The rise of interest rates

Something that was a direct result of the US Presidential election was the entire yield curve lifting. The short end in the USA will likely change upwards 0.25% on December 14.

Canadian interest rates are inevitably linked to US interest rates due to the very close economic connection between both countries.

I generally do not profess to have a good radar when it comes to interest rates, but I do observe the trends and notice that the 5-year Canadian government bond yield (which determines most, if not all, rate-resets on Canadian preferred shares) has eclipsed 1.00% for the first time in over a year:

5yrrates

The last time it reached 1% was briefly in November 2015, and then before that it was briefly above 1% in May and June of 2015. Before that it was only consistently above 1% before January 2015.

The question is whether this is a short-term rise up as a knee-jerk reaction to Donald Trump’s election, or whether this will be something that will be sustained (and if so, rates will likely not settle at 1% and will head higher). I have no idea what will be happening.

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I believe that interest rate will continue to rise as China will pressure Trump through the sustantial level of treasuries they control in order to Influence the debate on tarifs. Add on top of that the expansionnary policies that Trump wants to implement and you have an explosive cocktail for interest rates.

As an aside to this but as a consequence, I like the US denominated prefs of Enbridge (enb.pr.u, enb.pf.u etc…), that will start resetting in 2017 at 5 year treasuries plus 3 pc. With the treasuries in the 1.8 pc range right now, these could rest close to 5 pc and at around 19.75$ could generate a nice yeld or capital gain. The question is selecting the right series to buy as market timing is not obvious ….

Chessman, have you looked at the AX.PR.U?

I find it more interesting than ENB.PF.U because the dividends are partially return on capital and Riocan recently redeemed some of its preferred as rating agencies weren’t giving enough benefit for that capital with the view that Artis may choose to do the same when they come up for reset.

Safety, do you see redemption for the other Artis prefs trading in CAD. I hold the A (reset 9/2017), E (9/18) and G (7/19)shares? Dividends for all three contain substantial % in ROC.

Obviously, I don’t know. If you look at the total cost of the preferred, the U shares have the biggest reset and the 5-year US yield is significantly higher than its Canadian counterpart so I think that class is most likely but anything can happen.

So we have it, enb.pr.u is going to reset at 4.887%, a nice bump from the previous 4%. I think tis US issue is the first rate reset to reset at a higher rate than the initial rate. Don’t know what it will do to the psychology of the market in regards to rate resets in general. At todays price it will yelad more than 5%.