6.76 % |
| POW.PR.B | Perpetual-Discount | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 20.52 Evaluated at bid price : 20.52 Bid-YTW : 6.65 % |
| IAF.PR.B | Insurance Straight | -1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 6.14 % |
| NA.PR.E | FixedReset Disc | 1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 7.13 % |
| BN.PR.B | Floater | 1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 12.85 Evaluated at bid price : 12.85 Bid-YTW : 8.83 % |
| BN.PR.N | Perpetual-Discount | 1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 18.22 Evaluated at bid price : 18.22 Bid-YTW : 6.55 % |
| PVS.PR.K | SplitShare | 1.43 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2029-05-31 Maturity Price : 25.00 Evaluated at bid price : 21.30 Bid-YTW : 7.44 % |
| BN.PF.E | FixedReset Disc | 1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 15.40 Evaluated at bid price : 15.40 Bid-YTW : 8.60 % |
| FTS.PR.M | FixedReset Disc | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 16.45 Evaluated at bid price : 16.45 Bid-YTW : 8.17 % |
| IFC.PR.I | Perpetual-Discount | 1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 6.31 % |
| BN.PR.X | FixedReset Disc | 1.91 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 16.12 Evaluated at bid price : 16.12 Bid-YTW : 7.46 % |
| BN.PR.Z | FixedReset Disc | 1.99 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 21.40 Evaluated at bid price : 21.40 Bid-YTW : 7.07 % |
| BN.PF.A | FixedReset Disc | 2.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 19.70 Evaluated at bid price : 19.70 Bid-YTW : 7.56 % |
| BN.PF.H | FixedReset Disc | 2.35 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2025-12-31 Maturity Price : 25.00 Evaluated at bid price : 24.15 Bid-YTW : 6.19 % |
| BN.PR.R | FixedReset Disc | 2.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 14.45 Evaluated at bid price : 14.45 Bid-YTW : 8.38 % |
| BN.PF.G | FixedReset Disc | 2.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 16.15 Evaluated at bid price : 16.15 Bid-YTW : 8.42 % |
| BN.PF.F | FixedReset Disc | 3.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 17.02 Evaluated at bid price : 17.02 Bid-YTW : 8.39 % |
| BN.PR.T | FixedReset Disc | 3.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 15.28 Evaluated at bid price : 15.28 Bid-YTW : 8.08 % |
| BN.PF.I | FixedReset Disc | 3.83 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 22.26 Evaluated at bid price : 22.90 Bid-YTW : 7.09 % |
| MFC.PR.L | FixedReset Ins Non | 4.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 16.68 Evaluated at bid price : 16.68 Bid-YTW : 7.67 % |
| BN.PF.B | FixedReset Disc | 5.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 17.61 Evaluated at bid price : 17.61 Bid-YTW : 7.97 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| PWF.PF.A | Perpetual-Discount | 349,350 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 17.43 Evaluated at bid price : 17.43 Bid-YTW : 6.57 % |
| FTS.PR.M | FixedReset Disc | 69,762 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 16.45 Evaluated at bid price : 16.45 Bid-YTW : 8.17 % |
| CM.PR.O | FixedReset Disc | 66,400 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 17.47 Evaluated at bid price : 17.47 Bid-YTW : 7.52 % |
| RY.PR.H | FixedReset Disc | 43,600 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 17.55 Evaluated at bid price : 17.55 Bid-YTW : 7.40 % |
| BIP.PR.E | FixedReset Disc | 37,306 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 20.35 Evaluated at bid price : 20.35 Bid-YTW : 7.48 % |
| BIP.PR.F | FixedReset Disc | 37,254 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2052-12-14 Maturity Price : 18.81 Evaluated at bid price : 18.81 Bid-YTW : 7.92 % |
| There were 35 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| IFC.PR.C | FixedReset Disc | Quote: 14.00 – 17.44 Spot Rate : 3.4400 Average : 1.9198 YTW SCENARIO |
| IFC.PR.F | Insurance Straight | Quote: 20.59 – 23.10 Spot Rate : 2.5100 Average : 1.5056 YTW SCENARIO |
| CU.PR.H | Perpetual-Discount | Quote: 20.35 – 22.60 Spot Rate : 2.2500 Average : 1.3452 YTW SCENARIO |
| TD.PF.J | FixedReset Disc | Quote: 21.01 – 22.18 Spot Rate : 1.1700 Average : 0.7355 YTW SCENARIO |
| IFC.PR.K | Perpetual-Discount | Quote: 20.55 – 21.55 Spot Rate : 1.0000 Average : 0.6656 YTW SCENARIO |
| POW.PR.G | Perpetual-Discount | Quote: 21.75 – 22.50 Spot Rate : 0.7500 Average : 0.4729 YTW SCENARIO |
[…] PerpetualDiscounts now yield 6.59%, equivalent to 8.57% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.86% on 2022-12-16 and since then the closing price has changed from 15.46 to 15.20, a decline of 168bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 14bp since 12/16 to 5.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 355bp from the 370bp reported December 14. […]