PrefBlog

Bonds got clobbered:

Bond yields rose after upbeat U.S. retail sales data eroded expectations the Fed will kick off its interest rate cutting campaign as soon as March. By late afternoon, the U.S. two-year bond yield was up 13 basis points to its highest in a week, while the Canada two-year was up an even larger 18 basis points.

Traders’ expectations of a 25-basis-point Fed rate cut in March dipped to 55%, from around 60% before the data was released. Overnight swaps markets for Canada, which capture bets for where monetary policy is heading and are influenced by both domestic and U.S. economic data, now suggest 58% odds that the first cut by the Bank of Canada will arrive in April. At the start of this week, those odds stood at 87%.

Reuters adds:

Speaking Tuesday, Fed Governor Christopher Waller said that recent data had made him more confident that inflation is on track to the Fed’s 2% goal, but that consumer spending would be a critical component as he looked to incoming data to confirm that outlook.

Futures that settle to the Fed’s policy rate on Wednesday pointed to a little under a 60% chance of a rate cut in March, versus about a 65% chance seen at the close of business on Tuesday.

PerpetualDiscounts now yield 6.59%, equivalent to 8.57% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.99% on 2024-1-5 and since then the closing price has changed from 15.23 to 14.93, a decline of 197bp in price, with a Duration (BMO doesn’t specify Modified or Macaulay – I will assume the former) of 12.38 implying an increase of 16bp in yield to 5.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed sharply (for the second successive week) to 340bp from the 350bp reported January 10.

This entry was posted on Wednesday, January 17th, 2024 at 9:33 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.