Bonds & Interest Rates
Yield Curve Control
You’ll be hearing a lot about this if interest rates continue to edge up. Basically it means that the central banks create money to buy the government bonds needed to finance the deficit spending – and they buy them at low interest rates (yield). The Bank of Canada has bought over $300 billion in Gov bonds during the pandemic.
Many analysts think they’ll be forced to buy even more because inflation fears will precipitate more selling. After all, who wants to be stuck with a 10 year government of Canada bond that pays 1.5% if inflation is at 2% or more, which guarantees losing purchasing power.
During the pandemic interest rates would have been 3x higher or more because of the increased risk due to the pandemic fallout but 5% or 6% interest would push the government’s interest expense through the roof – plus cause massive losses in the bond market (remember bond prices drop when rates rise).
So the Bank of Canada stepped in – created hundreds of billions out of thin air and said we’ll buy the bonds thereby lending the government the money at record low rates.
But now rates on a 10 yr. Gov of Canada bond have moved from 0.46% in August to 1.5% in March. That’s a big difference when it comes to the cost of new borrowing.
So the big question is – how high will the Federal Reserve or the Bank of Canada let rates rise before they step in and create even more money and buy all the government bonds being sold in order to keep the interest rates down. In other words, CONTROL THE YIELD.
If you’re watching Thursday’s House hearing on misinformation, where Twitter CEO Jack Dorsey, Facebook CEO Mark Zuckerberg, and Google CEO Sundar Pichai are testifying, you might have noticed a clock-like device prominently displayed over Dorsey’s right shoulder. (It’s hard to miss — besides Dorsey, a window, and some houseware, it’s basically the only other thing in frame.) But the device doesn’t seem to be showing the time — or at least, I haven’t seen that. So what is it?
It’s a bitcoin clock. Specifically, Coinkite’s $399 BlockClock mini. If you’re even tangentially aware of Dorsey’s love of bitcoin, this will not come as a surprise.
In Canada, our preference is towards financials, energy and communication services.
No matter the metric, equity market valuations in the United States remain elevated. It does not matter if investors look at prices relative to earnings (trailing, forward or the Shiller cyclically adjusted price-to-earnings ratio), cash flows, free cash flow, EBITDA or just about any other indicator they can think of, the message remains the same. Indeed, as per our Strategizer publication, the valuations category is by far the least favourable component of our U.S. equity model.
As a result, it was no surprise to us that running a screen on the return of capital to shareholders (both buybacks and dividends, a.k.a. the “all-in” yield) for U.S. and Canadian equities produced a similar conclusion. Looking at the accompanying table, it is clear just how cheap Canadian stocks are relative to their U.S. peers: the TSX offers a more attractive 3.9-per-cent all-in yield (and a less elevated 44th percentile reading relative to its history) compared to 2.9 per cent (93rd percentile) for the S&P 500.
“I can only show you the door. You’re the one that has to walk through it.”
This morning – As Q1 wends to a close the threat of global recovery and higher rates overhang markets! Meanwhile, the market has spawned a whole new class of stocks: Trend Stocks – based on what we collectively believes about the future. Non Fungible Tokens (NFTs) look set to benefit from Trend Stock status!
And what an interesting week that was… Imminent vaccine wars, the “threat” post-pandemic economic recovery triggers rate rises thus undoing unsustainable P/E stock price multiples, and regulators seeking to regulate the vim out of the big dogs of Big Tech. Money is flowing back into cyclicals and fundamental stocks – but it seems based largely on what looks cheap to today’s already grossly inflated market. If it all looks like the ingredients for a corrective burst – well who knows?
There are a couple of victims out there. I feel most sorry for AstraZeneca and Oxford University – despite all their good intentions to produce a fast vaccine at zero profit and get it out there, they are on everyone’s solids list. The Europeans are using them as the sacrificial lamb for their botched rollout, and the Americans are being all high & mighty about numbers – although the good Dr Fauci did say “It’s still a very good vaccine.” I got the AZ jab and I ain’t dead yet. Good on them!
Pity the pilot and captain of the container ship Ever Given. How embarrassing. How dangerous to the global economy?
Next week will be slow ahead of the Easter Break and quarter-end. There is a deal of account balancing underway, so we may yet see some moves. It might be an opportunity to take stock of where markets are.
What’s going to happen in Q2?
There have been clear success and failures in the real estate market during the pandemic but the general backdrop is good according to Vision Capital CEO Jeff Olin.
“Not withstanding the increase in interest rates, the spread between the capital yields in REITs and in investment grade bonds has been almost double the long-term trends,” Olin said. “And when you can make little or no money on bonds, the thirst in the private market for property is extraordinary.
“According to Citi, there is $345 billion of dry powder funded in Blackstone, in Brookfield, and in pension funds that are increasing their weights to real estate from five to 10% to 15% to 20%. Private equity funds that have been fully funded are looking to invest in property, and so that’s a very good backdrop for the public markets.”
To illustrate his point, Olin highlighted Vision’s participation with Blackstone on an investment in Tricon – focused predominantly on… CLICK for the complete article
You can also watch Jeff Olin’s 2021 World Outlook Financial Conference presentation HERE
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