So, US inflation was announced today:
Overall inflation cooled: The Consumer Price Index for May was up 3.3 percent from a year earlier, lower than the 3.4 percent economists had forecast and down from the April reading. And if you compared May prices just to the previous month, they did not climb at all.
“Core” inflation also slowed: A closely watched measure that strips out volatile food and fuel prices to give a sense of the underlying trend climbed 3.4 percent from a year earlier, down from 3.6 percent the previous month and slower than economists had forecast. That was the slowest pace of increase since April 2021.
…
One piece of bad news in a mostly good-news report: The cost of shelter continued to rise fairly quickly, particularly for homeowners. That has been one of the most stubborn categories of inflation, which is unfortunate because it is also the single largest component of the Consumer Price Index.
…
As investors dial down expectations for interest rates, the two-year Treasury yield has fallen 0.15 percentage points, on course for its biggest move lower this year.
But the FOMC was wary:
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.
Five year Canadas closed at 3.43%, down a fair bit.
PerpetualDiscounts now yield 6.58%, equivalent to 8.55% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.18% on 2024-5-31 and since then the closing price of ZLC has changed from 14.73 to 15.10, an increase of 251bp in price, implying a decrease of yields of 20bp (BMO reports a duration of 12.31, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.98%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 355bp reported June 5.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| 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 | 0.4274 % | 2,243.9 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4274 % | 4,303.9 |
| Floater | 10.35 % | 10.72 % | 59,253 | 8.87 | 1 | 0.4274 % | 2,480.3 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4383 % | 3,449.1 |
| SplitShare | 4.88 % | 6.65 % | 30,353 | 1.63 | 7 | -0.4383 % | 4,118.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4383 % | 3,213.7 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0695 % | 2,686.2 |
| Perpetual-Discount | 6.41 % | 6.58 % | 54,611 | 13.02 | 28 | -0.0695 % | 2,929.1 |
| FixedReset Disc | 5.28 % | 7.44 % | 115,813 | 12.19 | 49 | -0.7125 % | 2,531.2 |
| Insurance Straight | 6.30 % | 6.41 % | 57,896 | 13.36 | 20 | 0.4570 % | 2,881.2 |
| FloatingReset | 9.31 % | 9.27 % | 33,700 | 10.05 | 3 | -0.0873 % | 2,728.2 |
| FixedReset Prem | 6.37 % | 6.80 % | 215,596 | 12.25 | 7 | 0.2047 % | 2,523.8 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.7125 % | 2,587.4 |
| FixedReset Ins Non | 5.37 % | 7.23 % | 105,136 | 12.71 | 14 | -0.7093 % | 2,648.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TD.PF.E | FixedReset Disc | -6.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 7.35 % |
| CM.PR.P | FixedReset Disc | -5.87 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.36 Evaluated at bid price : 21.65 Bid-YTW : 6.68 % |
| TD.PF.J | FixedReset Disc | -4.96 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 22.23 Evaluated at bid price : 22.80 Bid-YTW : 6.80 % |
| BN.PR.T | FixedReset Disc | -4.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 15.26 Evaluated at bid price : 15.26 Bid-YTW : 9.06 % |
| BN.PR.Z | FixedReset Disc | -4.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 8.66 % |
| PVS.PR.K | SplitShare | -3.48 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2029-05-31 Maturity Price : 25.00 Evaluated at bid price : 22.20 Bid-YTW : 7.23 % |
| MFC.PR.M | FixedReset Ins Non | -3.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 19.56 Evaluated at bid price : 19.56 Bid-YTW : 7.51 % |
| MFC.PR.Q | FixedReset Ins Non | -2.87 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.68 Evaluated at bid price : 22.00 Bid-YTW : 6.92 % |
| SLF.PR.H | FixedReset Ins Non | -2.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 18.01 Evaluated at bid price : 18.01 Bid-YTW : 7.34 % |
| BN.PR.X | FixedReset Disc | -2.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 15.75 Evaluated at bid price : 15.75 Bid-YTW : 8.44 % |
| SLF.PR.G | FixedReset Ins Non | -2.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 15.86 Evaluated at bid price : 15.86 Bid-YTW : 7.48 % |
| BIP.PR.E | FixedReset Disc | -1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 7.69 % |
| CU.PR.J | Perpetual-Discount | -1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 18.42 Evaluated at bid price : 18.42 Bid-YTW : 6.51 % |
| FTS.PR.M | FixedReset Disc | -1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 19.31 Evaluated at bid price : 19.31 Bid-YTW : 7.80 % |
| CU.PR.C | FixedReset Disc | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 19.56 Evaluated at bid price : 19.56 Bid-YTW : 7.49 % |
| IFC.PR.I | Insurance Straight | -1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.40 Evaluated at bid price : 21.40 Bid-YTW : 6.46 % |
| MFC.PR.I | FixedReset Ins Non | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 22.22 Evaluated at bid price : 22.70 Bid-YTW : 6.99 % |
| TD.PF.A | FixedReset Disc | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 22.37 Evaluated at bid price : 23.20 Bid-YTW : 6.23 % |
| CU.PR.D | Perpetual-Discount | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 6.43 % |
| IFC.PR.F | Insurance Straight | 1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.10 Evaluated at bid price : 21.10 Bid-YTW : 6.43 % |
| GWO.PR.N | FixedReset Ins Non | 1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 14.21 Evaluated at bid price : 14.21 Bid-YTW : 7.93 % |
| IFC.PR.E | Insurance Straight | 1.60 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 20.93 Evaluated at bid price : 20.93 Bid-YTW : 6.35 % |
| SLF.PR.E | Insurance Straight | 1.90 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 6.01 % |
| GWO.PR.G | Insurance Straight | 3.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 20.40 Evaluated at bid price : 20.40 Bid-YTW : 6.40 % |
| BN.PF.G | FixedReset Disc | 5.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 17.90 Evaluated at bid price : 17.90 Bid-YTW : 8.71 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.H | FixedReset Disc | 206,390 | YTW SCENARIO Maturity Type : Call Maturity Date : 2024-08-24 Maturity Price : 25.00 Evaluated at bid price : 24.96 Bid-YTW : 5.42 % |
| PWF.PR.T | FixedReset Disc | 198,400 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.54 Evaluated at bid price : 21.85 Bid-YTW : 6.77 % |
| MFC.PR.Q | FixedReset Ins Non | 98,930 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.68 Evaluated at bid price : 22.00 Bid-YTW : 6.92 % |
| NA.PR.S | FixedReset Disc | 90,829 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 22.54 Evaluated at bid price : 23.48 Bid-YTW : 6.47 % |
| IFC.PR.G | FixedReset Ins Non | 60,400 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2054-06-12 Maturity Price : 21.89 Evaluated at bid price : 22.30 Bid-YTW : 6.97 % |
| PVS.PR.I | SplitShare | 59,950 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-10-31 Maturity Price : 25.00 Evaluated at bid price : 24.41 Bid-YTW : 6.65 % |
| There were 19 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TD.PF.E | FixedReset Disc | Quote: 21.00 – 22.71 Spot Rate : 1.7100 Average : 1.0476 YTW SCENARIO |
| CM.PR.P | FixedReset Disc | Quote: 21.65 – 23.45 Spot Rate : 1.8000 Average : 1.1519 YTW SCENARIO |
| IFC.PR.I | Insurance Straight | Quote: 21.40 – 23.49 Spot Rate : 2.0900 Average : 1.5591 YTW SCENARIO |
| BN.PR.Z | FixedReset Disc | Quote: 19.00 – 21.16 Spot Rate : 2.1600 Average : 1.6862 YTW SCENARIO |
| PVS.PR.K | SplitShare | Quote: 22.20 – 23.65 Spot Rate : 1.4500 Average : 0.9825 YTW SCENARIO |
| TD.PF.J | FixedReset Disc | Quote: 22.80 – 24.10 Spot Rate : 1.3000 Average : 0.9727 YTW SCENARIO |
Hello everyone,
Is it possible that the capital gains tax hike in Canada is the primary driver for the recent weakness in preferred shares?
It seems to be coming into effect by the end of june.
Thanks!
unintended consequences of tax policy. (or was it intended to raise revenue for this year?)
i’ve been watching many of the energy stocks get hit quite a bit today with crude and brent up on the day (observation, don’t own any right now)
Hi Yomgui.
I agree that it’s having an effect — the opposite of December tax-loss selling.
What is lost in the change is that the new rate hits taxable institutional accounts, not just high-wealth retail. It doesn’t take much selling pressure to get illiquid pref prices moving down hard.
Note that the last day to trade before the new rate is June 24th.
In my mind palace, lower GoC5 spot rates are bad for fixed-rate resets as a whole, so the sell-off of ZPR TPRF etc. makes sense and tax selling is amplifying the move. Lower rates should have the opposite effect on bond proxies — yer BCE ENB FTS — yet they are getting whacked. Those core positions would have massive capital gains and it must make sense for at least some holders to book gains.
On FR prefs, although expectations of lower GoC5 rates (anchored by the spot rate) are bad, lower rates may be a net positive for lower-rated credits with high sensitivity to rates. BPO is the poster child here. If GoC5 goes way down, so do dividends at reset but the likelihood that holders get paid goes way up. Net win (I hope).
IMHO, whatever is going on right now sets up as a huge buying opportunity for interest-rate sensitive stocks. Sooner or later, high dividends are gonna look awfully good to Mr. Market!
“Is it possible that the capital gains tax hike in Canada is the primary driver for the recent weakness in preferred shares?”
Interesting question. On the one hand, higher capital gains taxes ought to make dividends incrementally more attractive than before (for individuals) so the change should not be a source of weakness.
On the other hand, FR preferred shares have had such a pronounced run since October that there might be a temporary surge in selling to crystallize capital gains before the hike takes effect.
If rates are going down over the next few years, shouldn’t we dump the FRDs and jump on PDs? Some of my FRDs are up over 30%.
To add to my comment, meaning sell next week before the new capital gains tax. Thinking about it, the PDs would then go up in value as rates go down.
“If rates are going down over the next few years, shouldn’t we dump the FRDs and jump on PDs?”
Perhaps sell something to buy PDs buy why FRs? IMO, spreads for discount FRs demanded in market remain too high so they have room run yet.
“sell next week before the new capital gains tax”
I fail to see how an increase in the capital gains inclusion rate from 50% to 67% will harm a long term stream of dividends. I suspect some profit taking is occurring ahead of the tax increase to capture that lower rate, but that should end after it takes effect. I’d say a rebound in FRs is more likely than further price erosion.
“If rates are going down over the next few years, shouldn’t we dump the FRDs and jump on PDs?”
should i sell my fixed resents that are paying my 9% for the next 5 years to buy perpetuals paying me 6.2%?
you’re all over the place man. you need to sit back and think about what is is you’re doing. why are you buying prefs in the first place. it really seems to me you have no idea.
and yes. you are clearly market timing.
[…] PerpetualDiscounts now yield 6.78%, equivalent to 8.81% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.07% on 2024-6-7 and since then the closing price of ZLC has changed from 15.02 to 15.30, an increase of 186bp in price, implying a decrease of yields of 15bp (BMO reports a duration of 12.31, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.92%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has exploded to 390bp from the 355bp reported June 12. […]