Tag: BAX

The Bank of Canada’s next interest rate decision will be on May 30th.

Pundits are saying the bank will stand pat, citing various economic statistics, trade uncertainty with NAFTA, lunar cycles, etc.

There is one other statistic that matters much more than others, and it is the following chart (10-year government bond yield):

As long as the spread between short-term rates and the 10-year yield remains greater than a percentage point, this gives them clearance to raise rates, especially when lock-step with the Federal Reserve.

My prediction, if it wasn’t obvious by the tone of the previous writing is, that barring some major change or news over the next week, the Bank of Canada will raise the short-term target rate to 1.5% (up 0.25%) on May 30th of this year.

Right now the 3-month Bankers’ Acceptance is at 1.69% which translates into 98.31 on the futures contract. Currently the June 2018 BAX Futures are trading at 1.81% (98.19), which also factors in some interest rate probability concerning the July 11, 2018 decision.

(Update, May 29, 2018: Given that 2, 5 and 10 year rates have dropped significantly in the past week, I’m withdrawing my prediction. Next cycle will depend on the rate spread between short-term and 10-year yields.)

There are three Bank of Canada announcements concerning interest rates for the rest of the year: September 6, October 25 and December 6.

Right now 3-month Banker’s Acceptance rates are 1.2%.

The BAX futures are signalling that there is a better than 50/50 chance that rates will increase 0.25% in the September 6 cycle, and that there is a slight chance of two 0.25% rate increases by the end of the year:

Month	Bid price	Ask price	Settl. price	Net change	Open int.	Vol.
Open interest: 942,178				Volume: 86,058
August 2017	0	0	98.765	0	0	0
September 2017	98.655	98.660	98.645	0.010	137,868	7,160
October 2017	0	0	98.615	0	0	0
December 2017	98.500	98.505	98.490	0.010	224,303	15,544
March 2018	98.395	98.400	98.375	0.020	163,606	19,552
June 2018	98.330	98.335	98.305	0.025	112,558	15,558
September 2018	98.270	98.280	98.250	0.030	120,395	10,055
December 2018	98.210	98.220	98.200	0.020	102,302	9,439
March 2019	98.160	98.170	98.140	0.020	45,030	5,208
June 2019	98.090	98.100	98.080	0.020	17,655	1,763
September 2019	98.010	98.030	98.010	0.010	10,774	827
December 2019	97.940	97.960	97.940	0.010	5,193	646
March 2020	97.860	97.870	97.870	0	2,199	198
June 2020	97.780	97.800	97.800	-0.010	295	108

Guessing the impact of these short-term interest rate changes I will leave as an exercise to the reader for now. The one salient fact, however, is that when short-term financing rates increase, the incentive to leveraging decreases and so marginal investments will be less viable. Parking cash in a rising-rate environment is best done with cash rather than using any debt instruments with duration (I wish I had stuck to this – my cash parked in VSB.TO has decidedly unperformed zero-yield cash!).

Today, the Bank of Canada announced it was keeping the target short-term interest rate steady at 1%. This was not a surprising announcement. The big concern on the minds of the bank is the escalation of household credit. It will blow up eventually (especially whenever interest rates rise again) but in the meantime, conditions continue to be very ripe for future borrowing.

I guess the financial tip of the day is to make sure to start deleveraging before everybody else does!

Month / Strike	Bid price	Ask price	Settl. price	Net change	Open int.	Vol.
Open interest: 651,369				Volume: 128,687
March 2013	98.715	98.720	98.720	0	87,081	3,000
April 2013	0	0	98.705	0	0	0
May 2013	0	0	98.720	0	0	0
June 2013	98.750	98.760	98.760	0	117,907	18,450
September 2013	98.800	98.810	98.800	0.010	140,414	30,685
December 2013	98.810	98.820	98.810	0.010	126,676	26,022
March 2014	98.790	98.800	98.790	0.030	85,272	21,108
June 2014	98.750	98.760	98.750	0.010	53,319	16,547
September 2014	98.690	98.700	98.690	0.030	17,236	8,173
December 2014	98.610	98.620	98.610	0.010	13,242	2,706
March 2015	98.520	98.540	98.530	0	5,555	1,051
June 2015	98.430	98.450	98.440	0.030	1,559	566
September 2015	98.340	98.350	98.350	0	1,723	149
December 2015	98.250	98.280	98.270	0	1,385	230

BAX Futures state that rates are not going to rise again for the remainder of 2013, and there is the expectation of a chance (but not certainty by any means) of a quarter-point hike around March 2015.

BAX Futures are as follows:

Month / Strike	Bid Price	Ask Price	Settl. Price	Net Change	Vol.
+ 12 OC	0.000	0.000	98.820	0.000	0
+ 12 NO	0.000	0.000	98.780	0.000	0
+ 12 DE	98.730	98.735	98.745	-0.015	10452
+ 13 MR	98.710	98.720	98.750	-0.030	27000
+ 13 JN	98.680	98.690	98.730	-0.050	32803
+ 13 SE	98.650	98.660	98.690	-0.040	19232
+ 13 DE	98.610	98.620	98.660	-0.040	11758
+ 14 MR	98.570	98.580	98.610	-0.030	1998
+ 14 JN	98.520	98.540	98.560	-0.020	1257
+ 14 SE	98.470	98.480	98.500	-0.020	613
+ 14 DE	98.410	98.430	98.430	-0.010	525
+ 15 MR	98.340	98.360	98.370	-0.010	123
+ 15 JN	98.280	98.300	98.310	-0.010	50
+ 15 SE	98.210	98.230	98.240	-0.020	50

The market is pricing in the anticipation that rates may increase a quarter point in 2013 but nothing yet substantive.  In particular, the September 2015 projection of a 1.5% target rate is an interesting bet from a risk/reward perspective.  Three-month corporate paper is at 1.16% and has been this for quite some time.