PrefBlog

There was another jump in yields today:

Financial markets have upped their bets on additional rate hikes from the Bank of Canada and U.S. Federal Reserve following blowout employment reports in both countries and higher-than-expected inflation data from the United States.

This amounts to a U-turn for bond traders and investors, who spent much of January and early February doubting the resolve of central bankers in both countries to keep interest rates at highly restrictive levels through 2023.

Interest rate swaps, which capture market expectations about future rate decisions, have gone from pricing in two rate cuts by the Bank of Canada before the end of the year, to pricing in another rate hike in July and no rate cuts until 2024. That would bring the bank’s benchmark rate to 4.75 per cent.

In the U.S., markets now see the Fed increasing its benchmark interest rate to a peak of 5.25 per cent by July, a quarter-point higher than expected two weeks ago.

But people are still buying things:

The S&P 500 ended higher on Wednesday after stronger-than-expected retail sales data offered evidence of resilience in the U.S. economy, but gains were capped as investors worried about more interest rate hikes by Federal Reserve in the months ahead. Canada’s main stock index eked out marginal gains.

A Commerce Department report showed U.S. retail sales surged 3% in January as purchases of motor vehicles and other goods pushed the number well past the 1.8% estimate from economists polled by Reuters.

But not houses:

Canada’s housing downturn deepened further in January, with sales hitting their lowest level since the 2009 Great Recession and home prices declining for the 11th straight month.

The volume of home resales fell 3 per cent from December to January after removing seasonal influences. That was the lowest level for January in 14 years, according to the Canadian Real Estate Association. The home price index, which excludes sales of highly priced properties, fell to $714,700 in January, down 1.9 per cent from December. The index is 12.6 per cent lower than a year ago and 15 per cent below last February’s peak values.

More homeowners put their properties on the market, with new listings increasing 3.3 per cent last month. CREA said this could be the start of more activity heading into spring, which is traditionally the busiest period for home sales.

GOC-5 now stands at 3.45%.

PerpetualDiscounts now yield 6.05%, equivalent to 7.86% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.06% on 2023-2-10 and since then the closing price has changed from 15.03 to 14.82, a decline of 140bp in price, with a Duration of 12.32 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 11bp since 2/10 to 5.17%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to about 270bp from the 285bp reported February 8.

This entry was posted on Wednesday, February 15th, 2023 at 9:22 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.