Category: Canada

The government of Canada today issued $1.5 billion in debt with a 50-year maturity. The yield to maturity is 2.96%. For the duration these are amazingly low interest rates. If the Bank of Canada can actually keep the inflation target pinned at 2%, the real rate of interest is less than a percentage point.

Suffice to say, I think this is a prudent move by the government. I wonder when Canadian banks will come up with mortgage products that will let consumers lock in insured 30-year mortgages for 150 basis points above government rates. They do this in the USA, why not here?

I’m also curious to know how much debt the government can issue with these terms before the public market starts to vomit on this much debt. For every seller (the government), somebody out there must want to be long this debt. There is a financial argument about hedging against market volatility (typically bond prices will rise with a reduction in equity prices) and generating some higher semblance of income compared to 1%-yielding cash, but locking yourself in at 2.96% for 50 years? Unreal.

In a very abstract level, the taxpayers of Canada win in this scenario – as long as the pension fund that is buying the debt isn’t the one paying your future defined benefits.

There have been drawn out periods where I have done literally nothing and 2014 has had that kind of start for me. Writing about how I am twiddling my thumbs is very unexciting, so I will talk about something which has caught my radar: The Canadian dollar.

Just like any patriotic Canadian, cross-border shopping (and just generally enjoying recreation in fantastic and not-too-contaminated by mass population areas like the Oregon Coast) is something that is easily accessible due to the relative strength of the Canadian dollar.

As you can see from the chart above, our purchasing power has just eroded by about 10% over the past year, which is mildly disturbing and makes inexpensive vacation prospects slightly more expensive. When something makes my recreational agenda more expensive, I take notice.

Not helping was today’s announcement by the Bank of Canada, declaring that inflation is “further below” their 2% target, which creates more pressure that interest rates are not going to be rising anytime soon, ergo the currency drops to the USA, which is starting to see signs of their short term rate increasing:

The thoughts swimming in my head is whether the drop in the Canadian currency is a predictive indicator of what is going to happen to the Canadian economy and equities as a whole (adjusting for the impact that they are now cheaper to purchase with US funds!)?

We will see. My market exposure is relatively low and I have not been inspired by anything I have seen out of the marketplace. It might be some time before I write again given this “do nothing” stance.

Other than the usual stuff about the S&P 500 being up a huge amount for the year, perhaps the unexpected financial highlight for most Canadians is in the following chart:

Looking at the other major currencies, the Euro has appreciated slightly against the USD over the year (from US$1.32 to US$1.38 per Euro), while the Yen has weakened considerably, with 87 Yen being one USD at the beginning of the year – now this is 105!

The Chinese Yuan strengthened against the USD of the year, 6.23 CNY per USD, while today it is 6.07. This continues a very slow trend of appreciation for the Chinese currency since they changed their monetary policy since 2010:

Some questions for 2014 will be:
– Will the Canadian dollar continue to downtrend?
– How low will the Yen go before Japan collapses its economy?

I have been watching the chart of the Canadian dollar. Over the past three years it has exhibited a surprising amount of non-volatility, trending roughly between 96 to 103 cents on the US dollar in the last year:

This is compared to a currency such as the Yen which has had some obvious devaluation going on over the past half year:

This leads to the obvious question of whether the Canadian dollar is still in a range or whether there is something going on that will trend into a further decrease in the dollar. Typically the dollar has been linked to the fortunes of the commodity market, and the general commodity market hasn’t really gone anywhere over the past year, so one would think this is part of a trading range as opposed to some breakout on the downside.

I continue to hold a majority of my holdings in US-denominated securities and despite the fact that the US federal reserve is doing its best to turn its currency into toilet paper, I would expect the US currency to be better toilet paper than other world currencies out there. I am guessing the phrase “in the world of the blind, the person with one eye sees all” is the most appropriate here.