Category: Finance

As I was speculating, the Bank of Canada has raised interest rates by 0.25%, which is a change from 0.75% to 1.00%.

The key guiding paragraph to determine future rate hikes is in the last paragraph. From the July 20 statement:

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

From the September 8 statement:

Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.

The phraseology of changing “would have to be weighed” with “would need to be carefully considered” suggests that the Bank of Canada is not necessarily totally done raising rates, but it is not out of the question if data warrants so.

The next Bank of Canada scheduled announcement is October 19, 2010 and the last one for the year is December 7, 2010.

3-month Bankers’ Acceptance Futures are at 1.24% for September and 1.3% for December. Both are trading about 0.15% up from yesterday as a reaction of today’s news. The futures imply there is roughly a 20% chance of a rate increase between now and years’ end.

Being an investor requires you to be part rational analyst, part number cruncher, and part armchair psychologist (and a lot of other parts as well). On the armchair psychologist side, you have to determine what other investors are thinking and determine whether this sentiment has reached a local maximum or minimum with respect to the expectations that are implied in market pricing.

So when I see a headline like “Equities are dead, long live bonds” it gets my attention. Not because there is any information in the headline, but rather that it is an indicator of sentiment. Although a single news article is never enough to give a definitive indication of sentiment, multiple articles over a short period of time spread across all sorts of non-specialized ‘conventional’ media tend to send signals.

While mining for this information is difficult without realizing that retrospective analysis is 20/20, recent memories such as the tech/internet mania in the late 90’s and early 00’s come to mind. Also, in the early 80’s when gold was bidded up to the moon, and the US currency was widely known as future toilet paper (along with those 15% 30-year government bond yields) made a sell gold / buy bonds trade to be the trade of that particular decade.

Trying to mine this information for future use, rather than historical use, might be impossible task. Who knows. Sometimes the masses are right.

Everybody is on holiday this week.

Thus, yesterday, when the markets went down, it was because of “traders betting on a double dip recession”. Today, the markets are up, so therefore it is because “they are betting on an economic recovery”.

It’s advisable to just not pay attention to the headlines and instead just pay attention to individual issues that might be wildly taken up or down in low volume conditions.

As 5 and 10-year yields plunge, they have had a corresponding impact on mortgage interest rates.

The best variable rates I can find are prime minus 0.75% for a 3-year variable mortgage, or prime minus 0.7% for a 5-year variable mortgage. Prime currently is 2.75%. This is still the dirt-cheap option and is preferential compared to the best available 5-year fixed rate, which is currently 3.75%.

Assuming the Bank of Canada raises rates 0.25% this September (which is not a certainty, but is a likely action) then the break-even proposition, in terms of net interest paid over a 5-year fixed period, is quite unlikely. An example of a breakeven calculation would be, on a 25-year amortization mortgage, a 0.25% rate increase every half-year in order for the 5-year fixed rate to be breakeven with the variable rate. This would correspond with a 2.5% rate increase over 5 years which seems to be unlikely given that the futures currently indicate that rates will go up by about 0.69% over the next 2.75 years.

That said, the current interest rates are historically low, and interest rates are not very predictable – it sometimes feels like one is reading tea leaves in order to get glimpses of the economic future.

As there is a real estate implication to mortgage rates, it should be noted that even though the USA has record low financing rates for mortgages, it is not sparking their real estate market.

Very little going on in the day-to-day action in the marketplace, hence very little to write about. If there was a story to write about, it would be at the extremely low yields of the US treasury market and how it continues to induce others to chase yield. Forcing people to invest in assets for income when they do not receive a fair risk-adjusted return of capital (opposed to return on capital) means making such investment decisions is a tricky endeavour.

Spot gold continues to swim at the US$1,200/Oz mark; spot crude continues to wobble between US$70 and US$85/barrel. Natural gas has been wobbling around $4.5/mmBtu, which is still quite divergent with the energy content implied with the crude contract – Natural gas has considerably lagged crude, presumably due to the implementation of cheap shale gas drilling (so-called hydraulic fracturing, or “fracking” in short).

3-month banker’s acceptance futures have also shifted slightly downward, implying less of a chance that the Bank of Canada will raise interest rates on their September 8th meeting. Three-month corporate paper is trading at a 0.91% yield. This change in the future projected rates also had the effect of taking down the Canadian dollar from roughly 97 cents to 95 cents, but this could just be white noise. The currency diversification is an interesting and separate topic, but I am happy with my mix of Canadian and US-based portfolio components.

There’s not a lot to be writing about, which gives me some time to research individual issues on my research queue. Also, since the last two weeks of August are the most heavily booked vacation days before the kids go back to school, the markets should also be relatively quiet in volume, but not necessarily price! However, at least Monday was a calm day.

I have been noticing some of my income trusts creeping up in price; if they go much higher, I might consider a partial liquidation.