Bond market chaos is attracting attention in the popular press:
While the S&P 500 has edged higher in the two weeks since the federal authorities took control of SVB, parts of the government bond market have been subjected to moves not seen since the 1980s, when the economy fell into recession after the Federal Reserve’s last major fight against inflation.
…
Usually, yields on these bonds rise and fall in tiny increments measured in hundredths of a percentage point, or “basis points.” But in the past two weeks, the yield on two-year Treasury notes has consistently moved within a range of 0.3 to 0.7 percentage points each day.
…
The largest day-to-day move in yields this month, when the two-year yield on March 13 slid to 3.98 percent from 4.59 percent, was the biggest lurch lower since 1982 — worse than anything traders witnessed in the 1987 “Black Monday” stock market crash, the bursting of the tech bubble at the turn of the century or the 2008 financial crisis.
…
Even since that March 13 plunge, the yield on two-year notes has gyrated sharply higher and lower. In a period of anxiety over the state of the economy, these swings stand out. Illustrated on a chart they resemble a sound wave that quieted after the last financial crisis but is growing louder again.Daily change in 2-year Treasury note yield
The New York Fed published its underlying inflation gauge:
- The UIG “full data set” measure for February is currently estimated at 4.8%, a 0.3 percentage point decrease from the current estimate of the previous month.
- The “prices-only” measure for February is currently estimated at 3.9%, a 0.3 percentage point decrease from the current estimate of the previous month.
- The twelve-month change in the February CPI was +6%, a 0.4 percentage point decrease from the previous month.
- For February 2023, trend CPI inflation is estimated to be in the 3.9% to 4.8% range, a similar range compared to January, with a 0.3 percentage point decrease of both its lower and upper bounds.
The IMF has published a Staff Discussion Note by Florence Jaumotte, Longji Li, Andrea Medici, Myrto Oikonomou, Carlo Pizzinelli, Ippei Shibata, Jiaming Soh and Marina M. Tavares titled Digitalization During the COVID-19 Crisis: Implications for Productivity and Labor Markets in Advanced Economies:
Digitalization induced by the pandemic was seen both as a possible silver-lining from the crisis that could increase longer-term productivity and a risk for further labor market inequality between digital and non-digital workers. The note shows that the pandemic accelerated digitalization and triggered a partial catch-up by less digitalized entities in advanced economies. Higher digitalization levels shielded substantially productivity and hours worked during the crisis. However, the extent to which the pandemic-induced digitalization led to structural change in the economy is less clear. Less digitalized sectors have rebounded more strongly, albeit after stronger declines, and while workers in digital occupations were more shielded from the crisis, there does not appear to be a structural change in the composition of labor demand. Meanwhile, shifts in labor supply are more likely to be permanent, driven by the increase in working from home.
…
Recent evidence points out that workers highly value working from home. Working from home provides
more flexibility in time use over the day, greater personal autonomy, and less time spent commuting,
generating a significant amenity value for workers who can work from home. The value of these amenity gains
can range from 1.5 percent of earnings at the low end of the earnings distribution to 7.3 percent at the high end (Barrero, Bloom, and Davis 2021). There is some evidence suggesting that these amenity gains help explain the lack of solid wage growth after the pandemic in the US despite labor market tightness (Barrero and others 2022) because workers acquire the implicit gains from working from home.The lack of wage growth is especially notable for high-skilled workers, while low-skilled workers, who are less likely to work from home, experienced wage gains, contributing to a recent decline in wage dispersion (Autor and Dube 2022).
By reducing the disutility from supplying labor, working from home could have positive consequences for employment in the longer term, although it is still too early to judge. Countries where a larger share of workers work from home have experienced a smaller drop in labor force participation and even an increase in labor force participation relative to the trend in 2021 (Figure 14, panel 1). The fact that this association is stronger in 2021 than 2020 suggests that the positive boost to labor force participation reflects not only digitalized workers’ greater likelihood of remaining in employment during lockdowns and hence lower likelihood of leaving the labor force. It also suggests that workers value working from home and that working from home may increase labor force participation by attracting marginally attached workers and extending the working life of elderly workers.
…
Time-use surveys suggest there may have been two shocks affecting labor supply as a result the pandemic. A critical benefit of working from home is the potential to save time commuting. Data from the American Time Use Survey (ATUS), which measures the amount of time people spend doing various activities, such as paid work, childcare, volunteering, and socializing, show that workers in teleworkable occupations save on average two hours a week by not commuting to an office.29 Part of this savings is associated with an increase in working hours, particularly for women in teleworkable occupations. However, surprisingly, the savings in commuting time is associated with a decline in working hours for men in teleworkable and non-teleworkable occupations (right bars in Figures 15, panels 1 and 2). The reduction in men’s working hours suggests that the pandemic may have increased men’s preference for leisure (independent of digitalization), leading to an acceleration in the long-term trend in men’s decline in labor market attachment.30
It’s my belief that although the amount of working from home will remain well above pre-pandemic levels, it will gradually decline in importance from the current peak. People are going to get tired of looking at the same four walls all day long and seeing the same old people. But we’ll see!
Thomas Jordan, Martin Schlegel and Andréa M. Maechler of the Swiss National Bank (the Central Bank) gave a speech:
I come now to our monetary policy decision. We have decided to tighten our monetary policy further and to raise the SNB policy rate by 0.5 percentage points to 1.5%. In doing so, we are countering the renewed increase in inflationary pressure. It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.
To provide appropriate monetary conditions, we also remain willing to be active in the foreign exchange market as necessary. For some quarters now, the focus has been on selling foreign currency.
The SNB policy rate change applies from tomorrow, 24 March 2023. Banks’ sight deposits held at the SNB will be remunerated at the SNB policy rate of 1.5% up to a certain threshold. Sight deposits above this threshold will be remunerated at an interest rate of 1.0%, and thus still at a discount of 0.5 percentage points relative to the SNB policy rate.
Powell’s doing a little sparring with the Republicans:
Republican lawmakers say spending programs signed into law by President Biden are pumping too much money into the economy and fueling an annual inflation rate that was 6 percent in February — a decline from last year’s highs, but still well above historical norms. Mr. Powell disputed those claims in congressional testimony earlier this month and in a news conference on Wednesday, after the Fed announced it would once again raise interest rates in an effort to bring inflation back toward normal levels.
Asked whether federal tax and spending policies were contributing to price growth, Mr. Powell pointed to a decline in federal spending from the height of the Covid-19 pandemic.
“You have to look at the fiscal impulse from spending,” Mr. Powell said on Wednesday, referring to a measure of how much tax and spending policies are adding or subtracting to economic growth. “Fiscal impulse is actually not what’s driving inflation right now. It was at the beginning perhaps, but that’s not the story right now.”
…
One recent model, from researchers at the Federal Reserve Bank of New York, the University of Maryland and Harvard University, estimates that about a third of the inflation from December 2019 through June 2022 was caused by fiscal stimulus measures.
…
The Hutchins Center at the Brookings Institution in Washington estimates that in the first quarter of 2021, when Mr. Biden’s economic aid bill delivered direct payments, enhanced unemployment checks and other benefits to millions of Americans, government fiscal policy added 8 percentage points to economic growth. At the end of last year, the center estimates, declining government spending was actually reducing economic growth by 1 percentage point.
| 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 | 0.2000 % | 2,407.4 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2000 % | 4,617.4 |
| Floater | 9.36 % | 9.42 % | 51,525 | 10.05 | 2 | 0.2000 % | 2,661.0 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0927 % | 3,321.8 |
| SplitShare | 5.06 % | 7.44 % | 54,345 | 2.69 | 7 | 0.0927 % | 3,966.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0927 % | 3,095.1 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0083 % | 2,760.1 |
| Perpetual-Discount | 6.18 % | 6.26 % | 58,173 | 13.48 | 35 | -0.0083 % | 3,009.8 |
| FixedReset Disc | 5.73 % | 7.26 % | 95,679 | 12.44 | 61 | -0.2720 % | 2,142.5 |
| Insurance Straight | 6.09 % | 6.14 % | 73,162 | 13.75 | 20 | 0.1209 % | 2,947.7 |
| FloatingReset | 10.24 % | 10.63 % | 30,879 | 9.10 | 2 | -2.3911 % | 2,418.7 |
| FixedReset Prem | 6.59 % | 6.28 % | 237,629 | 12.95 | 2 | -0.3353 % | 2,345.1 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2720 % | 2,190.0 |
| FixedReset Ins Non | 5.61 % | 6.87 % | 79,220 | 12.71 | 13 | 0.0430 % | 2,342.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| POW.PR.D | Perpetual-Discount | -4.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 19.04 Evaluated at bid price : 19.04 Bid-YTW : 6.59 % |
| TRP.PR.F | FloatingReset | -2.77 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 15.10 Evaluated at bid price : 15.10 Bid-YTW : 10.63 % |
| CU.PR.I | FixedReset Disc | -2.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 22.77 Evaluated at bid price : 23.50 Bid-YTW : 6.56 % |
| SLF.PR.J | FloatingReset | -2.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 14.70 Evaluated at bid price : 14.70 Bid-YTW : 10.04 % |
| TRP.PR.C | FixedReset Disc | -1.98 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 10.90 Evaluated at bid price : 10.90 Bid-YTW : 8.86 % |
| TRP.PR.A | FixedReset Disc | -1.92 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 13.30 Evaluated at bid price : 13.30 Bid-YTW : 8.59 % |
| BN.PF.G | FixedReset Disc | -1.90 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 15.00 Evaluated at bid price : 15.00 Bid-YTW : 8.75 % |
| RY.PR.Z | FixedReset Disc | -1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 17.06 Evaluated at bid price : 17.06 Bid-YTW : 7.26 % |
| PWF.PR.P | FixedReset Disc | -1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 12.75 Evaluated at bid price : 12.75 Bid-YTW : 7.75 % |
| GWO.PR.N | FixedReset Ins Non | -1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 11.91 Evaluated at bid price : 11.91 Bid-YTW : 7.66 % |
| BN.PR.T | FixedReset Disc | -1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 13.95 Evaluated at bid price : 13.95 Bid-YTW : 8.53 % |
| BN.PF.J | FixedReset Disc | -1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 21.68 Evaluated at bid price : 22.05 Bid-YTW : 6.81 % |
| BN.PF.A | FixedReset Disc | -1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 7.40 % |
| NA.PR.W | FixedReset Disc | -1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 16.26 Evaluated at bid price : 16.26 Bid-YTW : 7.61 % |
| TD.PF.B | FixedReset Disc | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 16.85 Evaluated at bid price : 16.85 Bid-YTW : 7.43 % |
| RY.PR.H | FixedReset Disc | -1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 17.20 Evaluated at bid price : 17.20 Bid-YTW : 7.23 % |
| CM.PR.S | FixedReset Disc | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 21.70 Evaluated at bid price : 21.70 Bid-YTW : 6.38 % |
| BN.PR.X | FixedReset Disc | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 14.50 Evaluated at bid price : 14.50 Bid-YTW : 7.96 % |
| MFC.PR.N | FixedReset Ins Non | -1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 16.57 Evaluated at bid price : 16.57 Bid-YTW : 7.44 % |
| BN.PF.D | Perpetual-Discount | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 18.81 Evaluated at bid price : 18.81 Bid-YTW : 6.55 % |
| CM.PR.T | FixedReset Disc | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 22.77 Evaluated at bid price : 23.28 Bid-YTW : 6.55 % |
| IFC.PR.E | Insurance Straight | 1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 6.14 % |
| CM.PR.Y | FixedReset Disc | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 23.26 Evaluated at bid price : 23.72 Bid-YTW : 6.70 % |
| PWF.PR.F | Perpetual-Discount | 1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 21.59 Evaluated at bid price : 21.85 Bid-YTW : 6.10 % |
| POW.PR.A | Perpetual-Discount | 1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 22.17 Evaluated at bid price : 22.45 Bid-YTW : 6.24 % |
| POW.PR.B | Perpetual-Discount | 1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 21.40 Evaluated at bid price : 21.40 Bid-YTW : 6.27 % |
| TD.PF.E | FixedReset Disc | 1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 7.06 % |
| CU.PR.E | Perpetual-Discount | 1.58 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 19.95 Evaluated at bid price : 19.95 Bid-YTW : 6.22 % |
| SLF.PR.C | Insurance Straight | 1.60 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 5.89 % |
| BIP.PR.A | FixedReset Disc | 1.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 16.95 Evaluated at bid price : 16.95 Bid-YTW : 8.81 % |
| POW.PR.C | Perpetual-Discount | 1.89 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 23.15 Evaluated at bid price : 23.45 Bid-YTW : 6.19 % |
| IFC.PR.A | FixedReset Ins Non | 2.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 16.85 Evaluated at bid price : 16.85 Bid-YTW : 6.87 % |
| POW.PR.G | Perpetual-Discount | 2.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 21.89 Evaluated at bid price : 22.13 Bid-YTW : 6.34 % |
| CU.PR.F | Perpetual-Discount | 4.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 6.07 % |
| TRP.PR.B | FixedReset Disc | 4.90 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 10.50 Evaluated at bid price : 10.50 Bid-YTW : 8.75 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.T | FixedReset Disc | 105,422 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 16.71 Evaluated at bid price : 16.71 Bid-YTW : 7.41 % |
| TD.PF.A | FixedReset Disc | 94,128 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 16.82 Evaluated at bid price : 16.82 Bid-YTW : 7.36 % |
| TD.PF.C | FixedReset Disc | 94,039 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 16.74 Evaluated at bid price : 16.74 Bid-YTW : 7.42 % |
| BMO.PR.S | FixedReset Disc | 77,090 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 17.65 Evaluated at bid price : 17.65 Bid-YTW : 7.19 % |
| RY.PR.Z | FixedReset Disc | 65,483 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 17.06 Evaluated at bid price : 17.06 Bid-YTW : 7.26 % |
| RY.PR.M | FixedReset Disc | 58,362 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-24 Maturity Price : 17.51 Evaluated at bid price : 17.51 Bid-YTW : 7.18 % |
| There were 9 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.M | FixedReset Ins Non | Quote: 16.90 – 20.45 Spot Rate : 3.5500 Average : 2.5428 YTW SCENARIO |
| POW.PR.D | Perpetual-Discount | Quote: 19.04 – 20.89 Spot Rate : 1.8500 Average : 1.0765 YTW SCENARIO |
| TRP.PR.A | FixedReset Disc | Quote: 13.30 – 14.69 Spot Rate : 1.3900 Average : 0.9958 YTW SCENARIO |
| MFC.PR.Q | FixedReset Ins Non | Quote: 19.50 – 20.95 Spot Rate : 1.4500 Average : 1.0869 YTW SCENARIO |
| NA.PR.W | FixedReset Disc | Quote: 16.26 – 17.25 Spot Rate : 0.9900 Average : 0.6700 YTW SCENARIO |
| NA.PR.E | FixedReset Disc | Quote: 20.25 – 20.90 Spot Rate : 0.6500 Average : 0.4232 YTW SCENARIO |
Hi,
With rates looking like they peaked and most likely turning down in the near future, I noticed the preferreds are taking it in the chin. Any reason? Are the reset preferreds no longer attractive with rates expected to go down? I may be off track, as usual 😉
As a side question, is there a facility on this website to be notified if someone replies to my question?
Thx,
Ferris
My observations on rate resets prefs over the last several years: Rates go down, rate resets go down; Rates go up, rate resets go down.
Kidding aside, I believe that the most recent downturn (after a nice few weeks at start of 2023) is mostly due to credit concerns due to this bank nonsense (i.e. essentially a risk-off environment). This will pass. I do not think for a second that this is a true banking crisis like 2008-09.
On the topic of interest rates, the bond market in the US and here in Canada seems to be of the view that inflation will come back within central banks targets imminently and that rate cuts will ensue. This seems to be baked into bond prices with virtual certainty. While inflation rates are reducing, what if CPI bottoms at ~4% here in Canada and the US and GP does not massively contract. Rate cuts? I think not. We may even see central banks’ rates slowly increase.
I am not saying that this will happen, but it seems that the bond market has become to accustomed to ultra-low interest rates and is completely ignoring the possibility that rates may be above 4-5% for several years to come. Probable? no clue. Possible? Yes, but apparently not to the bond traders.
Anyway, I am taking James’ advice: Shut up and clip my coupons (dividends). These divvys are quite nice right now.
Lol. Thanks for your feedback. I feel the market is too optimistic on inflation as well. All I can say is my Costco bill keeps increasing. I don’t believe the inflation is moderating story. Slowing, Yes but going back to 2% is hard to believe.
Rightly or wrongly, preferred share prices tend to correlate very well with high yield corporate debt instruments.
HYI, Horizons Active High Yield ETF
5 Year Cap Loss: 22%
2022 Cap Loss: 18%
2023 YTD: -0.9%
CPD 5 Year Cap Loss: 22%
CPD 2022 Cap Loss: 23%
COD 2023: YTD: 1.3%
ZPR 5 Year Cap Loss: 24%
ZPR 2022 Cap Loss: 22%
ZPR 2023 YTD: -0.4%