PrefBlog

The BoC maintained the policy rate:

The Bank of Canada today held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

Global economic developments have evolved broadly in line with the outlook in the January Monetary Policy Report (MPR). Global growth continues to slow, and inflation, while still too high, is coming down due primarily to lower energy prices. In the United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January. In particular, labour markets remain tight, and elevated core inflation is persisting. Growth in China is rebounding in the first quarter. Commodity prices have evolved roughly in line with the Bank’s expectations, but the strength of China’s recovery and the impact of Russia’s war in Ukraine remain key sources of upside risk. Financial conditions have tightened since January, and the US dollar has strengthened.

In Canada, economic growth came in flat in the fourth quarter of 2022, lower than the Bank projected. With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment. Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.

The labour market remains very tight. Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated. Wages continue to grow at 4% to 5%, while productivity has declined in recent quarters.

Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians. With weak economic growth for the next couple of quarters, pressures in product and labour markets are expected to ease. This should moderate wage growth and also increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.

Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year. Year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3½%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.

At its January decision, the Governing Council indicated that it expected to hold the policy interest rate at its current level, conditional on economic developments evolving broadly in line with the MPR outlook. Based on its assessment of recent data, Governing Council decided to maintain the policy rate at 4½%. Quantitative tightening is complementing this restrictive stance. Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Mark Rendell of the G&M comments:

Interest rate swaps, which capture market expectations about future rate hikes, are pricing in another quarter-point rate increase this summer, and no rate cuts before the end of the year.
…
Much of the decline in inflation has come from falling oil prices, as well as a drop in durable goods inflation, thanks to lower shipping costs and less consumer demand. For inflation to keep falling, there will also need to be a slowdown in service price inflation, which is driven to a large extent by wages.

Fabio Panetta, Member of the Executive Board of the European Central Bank, gave a speech titled The Quick and the Dead: building up cyber resilience in the financial sector:

The Euro Cyber Resilience Board for pan-European Financial Infrastructures (ECRB) has played a key role in protecting the security and integrity of the financial system from these threats. The last three years have shown that we can work under adverse conditions towards a common goal. Our financial infrastructures have proven their resilience to cyber threats. But this does not mean we can become complacent or any less vigilant in the face of cyber threats. We simply cannot afford to fall behind the curve: cybersecurity must be the backbone of digital finance.

Today I will take stock of the ECRB’s work. I will then discuss current cyber threats and emerging risks before outlining the implications for our work in the future.
…
The recent cyberattack on the third-party provider ION Cleared Derivatives shows how an attack on one software provider may cascade onto their clients. In this specific case, the disruptions to the trading and clearing of financial derivatives remained limited, but we cannot ignore scenarios where the attacks could have propagated quickly, disrupting the financial system.

This case signalled the need for financial entities to review their third-party providers, the providers of these third-parties, their cyber resilience levels and the systemic impact that may ensue from a cyberattack on any of these providers. In particular, it is vital to assess critical service dependencies on third-party products and services which could be disrupted or even terminated as a result of a cyberattack. Mitigating measures need to be put in place.
…
Ransomware attacks are growing more sophisticated and damaging, which in turn may enable ransomware threat actors to obtain even more resources. 2022 was one of the most active years for ransomware activity. However, it was also the first year that the majority of victims of ransomware attacks decided not to pay up, which indicates that the approach towards ransomware attacks is changing.

Authorities globally are stepping up their efforts to counter ransomware. For instance, the G7 issued
Fundamental Principles on Ransomware Resilience in October 2022.

We need to tackle ransomware attacks from various angles.

First, every firm must be ready to repel ransomware attacks, either through the use of proper cyber hygiene practices or by ensuring that data is backed up regularly and is kept up-to-date and tamper-proof.

Second, enforcement agencies need to conduct forensic analyses, locate attackers and join forces to prosecute them.

Third, crypto-assets – especially unbacked crypto-assets, which are used to make ransomware payments owing to the anonymity and money laundering possibilities they offer – need to be strictly regulated. Similarly, crypto-asset transfers must be traceable.

The proposed EU Regulation for Markets in Crypto-Assets (MiCA) and revision to the Regulation on information accompanying transfers of funds, which extends the “travel rule” to crypto-assets, are important steps. However, to be effective and prevent regulatory arbitrage, regulation must be stepped up globally. Implementation of the Financial Action Task Force (FATF) guidance for crypto-assets and its enforcement at international level are therefore crucial.
…
Even if we do not realise it, the use of artificial intelligence (AI) is already widespread. We use AI every day, including on our phones, in our homes and at the workplace. And firms use it to harness big data.

AI can help to strengthen cybersecurity, for instance, by improving the detection of highly sophisticated cyberattacks through its ability to identify abnormal system behaviour compared with an established baseline. This is the kind of potential that we need to leverage.

But AI can also multiply cyber risks by, for instance, helping malicious individuals, even those who have limited or no technical skills, draft very convincing phishing emails or identify topics that will achieve the maximum engagement from those being targeted. To make matters worse, AI can even create and fix code that can be used to exploit and compromise the endpoint. This opens up new possibilities for malicious individuals to use AI to launch cyberattacks. Although AI development firms try to install safeguards to prevent its unethical use, they can be circumvented.

Andrew Hauser, Executive Director for Markets of the Bank of England, gave a speech at the Chicago Booth Initiative on Global Markets’ Workshop on Market Dysfunction titled Looking through a glass
onion: lessons from the 2022 LDI intervention:

If the mayhem in financial markets in Spring 2020 had been a genuine one-off, that might have been the end of things. But what Lorie and I wanted to highlight was that, while Covid itself may have been truly exceptional, the financial market propagation mechanisms that turned that shock into a nascent systemic liquidity crisis reflected more structural trends: an increasing reliance by the real economy on core capital markets rather than banks; constraints on market intermediation capacity; and a range of unresolved vulnerabilities in non-bank firms that played an ever-growing role in those markets. In short, even if nothing as awful as Covid ever happened again, market dysfunction at a scale capable of threatening systemic stability could recur – and in all likelihood, would do so. And central banks needed to be ready to play their part.
…
In my remarks today, I want to discuss four main lessons that I take from those events: The LDI operations were successful, but highlight many questions for the future. For me, three in particular stand out:

1. The changing nature of systemic liquidity risk: though focus naturally alights on the idiosyncrasies of the autumn fiscal announcements and the UK LDI sector, the real import lies in the features the events had in common with the dash for cash and other similar developments: another reminder, if more were needed, that we face a new era of liquidity risk, originating outside the banking system, that can amplify shocks, destabilise core markets and undermine monetary and financial stability.

2. Public backstops vs private self insurance: as a central bank it fell to us to provide a public backstop to prevent systemic liquidity risk from undermining monetary and financial stability. At the same time, the events revealed material weaknesses in pension fund and LDI risk management. Given the costs involved, we must ensure public backstops do not end up substituting for a failure to achieve the appropriate level of private insurance against liquidity risk here and elsewhere in the non-bank sector.

3. Ensuring we have central bank tools that are effective: to backstop these new forms of systemic liquidity risk effectively, central banks need the right tools – to detect risks in a timely way; and to respond. In the LDI case, early warning required the use of qualitative as well as quantitative market intelligence. Effective response required the use of a buy/sell facility. Lending directly to non-banks would not have worked in this case. But it has many desirable properties for other scenarios, and is a high priority for future work.

4. Calibrating central bank tools to minimise risk: backstop facilities must be carefully designed if they are to be effective in removing the threat to systemic stability while minimising risks to the stance of monetary policy, to public funds, and to the incentives of market participants. In the LDI case, we sought to achieve that by grounding the objectives of the tool in restoring financial stability, targeting it on the parts of the market most in need of assistance, pricing it as a backstop to ensure we bought no more than needed, and ensuring it was strictly time limited, in its operation and in its unwind.

The LDI operations were successful, but highlight many questions for the future. For me, three in
particular stand out:

• Where do societies want to draw the line between public and private insurance against systemic liquidity in non-banks, and how do they ensure regulatory and central bank facility thinking develops in a co-ordinated way?
• What is the right mix of central bank tools between buy/sell and lending/repo facilities? Where lending is preferred, which firms do we need to reach to maintain stability; how do ensure we can reach them (legally and operationally); and what terms and conditions should they face?
• What are the pros and cons of establishing standing facilities, whose terms and conditions are known in advance; versus simply ensuring we are ready to act in a more discretionary ways as/when required?

In terms of the intervention tool itself, we would have much preferred to rely solely on collateralised
lending. But this wasn’t viable, for the simple reason that there was no-one either willing to, or capable of, borrowing from us at sufficient speed to staunch the firesale dynamic. The LDI funds themselves needed less leverage not more. The pension funds that invested in the LDI funds had collateral, but many lacked the ability to borrow, and anyway were too numerous and preoccupied in time-consuming processes aimed at reaching formal decisions as to whether to recapitalise their investments to act at the speed required. We had many ways to provide liquidity to the banks,[12] but they were already flush with liquidity, and no better placed than we were to pass liquidity on, either to pension schemes or LDI funds.[13] In the circumstances we faced, therefore, a buy/sell tool proved the only way to stop firesale dynamics in a timely manner (Figure 3).

This is clearly not where we want to be in the steady state. Collateralised lending programmes targeted directly at an appropriate set of non-banks would be materially less risky, to public money and to market incentives; they would pose fewer potential conflicts with monetary policy; and could be put in place ahead of potential shocks, with well-understood operational, collateral and pricing terms. Developing viable options for such facilities is therefore a high priority on our work programme. There are at least three key sets of operational design questions to tackle. First, which non-banks do you need to be able to get liquidity to, in order to stem potential systemic shocks effectively? Second, are those non-banks able to borrow (or can we devise mechanisms to allow them to do so), both in terms of their legal remits, and in terms of their operational arrangements? And, third, what terms and conditions would we want to impose on borrowers, including pricing, collateral requirements and any access conditions – including regulatory status? I have to say that my instincts are that finding a workable group of non-bank entities that are (a) collectively systemically important enough to allow us to maintain stability, (b) legally and operationally able to borrow at sufficient size and speed, and (c) willing to meet the conditions of a borrowing programme, could be challenging. But some central banks, for instance the Canadians,[14] have made important progress in this area – and we will be learning from them and others.

Footnote 14 is: See for instance: Canada: Contingent Term Repo Facility (yale.edu) and COVID-19 crisis: Liquidity management at Canada’s largest public pension funds (bankofcanada.ca).
And, just to put things in perspective:

PerpetualDiscounts now yield 6.37%, equivalent to 8.28% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.17% on 2023-2-28 and since then the closing price has changed from 14.83 to 15.00, an increase of 115bp in price, with a Duration of 12.26 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 9bp since 2/28 to 5.08%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened substantially to about 320bp from the 295bp reported March 1.

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	0.5765 %	2,515.0
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.5765 %	4,823.8
Floater	8.96 %	9.16 %	51,385	10.11	2	0.5765 %	2,780.0
OpRet	0.00 %	0.00 %	0	0.00	0	0.0307 %	3,345.8
SplitShare	5.03 %	6.80 %	53,250	2.74	7	0.0307 %	3,995.6
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0307 %	3,117.5
Perpetual-Premium	0.00 %	0.00 %	0	0.00	0	0.1613 %	2,741.9
Perpetual-Discount	6.22 %	6.37 %	62,927	13.30	35	0.1613 %	2,989.9
FixedReset Disc	5.48 %	7.83 %	88,466	11.70	61	-0.4071 %	2,242.8
Insurance Straight	6.17 %	6.22 %	87,389	13.62	20	0.2528 %	2,909.1
FloatingReset	9.85 %	10.08 %	33,843	9.55	2	-0.4710 %	2,573.0
FixedReset Prem	6.56 %	6.47 %	216,697	3.96	2	0.1183 %	2,356.2
FixedReset Bank Non	0.00 %	0.00 %	0	0.00	0	-0.4071 %	2,292.6
FixedReset Ins Non	5.34 %	7.44 %	66,564	12.08	13	-0.1943 %	2,432.6

Performance Highlights
Issue	Index	Change	Notes
BIP.PR.F	FixedReset Disc	-6.84 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 19.19 Evaluated at bid price : 19.19 Bid-YTW : 8.44 %
BN.PF.G	FixedReset Disc	-3.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 15.87 Evaluated at bid price : 15.87 Bid-YTW : 9.40 %
IFC.PR.C	FixedReset Disc	-2.47 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 18.20 Evaluated at bid price : 18.20 Bid-YTW : 7.78 %
TRP.PR.E	FixedReset Disc	-2.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 15.30 Evaluated at bid price : 15.30 Bid-YTW : 9.42 %
BN.PF.I	FixedReset Disc	-1.86 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 21.76 Evaluated at bid price : 22.11 Bid-YTW : 7.91 %
CU.PR.I	FixedReset Disc	-1.69 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2025-12-01 Maturity Price : 25.00 Evaluated at bid price : 24.42 Bid-YTW : 5.48 %
BIP.PR.B	FixedReset Disc	-1.67 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2025-12-31 Maturity Price : 25.00 Evaluated at bid price : 23.50 Bid-YTW : 7.82 %
BN.PR.R	FixedReset Disc	-1.56 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 14.47 Evaluated at bid price : 14.47 Bid-YTW : 9.19 %
BN.PR.T	FixedReset Disc	-1.54 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 14.72 Evaluated at bid price : 14.72 Bid-YTW : 9.15 %
BMO.PR.Y	FixedReset Disc	-1.50 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 18.40 Evaluated at bid price : 18.40 Bid-YTW : 7.88 %
BN.PF.F	FixedReset Disc	-1.42 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 9.08 %
MFC.PR.Q	FixedReset Ins Non	-1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 20.78 Evaluated at bid price : 20.78 Bid-YTW : 7.43 %
BN.PR.M	Perpetual-Discount	-1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 18.43 Evaluated at bid price : 18.43 Bid-YTW : 6.59 %
BN.PR.Z	FixedReset Disc	-1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 20.90 Evaluated at bid price : 20.90 Bid-YTW : 7.84 %
PWF.PR.H	Perpetual-Discount	-1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 22.39 Evaluated at bid price : 22.65 Bid-YTW : 6.43 %
MFC.PR.K	FixedReset Ins Non	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 19.54 Evaluated at bid price : 19.54 Bid-YTW : 7.44 %
BN.PF.C	Perpetual-Discount	-1.05 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 6.59 %
BN.PR.K	Floater	1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 13.16 Evaluated at bid price : 13.16 Bid-YTW : 9.16 %
PWF.PR.P	FixedReset Disc	1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 13.16 Evaluated at bid price : 13.16 Bid-YTW : 8.66 %
GWO.PR.N	FixedReset Ins Non	1.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 12.95 Evaluated at bid price : 12.95 Bid-YTW : 8.25 %
CCS.PR.C	Insurance Straight	1.49 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 6.33 %
CU.PR.E	Perpetual-Discount	1.54 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 6.24 %
BN.PR.N	Perpetual-Discount	1.67 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 18.30 Evaluated at bid price : 18.30 Bid-YTW : 6.64 %
CM.PR.P	FixedReset Disc	3.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 17.30 Evaluated at bid price : 17.30 Bid-YTW : 8.13 %

Volume Highlights
Issue	Index	Shares Traded	Notes
RY.PR.M	FixedReset Disc	137,835	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 18.06 Evaluated at bid price : 18.06 Bid-YTW : 7.83 %
TD.PF.B	FixedReset Disc	84,800	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 17.70 Evaluated at bid price : 17.70 Bid-YTW : 8.11 %
CU.PR.G	Perpetual-Discount	75,100	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 18.52 Evaluated at bid price : 18.52 Bid-YTW : 6.13 %
CU.PR.F	Perpetual-Discount	51,000	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 18.63 Evaluated at bid price : 18.63 Bid-YTW : 6.09 %
GWO.PR.N	FixedReset Ins Non	50,058	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 12.95 Evaluated at bid price : 12.95 Bid-YTW : 8.25 %
TRP.PR.C	FixedReset Disc	47,646	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 11.57 Evaluated at bid price : 11.57 Bid-YTW : 9.63 %
There were 18 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BIP.PR.F	FixedReset Disc	Quote: 19.19 – 21.94 Spot Rate : 2.7500 Average : 1.8862 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 19.19 Evaluated at bid price : 19.19 Bid-YTW : 8.44 %
BN.PF.F	FixedReset Disc	Quote: 17.35 – 18.00 Spot Rate : 0.6500 Average : 0.3821 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 9.08 %
CCS.PR.C	Insurance Straight	Quote: 19.80 – 21.43 Spot Rate : 1.6300 Average : 1.3755 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 6.33 %
GWO.PR.S	Insurance Straight	Quote: 20.54 – 21.36 Spot Rate : 0.8200 Average : 0.5785 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 20.54 Evaluated at bid price : 20.54 Bid-YTW : 6.41 %
BIP.PR.B	FixedReset Disc	Quote: 23.50 – 24.10 Spot Rate : 0.6000 Average : 0.3742 YTW SCENARIO Maturity Type : Call Maturity Date : 2025-12-31 Maturity Price : 25.00 Evaluated at bid price : 23.50 Bid-YTW : 7.82 %
BN.PF.G	FixedReset Disc	Quote: 15.87 – 16.52 Spot Rate : 0.6500 Average : 0.4346 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-08 Maturity Price : 15.87 Evaluated at bid price : 15.87 Bid-YTW : 9.40 %

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