US inflation news was better than expected:
The Consumer Price Index climbed 4.9 percent in April from a year earlier, less than the 5 percent that economists in a Bloomberg survey had expected. Inflation has come down notably from a peak just above 9 percent last summer, though it has remained far higher than the 2 percent annual gains that were normal before the pandemic.
After stripping out food and fuel to get a sense of the underlying trend in price increases — what economists call a core measure — consumer prices climbed 5.5 percent from a year earlier, a slight drop from 5.6 percent in the previous reading.
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But underlying trends that could keep inflation persistently high over time have remained intact, including unusually strong wage growth, which could prod companies to try to charge more for products and services
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The relentless rise in rents might finally be coming to an end.The price of renting a home was up 8.8 percent in April from a year earlier, the same rate of increase as in February and March. That suggests that rental inflation may finally be leveling off, albeit at a high rate.
The New York Fed has updated the Underlying Inflation Gauge:
- The UIG “full data set” measure for April is currently estimated at 4.0%, a 0.3 percentage point decrease from the current estimate of the previous month.
- The “prices-only” measure for April is currently estimated at 3.4%, a 0.2 percentage point decrease from the current estimate of the previous month.
- The twelve-month change in the April CPI was +4.9%, a 0.1 percentage point decrease from the previous month.
- -For April 2023, trend CPI inflation is estimated to be in the 3.4% to 4.0% range, a lower and slightly narrower range than March, with a 0.2 percentage point decrease on its lower bound and a 0.3 percentage point decrease on its upper bound.
John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, gave a speech titled This is the Way:
Although short- and medium-term inflation expectations rose during the pandemic, these measures have since come down. Indeed, based on the latest reading of the New York Fed’s Survey of Consumer Expectations, three-year-ahead expectations have returned to a level nearly identical to its average between 2014 and 2020. Although one-year-ahead inflation expectations in the survey remain elevated, they have declined considerably from the peak level reached in June 2022.
To understand why inflation remains too high, it’s instructive to examine inflation developments in various sectors of our economy. So far, inflation has declined in many categories of commodities and goods, which tend to be more sensitive to interest rate increases.
In addition, supply chains, which were severely constrained after the pandemic’s onset, have improved considerably. This is something I hear from business leaders from across the Federal Reserve’s Second District. And the New York Fed’s Global Supply Chain Pressure Index has declined to a level that indicates supply chain pressures are now actually somewhat lower than normal.
At the same time, the March price data indicate some moderation in overall rent inflation. And rents for new leases have been showing slower rates of increases, which should bring down shelter inflation in coming months. This is important because shelter inflation had been a significant driver of higher inflation over the past year.
But the most persistent area of inflation is in core services excluding housing, which has been running around 4-1/2 percent since last August . This is driven by a continued imbalance in overall supply and demand, and it will take the longest to bring down.
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Because of the lag between policy actions and their effects, it will take time for the FOMC’s actions to restore balance to the economy and return inflation to our 2 percent target. I expect inflation to decline to around 3-1/4 percent this year, before returning to our longer-run goal of 2 percent over the next two years.
The Boston Fed has released a Research Department Working Paper By Claire Greene, Oz Shy, and Joanna Stavins titled Personality Traits and Financial Outcomes:
Surveys indicate that about 4.5 percent of US households do not have a bank account, about one-quarter do not own any credit cards, and among credit cardholders, revolving credit card debt (carrying unpaid balances) is common. Using data from the 2021 Survey and Diary of Consumer Payment Choice and the University of Southern California Understanding America Study, this paper looks at whether self-reported personality traits have a significant effect on these financial outcomes when the analysis takes into account consumers’ income, demographics, and financial literacy. Specifically, it studies which if any of the Big Five personality traits—openness to experience, conscientiousness, extroversion, agreeableness, and neuroticism—influence consumers’ decisions to be unbanked, adopt a credit card, or revolve credit card debt.
Lucrezia Reichlin, professor of economics at the London Business School, was interviewed by F&D Magazine:
If a bank is failing, the regulator can seek resolution with a bail-in or a bailout. A bail-in in theory is a good option to protect taxpayers, but in some cases a bailout may be wiser. The way to think about the choice is that a bail-in may cause financial instability while a bailout causes moral hazard and is an implicit subsidy to the banking sector.
In many cases, the crisis of one bank is addressed by a national regulator facilitating a merger with a national bank, either by moral suasion, subsidy, or both. This was the case in Switzerland, where UBS was encouraged by the regulator to absorb Credit Suisse at a very unfavorable exchange for Credit Suisse shareholders. Such a solution is not always feasible. In the case of Switzerland, another merger would not be possible since UBS is now the only national bank, and a cross-border merger would involve authorities with different national interests.
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There are also questions about the EU resolution rules. The Banking Recovery and Resolution Directive prevents any bailout before 8 percent of the unweighted balance sheet of a troubled bank has been bailed in. As Mathias Dewatripont, André Sapir, and I have pointed out, the problem is that many of the smaller and midsize banks cannot satisfy the 8 percent bail-in rule without hitting depositors, as they do not hold enough debt that can be bailed in. For such banks, the US approach to Silicon Valley Bank would be illegal. Under these circumstances, if a banking crisis were to strike today, there would be a risk of financial instability.Another concern is that deposit insurance is low in the EU, at only 100,000 euros, and there is no systemic risk exemption, unlike in the US, where depositors can expect to be protected in cases where a bank’s collapse would pose a risk to the entire financial system. This, combined with the fact that the banking union doesn’t involve common deposit insurance at the EU level, makes the system fragile. When there is tension in the market, nonresident deposits flow toward countries which are safer from the public finance standpoint, while banks hold bonds of their own sovereign on the asset side. This creates market segmentation and a vicious cycle of risks between banks and sovereigns.
PerpetualDiscounts now yield 6.27%, equivalent to 8.15% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.98% on 2023-5-5 and since then the closing price has changed from 15.21 to 15.19, a decline of 13bp 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 inccrease in yield of about 1bp since 5/5 to 4.99%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to about 315bp from the 330bp reported May 3.
| 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 | -4.9885 % | 1,976.9 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -4.9885 % | 3,791.6 |
| Floater | 11.40 % | 11.44 % | 52,964 | 8.45 | 2 | -4.9885 % | 2,185.1 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0616 % | 3,333.3 |
| SplitShare | 5.04 % | 7.58 % | 42,647 | 2.56 | 7 | 0.0616 % | 3,980.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0616 % | 3,105.8 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1876 % | 2,743.7 |
| Perpetual-Discount | 6.22 % | 6.27 % | 46,097 | 13.50 | 34 | 0.1876 % | 2,991.9 |
| FixedReset Disc | 5.85 % | 7.75 % | 85,061 | 11.90 | 63 | -0.1491 % | 2,116.8 |
| Insurance Straight | 6.07 % | 6.21 % | 64,610 | 13.56 | 19 | 0.2245 % | 2,962.9 |
| FloatingReset | 10.47 % | 10.99 % | 45,068 | 8.75 | 2 | 0.0340 % | 2,386.3 |
| FixedReset Prem | 6.96 % | 6.53 % | 338,158 | 12.82 | 1 | 0.0000 % | 2,322.8 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1491 % | 2,163.8 |
| FixedReset Ins Non | 5.95 % | 7.22 % | 76,365 | 12.20 | 11 | 0.0462 % | 2,343.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BN.PR.B | Floater | -9.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 10.52 Evaluated at bid price : 10.52 Bid-YTW : 11.44 % |
| TD.PF.E | FixedReset Disc | -2.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 17.86 Evaluated at bid price : 17.86 Bid-YTW : 7.67 % |
| CM.PR.O | FixedReset Disc | -1.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 16.88 Evaluated at bid price : 16.88 Bid-YTW : 7.81 % |
| CM.PR.Q | FixedReset Disc | -1.64 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 17.34 Evaluated at bid price : 17.34 Bid-YTW : 7.84 % |
| TRP.PR.G | FixedReset Disc | -1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 16.30 Evaluated at bid price : 16.30 Bid-YTW : 8.44 % |
| TD.PF.B | FixedReset Disc | -1.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 16.53 Evaluated at bid price : 16.53 Bid-YTW : 7.90 % |
| CM.PR.S | FixedReset Disc | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 6.69 % |
| RY.PR.Z | FixedReset Disc | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 16.86 Evaluated at bid price : 16.86 Bid-YTW : 7.71 % |
| RY.PR.J | FixedReset Disc | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 17.78 Evaluated at bid price : 17.78 Bid-YTW : 7.69 % |
| GWO.PR.N | FixedReset Ins Non | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 12.36 Evaluated at bid price : 12.36 Bid-YTW : 7.93 % |
| RY.PR.H | FixedReset Disc | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 16.80 Evaluated at bid price : 16.80 Bid-YTW : 7.76 % |
| FTS.PR.K | FixedReset Disc | -1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 15.99 Evaluated at bid price : 15.99 Bid-YTW : 8.08 % |
| CU.PR.I | FixedReset Disc | 1.06 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2025-12-01 Maturity Price : 25.00 Evaluated at bid price : 23.85 Bid-YTW : 6.39 % |
| MFC.PR.L | FixedReset Ins Non | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 16.55 Evaluated at bid price : 16.55 Bid-YTW : 7.87 % |
| BIP.PR.A | FixedReset Disc | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 17.20 Evaluated at bid price : 17.20 Bid-YTW : 9.14 % |
| BN.PF.A | FixedReset Disc | 1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 18.28 Evaluated at bid price : 18.28 Bid-YTW : 8.28 % |
| SLF.PR.C | Insurance Straight | 1.75 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 19.20 Evaluated at bid price : 19.20 Bid-YTW : 5.88 % |
| GWO.PR.Y | Insurance Straight | 1.90 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 6.08 % |
| BMO.PR.S | FixedReset Disc | 2.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 17.25 Evaluated at bid price : 17.25 Bid-YTW : 7.72 % |
| CU.PR.F | Perpetual-Discount | 2.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 18.50 Evaluated at bid price : 18.50 Bid-YTW : 6.10 % |
| ELF.PR.H | Perpetual-Discount | 2.98 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 21.40 Evaluated at bid price : 21.40 Bid-YTW : 6.51 % |
| CU.PR.D | Perpetual-Discount | 3.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 6.21 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.H | FixedReset Disc | 37,260 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 16.80 Evaluated at bid price : 16.80 Bid-YTW : 7.76 % |
| BN.PF.J | FixedReset Disc | 24,070 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 21.51 Evaluated at bid price : 21.80 Bid-YTW : 7.20 % |
| CM.PR.S | FixedReset Disc | 23,220 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 6.69 % |
| BN.PR.R | FixedReset Disc | 20,000 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 13.43 Evaluated at bid price : 13.43 Bid-YTW : 9.17 % |
| NA.PR.W | FixedReset Disc | 15,400 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 16.70 Evaluated at bid price : 16.70 Bid-YTW : 7.74 % |
| BMO.PR.S | FixedReset Disc | 15,160 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-10 Maturity Price : 17.25 Evaluated at bid price : 17.25 Bid-YTW : 7.72 % |
| There were 5 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CU.PR.E | Perpetual-Discount | Quote: 19.68 – 23.72 Spot Rate : 4.0400 Average : 2.7019 YTW SCENARIO |
| TRP.PR.E | FixedReset Disc | Quote: 15.00 – 17.45 Spot Rate : 2.4500 Average : 1.3704 YTW SCENARIO |
| BN.PR.Z | FixedReset Disc | Quote: 19.60 – 20.99 Spot Rate : 1.3900 Average : 0.9012 YTW SCENARIO |
| BN.PR.K | Floater | Quote: 10.05 – 12.15 Spot Rate : 2.1000 Average : 1.6159 YTW SCENARIO |
| BN.PR.B | Floater | Quote: 10.52 – 11.60 Spot Rate : 1.0800 Average : 0.6374 YTW SCENARIO |
| IFC.PR.E | Insurance Straight | Quote: 21.65 – 22.38 Spot Rate : 0.7300 Average : 0.4883 YTW SCENARIO |
A quick question related to the hierarchy of funds for Brookfield.
Preferreds rank over common, for sure.
Where does the private capital raised by Brookfield rank? Higher/lower/same as bonds?
That will depend entirely on the nature of the private capital and of Brookfield’s investment in the subsidiary.
Say Brookfield owns preferred shares in a subsidiary. Then it will be junior to the sub’s bonds, parri passu (probably) to the sub’s preferreds and senior to the sub’s common shares.
If BN holds common shares in a sub, they will be junior to the sub’s bonds and preferreds, and parri passu with the sub’s other common shareholders.
Remember this post:
Thanks James.
[…] PerpetualDiscounts now yield 6.34%, equivalent to 8.24% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.98% on 2023-5-5 and since then the closing price has changed from 15.21 to 15.17, a decline of 26bp 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 inccrease in yield of about 2bp since 5/5 to 5.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 325bp from the 315bp reported May 10. […]