Before we discuss current events, I’ll answer some reader mail. Mikail Alcott, Potato Sprouting Advocate and Knitting Coach asks “How do you approach a typical day as a Treasury Guy?”
Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That’s the other guy’s problem. It’s either kill or be killed. You make no friends and you take no prisoners. One minute you’re up half a million in soybeans and the next, boom, your kids don’t go to university and they’ve repossessed your Bentley.
It’s been a volatile week as the market sorts through strong Canadian data contrasted with the dovish Fed tone in the US.
5 year GoC bonds are trading at 1.37% with yields as low as 1.28% on Tuesday (on dovish Euro Central Bank chatter and post Raptor parade fatigue) and as high as 1.40% on Wednesday (following strong inflation data).
10 year GoC bonds are trading at 1.48% after touching a low of 1.38% on Tuesday morning and high of 1.49% Tuesday.
Despite the fact that we’re finishing the week off the lows in terms of yield, it’s worth reminding you that just a few months ago, both 5 and 10 year yields were about 50bps higher at 1.90% and 2.00% respectively.
On Wednesday morning, reports showed that Canadian inflation quickened in May as the year over year consumer price index (“CPI”) jumped to 2.4% compared to 2.0% last month and median economist forecasts of 2.1%. Core inflation, the measure most closely watched by policy makers, rose 2.1%, the highest level since February 2012. Core inflation allows the Bank of Canada to ‘look through’ temporary changes in total CPI and focus on the underlying trend. Predictably, bonds sold off and yields moved higher by about 7 basis points following the news.
Later on Wednesday afternoon the US Federal Open Market Committee (“FOMC”) held their regularly scheduled policy meeting. The Fed held rates steady, as most expected, but raised the prospect for as many as two potential rate cuts later this year. Uncertainty amid intensifying trade tensions and muted US inflation make the cuts plausible if not probable. The overall tone of the Fed’s comments were sufficiently dovish to more than reverse the earlier inflation led rally and bonds yields promptly retreated 8-9 basis points.
The Bank of Canada has kept its key interest rate at 1.75% since October last year and there are mixed opinions about what the Bank will do this year. Wednesday’s inflation report (and continued strong employment data) may help the bank resist the temptation to follow the Fed’s dovish tone.
For newer readers, when monetary policy makers are ‘dovish’ it means they favour a looser or more accommodating policy because, on balance, they want to stimulate the economy. This is accomplished most commonly by lowering interest rates. When Treasury Guy is dovish it means he favours ordering another round because, on balance, he wants to stimulate conversation.
On Monday June 10th Laurentian Bank followed on the heels of Merrill’s NHA MBS issue the previous Friday and issued a $340 million pool of single family residential mortgages at GoC +52. 5 year term Residential MBS spreads have been pretty steady and pools have been trading in the range of +48 to +53 for the last 18 months.
On June 13th, Canada Housing Trust priced the regular 5 year CMB issue. The $5.5 billion re-opening of the June 2024 maturity date was priced at GoC+33.5 compared to GoC+36.5 when the bond was first issued in March.
On June 14th RBC brought their eighth CMBS issuance from Real Estate Asset Liquidity Trust (“REAL-T”) since its return to market in 2014. The $446 million issue of sequential pay certificates featured $185 million 3.5 year and $202 million 8.2 year AAA notes with 13% credit support in the from subordinate certificates. The AAA notes were issued at spreads of +107 and +162 respectively. Strong investor support ensured the transaction priced inside initial guidance. Spreads are comparable to those on the last REAL-T issuance in July of 2018.
On Wednesday, RBC launched a $750 million 3-year floating rate covered bond. This is RBC’s seventh covered bond in the Canadian market but first since 2016 (most covered bond issuance happens in Europe). The deal was upsized to $1.25 billion on strong demand and priced at CDOR+14.
Let’s head on over to commodity corner for a visit. West Texas Intermediate (WTI) has moved higher after Iran shot down a US military drone this week. This comes on the heels of the recent tanker attacks. What a time to be alive! WTI is now trading around $57.15 per barrel. That’s down from $75 back in October but still up from the low of $27 set back in February 2016. It sounds pretty cheap when you consider that a barrel of Mountain Dew would run you $158.
Gold has also moved sharply higher this month and is trading at a 5 year high of $1,397 per ounce as investors turn to gold (and ammunition) to protect them from a gloomy economic outlook.
A European Union court has ruled that Adidas’ three stripe pattern lacks a ‘distinctive character’ and declared the trademark invalid. Too bad. I was hoping to trademark my new line of Treasury Guy apparel with a simple circle. The ruling that three parallel equidistant stripes of equal width is generic probably hurts my case. I guess the lesson here is that you should keep your logos sufficiently complicated. Maybe I’ll call the SCTV Logos Galore people for help.
On Wednesday, our Co-founder and CEO Stephen Smith was inducted in to the Canadian Business Hall of Fame. Also inducted was Claude Lamoureux, best known for his role as the CEO of the Ontario Teachers’ Pension Plan. Claude ended his speech with a simple piece of advice I’d like to share. “When faced with a difficult decision in business, choose the path that helps you sleep well, not the one that helps you eat well.”
On that note, I’d like to offer a piece of my own advice. If it’s the weekend, then make the decision that helps you drink well. Once it hits your lips, it’s so good!