October 28, 2010

Econbrowser‘s James Hamilton discusses Negative real interest rates:

In terms of the Fed’s policy objectives at the moment, one of the problems with deflation is that it guarantees a positive real return just from stuffing cash under your mattress. A primary purpose of the Fed’s contemplated QE2 is to prevent this and spur consumers and firms to invest funds productively rather than hoard cash. Insofar as the recent moves in TIPS and other yields represent the market already pricing in the Fed’s next steps, one might conclude from the latest TIPS readings that this aspect of the Fed’s strategy is already working.

He attaches a good graph:


Click for Big

Although this appears to be the first time that newly issued TIPS have locked in a negative real return, that’s because TIPS have only been offered to U.S. investors since 1997. You can get a longer time series by comparing the yield on a 6-month T-bill at any date with what the CPI inflation rate actually turned out to be over the subsequent 6 months for which investors held that bill, a magnitude sometimes described as the “ex-post real interest rate.” That series is plotted below. We’ve actually been in a period for several years in which short-term loans to the government were a losing proposition in real terms, and the longer-term real yields such as the 5-year TIPS are only now coming down to join them. The recent era of negative real yields was briefly (if spectacularly) interrupted in the fall of 2008, when a sharp deflation in the CPI made short-term loans to the government an excellent deal for the lender in ex-post real terms.

The Canadian preferred share market continued its recent (boring) pattern with a good day on elevated, if somewhat lower than recent norms, volume. PerpetualDiscounts gained 10bp and FixedResets squeaked out a win of 2bp. It should be noted that, given about 250 trading days in a year, a daily win of just over 1bp is expected.

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 0.1643 % 2,182.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1643 % 3,305.9
Floater 2.87 % 3.18 % 89,685 19.27 3 0.1643 % 2,356.3
OpRet 4.90 % 3.36 % 95,667 0.58 9 0.2634 % 2,374.9
SplitShare 5.86 % -21.51 % 67,593 0.09 2 -0.0404 % 2,403.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2634 % 2,171.7
Perpetual-Premium 5.70 % 5.07 % 153,856 5.33 19 -0.0901 % 2,014.5
Perpetual-Discount 5.40 % 5.41 % 248,215 14.69 58 0.1040 % 2,023.8
FixedReset 5.28 % 3.01 % 371,237 3.24 47 0.0178 % 2,276.0
Performance Highlights
Issue Index Change Notes
BMO.PR.P FixedReset -1.48 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-27
Maturity Price : 25.00
Evaluated at bid price : 27.22
Bid-YTW : 3.09 %
RY.PR.H Perpetual-Premium -1.04 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-23
Maturity Price : 25.00
Evaluated at bid price : 25.78
Bid-YTW : 5.06 %
BAM.PR.I OpRet 1.04 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-11-27
Maturity Price : 25.50
Evaluated at bid price : 26.28
Bid-YTW : -24.65 %
GWO.PR.I Perpetual-Discount 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-28
Maturity Price : 21.01
Evaluated at bid price : 21.01
Bid-YTW : 5.42 %
MFC.PR.C Perpetual-Discount 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-28
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 5.71 %
BAM.PR.O OpRet 1.36 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 3.36 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.P FixedReset 110,058 RBC crossed 99,000 at 26.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.53
Bid-YTW : 2.44 %
RY.PR.B Perpetual-Discount 109,193 RBC crossed blocks of 67,200 and 31,600, both at 23.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-28
Maturity Price : 22.81
Evaluated at bid price : 23.00
Bid-YTW : 5.10 %
TRP.PR.B FixedReset 86,368 RBC bought 34,300 from anonymous at 25.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-28
Maturity Price : 24.87
Evaluated at bid price : 24.92
Bid-YTW : 3.32 %
BNS.PR.M Perpetual-Discount 62,088 Desjardins crossed 20,000 at 22.50; RBC crossed 19,100 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-28
Maturity Price : 22.33
Evaluated at bid price : 22.47
Bid-YTW : 5.03 %
CM.PR.I Perpetual-Discount 61,317 TD crossed two blocks of 15,000 each and one of 10,000, all at 22.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-28
Maturity Price : 22.37
Evaluated at bid price : 22.52
Bid-YTW : 5.24 %
CM.PR.G Perpetual-Discount 59,816 Scotia crossed 19,400 at 25.05 and 33,200 at 25.07.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-31
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 5.36 %
There were 38 other index-included issues trading in excess of 10,000 shares.

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