March 22, 2024

Some interesting remarks from BoC Deputy Governor Toni Gravelle:

Lately, though, we’ve all seen a lot of speculation about whether QT may need to end before we get to those levels. What’s driving that speculation is the upward pressure we saw in overnight repurchase agreement (repo) markets over an extended period, starting late in 2023 and continuing into the early part of this year. We don’t think the decline in settlement balances linked to our normalization process has been much of a factor behind that tightness in overnight markets. Nor do we see any signs of stress in the financial system that can be tied to those pressures.

Our assessment is that the surge in demand for repo funding in Canada came from growing market expectations that interest rates are going to fall.10 Late in 2023, market participants around the world became increasingly convinced that major central banks would pivot to aggressive policy rate cuts this year. Because of this conviction, many participants in Canada and elsewhere took leveraged long positions in government bonds to get ahead of the expected shift in policy.

The more policy rates fall, the more those bonds will be worth. And the promise of big gains led many to borrow in repo markets to fund the trades. Starting in December 2023, high demand for repo funding caused a wider-than-usual spread between our target overnight rate and the benchmark overnight interest rate, which is calculated from transacted overnight repo rates (Chart 3).

In addition to leveraged long positions, the “basis trade” that is common in the US Treasury market has recently become more popular in Canada.

This is an arbitrage strategy used to exploit gaps between prices for government bonds and the futures that are tied to them.11 The basis trade also boosted demand for repo funding, particularly from the growing presence of active hedge funds in Canadian fixed-income markets (Chart 4).

When the pressures in repo markets became evident earlier this year, we used our routine policy implementation operations to reinforce our policy rate. This is something we’ve done for decades, whenever it was needed.

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 0.0000 % 2,349.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0000 % 4,505.3
Floater 10.24 % 10.33 % 42,352 9.32 1 0.0000 % 2,596.5
OpRet 0.00 % 0.00 % 0 0.00 0 0.0777 % 3,435.8
SplitShare 4.90 % 7.02 % 38,507 1.82 7 0.0777 % 4,103.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0777 % 3,201.4
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 -0.3859 % 2,665.8
Perpetual-Discount 6.45 % 6.64 % 47,651 12.95 31 -0.3859 % 2,906.9
FixedReset Disc 5.33 % 7.13 % 105,882 12.08 59 -0.0183 % 2,477.3
Insurance Straight 6.33 % 6.50 % 48,800 13.25 22 -0.1039 % 2,839.5
FloatingReset 9.91 % 10.14 % 30,735 9.47 3 0.0752 % 2,608.7
FixedReset Prem 6.91 % 6.80 % 161,046 3.18 1 0.0000 % 2,525.3
FixedReset Bank Non 0.00 % 0.00 % 0 0.00 0 -0.0183 % 2,532.3
FixedReset Ins Non 5.43 % 7.28 % 74,009 12.48 14 -0.0664 % 2,615.7
Performance Highlights
Issue Index Change Notes
BIP.PR.A FixedReset Disc -3.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.25
Evaluated at bid price : 18.25
Bid-YTW : 9.59 %
RY.PR.N Perpetual-Discount -2.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 21.72
Evaluated at bid price : 22.00
Bid-YTW : 5.62 %
POW.PR.D Perpetual-Discount -2.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 19.05
Evaluated at bid price : 19.05
Bid-YTW : 6.71 %
CU.PR.I FixedReset Disc -1.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 21.71
Evaluated at bid price : 22.17
Bid-YTW : 8.02 %
BN.PF.F FixedReset Disc -1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.77
Evaluated at bid price : 18.77
Bid-YTW : 8.71 %
ELF.PR.H Perpetual-Discount -1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 21.31
Evaluated at bid price : 21.58
Bid-YTW : 6.50 %
IFC.PR.A FixedReset Ins Non -1.60 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.49
Evaluated at bid price : 18.49
Bid-YTW : 7.17 %
CU.PR.E Perpetual-Discount -1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.68
Evaluated at bid price : 18.68
Bid-YTW : 6.64 %
BIP.PR.F FixedReset Disc -1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 8.06 %
BN.PF.I FixedReset Disc -1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 20.25
Evaluated at bid price : 20.25
Bid-YTW : 8.77 %
GWO.PR.H Insurance Straight -1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.50
Evaluated at bid price : 18.50
Bid-YTW : 6.59 %
IFC.PR.I Insurance Straight -1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 21.05
Evaluated at bid price : 21.05
Bid-YTW : 6.45 %
GWO.PR.M Insurance Straight -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.22
Evaluated at bid price : 22.50
Bid-YTW : 6.47 %
PWF.PR.G Perpetual-Discount -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.11
Evaluated at bid price : 22.33
Bid-YTW : 6.72 %
PWF.PR.F Perpetual-Discount -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 19.97
Evaluated at bid price : 19.97
Bid-YTW : 6.70 %
PWF.PR.E Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 20.91
Evaluated at bid price : 20.91
Bid-YTW : 6.70 %
NA.PR.S FixedReset Disc 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.03
Evaluated at bid price : 22.60
Bid-YTW : 6.82 %
GWO.PR.Y Insurance Straight 1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 17.56
Evaluated at bid price : 17.56
Bid-YTW : 6.44 %
CM.PR.Q FixedReset Disc 1.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.43
Evaluated at bid price : 22.85
Bid-YTW : 6.80 %
BN.PR.Z FixedReset Disc 1.88 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 19.47
Evaluated at bid price : 19.47
Bid-YTW : 8.41 %
BMO.PR.W FixedReset Disc 1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.29
Evaluated at bid price : 23.08
Bid-YTW : 6.36 %
BMO.PR.Y FixedReset Disc 2.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.59
Evaluated at bid price : 23.01
Bid-YTW : 6.69 %
Volume Highlights
Issue Index Shares
Traded
Notes
FTS.PR.H FixedReset Disc 152,100 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 14.82
Evaluated at bid price : 14.82
Bid-YTW : 8.32 %
TD.PF.E FixedReset Disc 150,945 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.45
Evaluated at bid price : 22.83
Bid-YTW : 6.89 %
BMO.PR.Y FixedReset Disc 115,911 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.59
Evaluated at bid price : 23.01
Bid-YTW : 6.69 %
FTS.PR.M FixedReset Disc 102,640 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.85
Evaluated at bid price : 18.85
Bid-YTW : 8.17 %
NA.PR.S FixedReset Disc 95,654 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 22.03
Evaluated at bid price : 22.60
Bid-YTW : 6.82 %
SLF.PR.H FixedReset Ins Non 53,277 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.55
Evaluated at bid price : 18.55
Bid-YTW : 7.28 %
There were 24 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.L FixedReset Ins Non Quote: 19.81 – 24.06
Spot Rate : 4.2500
Average : 2.2967

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 19.81
Evaluated at bid price : 19.81
Bid-YTW : 7.45 %

CU.PR.F Perpetual-Discount Quote: 17.46 – 18.64
Spot Rate : 1.1800
Average : 0.6885

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 17.46
Evaluated at bid price : 17.46
Bid-YTW : 6.52 %

IAF.PR.B Insurance Straight Quote: 20.01 – 22.50
Spot Rate : 2.4900
Average : 2.0304

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 20.01
Evaluated at bid price : 20.01
Bid-YTW : 5.78 %

BN.PF.F FixedReset Disc Quote: 18.77 – 20.00
Spot Rate : 1.2300
Average : 0.8175

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.77
Evaluated at bid price : 18.77
Bid-YTW : 8.71 %

BIP.PR.A FixedReset Disc Quote: 18.25 – 19.34
Spot Rate : 1.0900
Average : 0.6875

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 18.25
Evaluated at bid price : 18.25
Bid-YTW : 9.59 %

BIP.PR.F FixedReset Disc Quote: 20.50 – 21.40
Spot Rate : 0.9000
Average : 0.6454

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2054-03-22
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 8.06 %

2 Responses to “March 22, 2024”

  1. […] All the above can be looked at as the back-up behind Bank of Canada Deputy Governor Toni Gravelle’s March 21 speech, which I reported 2024-3-22. […]

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