Bank of Canada holds at 1%

The Bank of Canada continues to hold its short term target rate steady at 1%. The salient quotation:

While underlying inflation is subdued, a number of temporary factors will boost total CPI inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges to the 2 per cent target by the middle of 2012. This short-term volatility reflects the impact of recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes. Core inflation has fallen further in recent months, in part due to temporary factors. It is expected to rise gradually to 2 per cent by the middle of 2012 as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

My own metric, the spread between the short term rate and the 10-year government bond, is at a 2.48% spread as of present. If this goes higher then the Bank of Canada might consider raising rates. BAX futures still imply a rate increase is on the horizon before year’s end. 3-month corporate paper is yielding 1.18%.

TFSAs to increase?

One of the campaign trail promises was to double TFSA contribution limits to $10,000/year if/when the budget is balanced.

Given the existing projections of the federal government, this may not happen for a few years, if ever.

However, an increase in TFSA contribution limits would make them much more significant vehicles for investing than present. It is a much more functional solution than giving some form of relief on capital gains taxes – effectively the TFSA becomes the conduit for this, or for relieving people from paying taxes on interest income.

Because of the contribution limit rate, TFSAs disproportionately favour lower net worth individuals – for example, if your net worth was $20,000, you could invest it all tax-free but if your net worth was $1,000,000 then it would be a drop in the bucket. It is a surprisingly egalitarian method to allowing tax-free compounding of capital.

The only negative part of the TFSA is that you can’t write off capital losses – so make those choices carefully.

Treasury yields creeping up again

I know a few days of trading don’t make a market, but the spike up in yield seemed a bit unusual:

If long term interest rates continue to use, it will have a dampening effect on the rest of the marketplace. Inflation expectations are also baked into this chart.

If somebody asked me to receive 3.55% over the next 10 years, versus dumping that money into selected equities, one would think that equities would outperform.

Can HEAT and COOL mix together?

This is probably why I don’t try financial humour too often on this site, but I couldn’t help but spot the two ticker symbols together on the daily gainers:

You can see HEAT and COOL are together in the gainers list. Isn’t that COOL? Or should I say they are HEATing up the Nasdaq?

This sad attempt at humour will not be repeated again here for a long, long time.