The BoC has published a paper by Martin Kuncl and Dmitry Matveev titled The Canadian Neutral Rate of Interest through the Lens of an Overlapping-Generations Model:
The neutral rate of interest is an important concept and communication tool for central banks. We develop a small open economy model with overlapping generations to study the determinants of the neutral real rate of interest in a small open economy. The model captures domestic factors such as population aging, declining productivity, rising government debt and inequality. Foreign factors are captured by changes in the global neutral real rate. We use the model to evaluate secular dynamics of the neutral rate in Canada from 1980 to 2018. We find that changes in both foreign and domestic factors resulted in a protracted decline in the neutral rate.
…
The biggest domestic contributors to the neutral rate change were the two demographic factors. Firstly, higher domestic savings due to longer longevity contributed -83 bps and -34 bps to the R∗ change in the high- and the low-elasticity case, respectively. Secondly, the reduction in TLI [Trend Labour Input] growth that implies lower investment and borrowing of young households contributed by -75 bps and -34 bps to the R∗ change in the high- and low-elasticity case, respectively.
The New York Fed updated its Corporate Bond Market Distress Index (CMDI):
- Corporate bond market functioning appears healthy, with the overall market-level CMDI remaining stable around its historical 30th percentile.
- Market functioning in the investment-grade segment remained below its historical 75th percentile in February.
PerpetualDiscounts now yield 6.25%, equivalent to 8.12% 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 14.69, a decline of 226bp 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 18bp since 2/10 to 5.24%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 290bp from the 270bp reported February 15.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| 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 | 0.0000 % | 2,575.6 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 4,940.0 |
| Floater | 8.75 % | 8.93 % | 61,385 | 10.36 | 2 | 0.0000 % | 2,846.9 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1336 % | 3,381.4 |
| SplitShare | 4.97 % | 6.59 % | 56,565 | 2.78 | 7 | 0.1336 % | 4,038.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1336 % | 3,150.7 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2447 % | 2,776.8 |
| Perpetual-Discount | 6.14 % | 6.25 % | 72,419 | 13.52 | 37 | -0.2447 % | 3,028.0 |
| FixedReset Disc | 5.38 % | 7.69 % | 87,965 | 11.84 | 59 | -0.6460 % | 2,267.1 |
| Insurance Straight | 6.02 % | 6.17 % | 91,226 | 13.59 | 20 | -0.0024 % | 2,981.3 |
| FloatingReset | 9.77 % | 10.17 % | 39,937 | 9.31 | 2 | -0.2162 % | 2,622.5 |
| FixedReset Prem | 6.40 % | 6.36 % | 203,977 | 4.01 | 2 | 0.4998 % | 2,370.2 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.6460 % | 2,317.4 |
| FixedReset Ins Non | 5.24 % | 7.29 % | 46,593 | 12.15 | 14 | -0.3064 % | 2,464.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IFC.PR.C | FixedReset Disc | -24.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 14.00 Evaluated at bid price : 14.00 Bid-YTW : 9.90 % |
| CU.PR.E | Perpetual-Discount | -5.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 19.10 Evaluated at bid price : 19.10 Bid-YTW : 6.45 % |
| CIU.PR.A | Perpetual-Discount | -4.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 17.99 Evaluated at bid price : 17.99 Bid-YTW : 6.43 % |
| IFC.PR.G | FixedReset Ins Non | -3.48 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.38 Evaluated at bid price : 21.38 Bid-YTW : 7.29 % |
| CU.PR.D | Perpetual-Discount | -3.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 19.56 Evaluated at bid price : 19.56 Bid-YTW : 6.30 % |
| RY.PR.J | FixedReset Disc | -2.65 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 19.13 Evaluated at bid price : 19.13 Bid-YTW : 7.69 % |
| BN.PR.M | Perpetual-Discount | -2.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 18.62 Evaluated at bid price : 18.62 Bid-YTW : 6.50 % |
| BIP.PR.F | FixedReset Disc | -1.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.11 Evaluated at bid price : 21.11 Bid-YTW : 7.76 % |
| BMO.PR.Y | FixedReset Disc | -1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 18.84 Evaluated at bid price : 18.84 Bid-YTW : 7.66 % |
| MFC.PR.F | FixedReset Ins Non | -1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 13.21 Evaluated at bid price : 13.21 Bid-YTW : 8.38 % |
| PWF.PR.K | Perpetual-Discount | -1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 20.21 Evaluated at bid price : 20.21 Bid-YTW : 6.20 % |
| CM.PR.P | FixedReset Disc | -1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 17.65 Evaluated at bid price : 17.65 Bid-YTW : 7.94 % |
| GWO.PR.T | Insurance Straight | -1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 6.24 % |
| BN.PF.H | FixedReset Disc | -1.25 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2025-12-31 Maturity Price : 25.00 Evaluated at bid price : 23.61 Bid-YTW : 7.53 % |
| MFC.PR.I | FixedReset Ins Non | -1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 22.45 Evaluated at bid price : 23.26 Bid-YTW : 6.89 % |
| POW.PR.D | Perpetual-Discount | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 20.35 Evaluated at bid price : 20.35 Bid-YTW : 6.24 % |
| NA.PR.W | FixedReset Disc | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 17.55 Evaluated at bid price : 17.55 Bid-YTW : 8.00 % |
| SLF.PR.H | FixedReset Ins Non | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 15.82 Evaluated at bid price : 15.82 Bid-YTW : 8.09 % |
| PWF.PF.A | Perpetual-Discount | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 18.35 Evaluated at bid price : 18.35 Bid-YTW : 6.21 % |
| SLF.PR.J | FloatingReset | -1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 15.71 Evaluated at bid price : 15.71 Bid-YTW : 9.90 % |
| TD.PF.E | FixedReset Disc | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 19.58 Evaluated at bid price : 19.58 Bid-YTW : 7.57 % |
| MFC.PR.B | Insurance Straight | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 19.96 Evaluated at bid price : 19.96 Bid-YTW : 5.94 % |
| PVS.PR.K | SplitShare | 1.12 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2029-05-31 Maturity Price : 25.00 Evaluated at bid price : 22.60 Bid-YTW : 6.33 % |
| TD.PF.C | FixedReset Disc | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 17.77 Evaluated at bid price : 17.77 Bid-YTW : 7.93 % |
| EIT.PR.A | SplitShare | 1.34 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2024-03-14 Maturity Price : 25.00 Evaluated at bid price : 24.58 Bid-YTW : 6.22 % |
| IFC.PR.K | Perpetual-Discount | 1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.51 Evaluated at bid price : 21.80 Bid-YTW : 6.11 % |
| PWF.PR.L | Perpetual-Discount | 1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 6.15 % |
| MFC.PR.K | FixedReset Ins Non | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 7.43 % |
| RY.PR.N | Perpetual-Discount | 1.96 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.90 Evaluated at bid price : 22.40 Bid-YTW : 5.48 % |
| BN.PR.X | FixedReset Disc | 1.98 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 16.50 Evaluated at bid price : 16.50 Bid-YTW : 7.96 % |
| CU.PR.H | Perpetual-Discount | 6.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.88 Evaluated at bid price : 21.88 Bid-YTW : 6.03 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| IFC.PR.G | FixedReset Ins Non | 43,158 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.38 Evaluated at bid price : 21.38 Bid-YTW : 7.29 % |
| NA.PR.G | FixedReset Disc | 35,750 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.72 Evaluated at bid price : 22.15 Bid-YTW : 7.16 % |
| BMO.PR.E | FixedReset Disc | 30,970 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.27 Evaluated at bid price : 21.27 Bid-YTW : 7.35 % |
| TD.PF.K | FixedReset Disc | 30,630 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 7.38 % |
| IFC.PR.A | FixedReset Ins Non | 29,075 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 18.57 Evaluated at bid price : 18.57 Bid-YTW : 7.08 % |
| MFC.PR.F | FixedReset Ins Non | 28,200 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-02-22 Maturity Price : 13.21 Evaluated at bid price : 13.21 Bid-YTW : 8.38 % |
| There were 11 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 – 18.67 Spot Rate : 4.6700 Average : 2.5182 YTW SCENARIO |
| CU.PR.J | Perpetual-Discount | Quote: 19.60 – 23.50 Spot Rate : 3.9000 Average : 2.2493 YTW SCENARIO |
| CIU.PR.A | Perpetual-Discount | Quote: 17.99 – 19.36 Spot Rate : 1.3700 Average : 0.8637 YTW SCENARIO |
| CU.PR.E | Perpetual-Discount | Quote: 19.10 – 20.35 Spot Rate : 1.2500 Average : 0.8108 YTW SCENARIO |
| RY.PR.J | FixedReset Disc | Quote: 19.13 – 20.05 Spot Rate : 0.9200 Average : 0.5992 YTW SCENARIO |
| CU.PR.C | FixedReset Disc | Quote: 19.70 – 20.75 Spot Rate : 1.0500 Average : 0.7650 YTW SCENARIO |
“The neutral rate of interest is an important concept and communication tool for central banks.”
A lot of central bankers are nodding enthusiastically to the conclusions of this paper. Stephen Poloz arrives at similar conclusions in his book “The Next Age of Uncertainty”.
Like all models, the OLG model described in the paper makes a lot of assumptions and omits a lot of real world complexity (no plutocrats and drug dealers for example). Nonetheless, the main conclusions seem reasonable enough.
I think the model falls short of shedding a decent light on the effect of inequality however. This is mostly due to the oversimplifications in the model itself.
I think it would be fascinating if a future study organized the economic cohorts in a more Piketty-type way, i.e. Top 1%, next nine, next 40, last 50, and sub-typed them by age (rather than organizing by age group then sub-typing those chohorts by income level as in the paper). I suspect the conclusions would be different because the utility functions of each of the cohorts would be quite different from those in the OLG study.
[…] PerpetualDiscounts now yield 6.31%, equivalent to 8.20% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.25% on 2023-2-24 and since then the closing price has changed from 14.72 to 14.74, an increase of 13bp in price, with a Duration of 12.20 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 1bp since 2/24 to 5.24%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to about 295bp from the 290bp reported February 22. […]