Public Sector Strategy

Transcription

1 Public Sector Strategy Fixed Income Trading Desk Strategy Quick Hit Twas the seasonals (or not) PLEASE SEE END OF DOCUMENT FOR IMPORTANT DISCLOSURES January 18, (Vol. 2, No. 2) We Canadians know a lot about seasonal weather patterns. Go stand at the corner of Portage and Main for a few minutes or take a trek into northern Québec if you need convincing. But seasonal tendencies can crop up in financial markets too seemingly established patterns influencing everything from stocks to rates, credit to commodities, and everything in between. With 217 in the books, we re offering a quick look back at the last 12 months. The aim here is to highlight where traditional seasonal trends repeated or, more appropriately, where they failed to materialize. Spoiler: the so-called seasonals broke down a fair bit. For the record, we ve undertaken seasonality analysis previously, but persistent investor interest keeps us coming back to the subject. After all, a better understanding of seasonal patterns might prepare one for the coming year s market moves. For reference, we ve included a number of charts on page 2 illustrating how last year s monthly moves lined up with prior trends. Detailed tables on pages 3-4, meanwhile, capture average monthly levels/changes for a variety of indicators in the post-crisis period. Here are select reflections on 217 seasonals and our high-level assessment of whether the prior trend held () or not (): Economic data surprises ( for US, for Canada) US data did little to diminish talk of residual seasonality in certain reports. As in prior years, stateside data disappointed in the spring, but firmed nicely in the second half. Canadian data, on the other hand, were alternatively hot and cold, with the pattern of economic surprises distinctly at odds with prior-year tendencies. Canadian rates () GoC yields definitely bucked seasonal trends in 217, thrown off kilter by shifting BoC rhetoric/posture and related market re-pricing. Canadas held up better than average during the spring, swooned dramatically in June to September, only to temporarily regain their footing in the fall. GoC bonds ended 217 on a weak note, as explosive job creation saw more BoC tightening priced in a sell-off validated by Wednesday s rate hike. US Treasuries moved to a somewhat different beat in 217, suffering a larger-than-normal selloff in the final four months of the year. Still, monthly movements in Treasury yields, notably in 2s, were more in-line with the prior trend than what we saw in the Canada market. Canada yield curve () Extreme bear flattening has been the name of the game, with 2s-longs flattening a cumulative 1 in the past nine months, the most extreme move in a dozen years. Recent curve changes have been at odds with prior trends. Given our macro forecast/rate call and the length of the current expansion, it s hard to see a noted reversal ahead. Indeed, realized rate hikes look to keep the front end on the defensive this year, while well-cemented inflation expectations and a dearth of sovereign product add technical support to longer tenors. Canada-US yield differentials (mostly ) Yield differentials underwent a radical re-pricing in 217, including a massive relative cheapening of Canadas in Q3, giving way to noted outperformance in the final quarter of the year (Chart 2). Note that Canadas often outperform Treasuries in the waning stages of the calendar year, owing in part to big-time seasonal cash flows and related index adjustments. We saw this again in December, albeit to a much lesser extent. Going forward, while the Canadian economy is sufficiently strong to support/encourage further rate hikes (overnight could well touch 2% by the end of 218 or early 219), the BoC is understandably reluctant to outgun the Fed, lest it risk an overshoot of the currency hardly desirable given that US tax/regulatory reforms and provincial minimum wage changes risk tilting the competitive landscape away from Canada. Beyond policy rates, differences in inflation expectations, fiscal posture and related net bond supply lend relative support to Canadas. Canada swap spreads (mixed) There s something to be said about seasonal trends in Canadian swap spreads, reflecting the historic concentration of housing/mortgage market activity and related hedging during certain times of the year. We would typically observe swap spread widening in the spring and fall, with swap spread compression observed in the summer (Chart 3). Last year didn t totally break from seasonal patterns, but at +.3, the correlation coefficient (R) between last year s monthly moves and the prior trend hardly signals a tight fit. With housing market activity expected to moderate and the BoC in extreme data dependence mode, we d caution against blind devotion to seasonals in Canadian swap spreads. US investment grade credit spreads & equities () Corporate credit spreads narrowed sharply in 217, with US 5-year IG CDX snapping in 18 (or about 25% over the course of the year). Not only was that an outsized rally (Chart 4), but the monthly pattern decoupled from the prior trend indeed, tightening/widening tended to occur in less traditional intervals. US equities and measures of financial market volatility likewise spent much of the last year disconnected from traditional patterns. Provincial credit spreads () Finally something that worked, in terms of seasonals that is. First off, we d note that provi spreads snapped in nicely in 217, consistent with a global rally in credit/equities. Monthly gyrations, in 1s in particular, lined up pretty well with established trends (Chart 5). At the risk of oversimplifying, provincial credit spreads typically weaken in the spring (April to June) and again in late summer/early fall (August to October). Spreads have a tendency to firm up, starting in November and often extending through March. If you put any stock in these seasonal trends, we re still smack dab in the middle of favourable performance window. We ve included a related table on page 5 focused on Ontario 1-year C$ spreads. Bond supply (mostly ) There s seasonality in Canadian bond supply, no question. The past year s bond crop may not have mimicked traditional supply patterns perfectly, but in Canadas, CMBs, provis, munis and corps, there was noted positive correlation with prior trends. While counter to conventional wisdom, we d argue that provi spread performance does not appear to be meaningfully/statistically connected to shifts in gross bond supply. Rather, as we pointed out in a recent note, it s the rate of net supply relative to Canadas that appears to hold greater sway. Warren Lovely Fixed Income Trading Desk Strategy 1

2 CESI Cda CESI US GoC 2Y GoC 5Y GoC 1Y GoC 2-1 GoC 5-3 GoC 1-3 UST 2Y C-US 2Y C-US 1Y Cda SS 5Y US IG 5Y Ont 5Y Ont 1Y Ont 3Y RY DN 5Y H.One 3Y S&P 5 S&P TSX VIX CAD WTI WCS-WTI Diff GoC Issue CMB Issue Prov C$ Issue Prov US$ Issue Muni Issue Corp Issue Public Sector Strategy Chart 1: Many traditional seasonal patterns failed to take hold in 217 Correlation in monthly changes for select variables: 217 vs prior post-crisis trend (i.e., seven year average from ) January 18, Correlation coefficient Source: NBF, Bloomberg Notes: Re shading, negative correlations shaded red, materially positive correlations (R>.5) shaded blue, all others shaded grey; correlations based on month-to-month changes (either in level or percentage terms) Chart 2: Canada-US yield differentials () Monthly change in Canada-US 1-year yield differential Avg Source: NBF, Bloomberg Note: Changes based on monthly average levels Chart 3: Canada swap spreads (mixed) Monthly change in Canada 5-year swap spreads Avg Source: NBF, Bloomberg Note: Changes based on monthly average levels Chart 4: US IG credit spreads () Monthly change in US 5-year IG CDX Avg Source: NBF, Bloomberg Note: Changes based on monthly average levels Chart 5: Provincial credit spreads () Monthly change in Ontario 1-year constant maturity spread vs GoC Source: NBF Note: Changes based on monthly average levels 217 Avg Warren Lovely Fixed Income Trading Desk Strategy 2

3 Public Sector Strategy January 18, 218 Table 1: Seasonal heat map (level) Average level by month: (i.e., 8 years) Variable Unit Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg Std dev High Low US Economic Surprise Index Dec Jun Bond Supply Ccy Commod Stocks Vol Credit Rates Swaps Eco Cda Economic Surprise Index May Feb Cda-US Eco Surprise Index Jun Jan US Bond Yield (2Y) % Dec Aug US Bond Yield (1Y) % Mar Oct Cda Bond Yield (2Y) % Apr Feb Cda Bond Yield (1Y) % Jan Oct Cda-US Yield Spread (2Y) Bps Apr Dec Cda-US Yield Spread (1Y) Bps Sep Mar US Swap Spread (5Y) Bps Jun Dec Cda Swap Spread (5Y) Bps Jun Sep Cda-US Swap Sprd/Sprd (5Y) Bps Jun Feb US IG CDX (5Y) Bps Jun Apr Ontario vs GoC (3Y) Bps May Jan Ontario vs GoC (5Y) Bps Jun Jan Ontario vs GoC (1Y) Bps Oct Mar Ontario vs GoC (3Y) Bps Oct Mar RY Dep Note vs GoC (5Y) Bps Dec Apr Hydro One vs GoC (3Y) Bps Oct Mar S&P 5 M/M % Mar Aug S&P TSX M/M % Feb Jun Volatility (VIX) Index Sep Apr US Financial Cond'n Index Apr Sep US Dollar (Trade Wgt) Index Dec Aug Canadian Dollar US /C$ Apr Dec Crude Oil (WTI Spot) US$/bbl Apr Dec Nat Gas (HH Future) US$/MMBtu Jan Oct Gold (Spot) US$/oz 1,324 1,351 1,35 1,348 1,339 1,338 1,334 1,375 1,393 1,375 1,361 1,328 1, Sep Jan GoC Nominal (CAD) C$bln Nov Nov CHT (CAD) C$bln Mar 4X Provincial (CAD) C$bln Jan Apr Provincial (USD) C$bln Jan Mar Municipal (CAD) C$bln May Dec Corporate (CAD) C$bln Sep Aug Source: NBF, Bloomberg; to aid interpretation, shading has been applied from high to low values, with green generally synonymous with "risk-on" and red most consistent with "risk-off"; for equities, values reflect monthly changes Warren Lovely Fixed Income Trading Desk Strategy 3

4 Public Sector Strategy January 18, 218 Table 2: Seasonal heat map (change) Average change by month: (i.e., 8 years) Variable Unit Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg Std dev High Low US Economic Surprise Index pts Sep May Bond Supply Ccy Commod Stocks Vol Credit Rates Swaps Eco Cda Economic Surprise Index pts Apr Aug Cda-US Eco Surprise Index pts Apr Aug US Bond Yield (2Y) Bps Dec May US Bond Yield (1Y) Bps Dec Aug Cda Bond Yield (2Y) Bps Apr Aug Cda Bond Yield (1Y) Bps Nov Aug Cda-US Yield Spread (2Y) Bps Apr Nov Cda-US Yield Spread (1Y) Bps Apr Dec US Swap Spread (5Y) Bps May Mar Cda Swap Spread (5Y) Bps Apr Aug Cda-US Swap Sprd/Sprd (5Y) Bps Apr Aug US IG CDX (5Y) Bps Jun Mar Ontario vs GoC (3Y) Bps Apr Dec Ontario vs GoC (5Y) Bps Apr Jul Ontario vs GoC (1Y) Bps May Jul Ontario vs GoC (3Y) Bps May Mar RY Dep Note vs GoC (5Y) Bps Jun Jul Hydro One vs GoC (3Y) Bps Jun Jan S&P 5 %-pts Mar Aug S&P TSX %-pts Feb Jun Volatility (VIX) %-pts Aug Jul US Financial Cond'n Index pts Mar Aug US Dollar (Trade Wgt) %-pts Nov Aug Canadian Dollar %-pts Apr Nov Crude Oil (WTI Spot) %-pts Mar Jan Nat Gas (HH Future) %-pts May Feb Gold (Spot) %-pts Aug Dec GoC Nominal (CAD) C$bln Feb Jan CHT (CAD) C$bln May Apr Provincial (CAD) C$bln May Jul Provincial (USD) C$bln Jan Feb Municipal (CAD) C$bln Sep Dec Corporate (CAD) C$bln Sep Aug Source: NBF, Bloomberg; to aid interpretation, shading has been applied from high to low values, with green generally synonymous with "risk-on" and red most consistent with "risk-off" Warren Lovely Fixed Income Trading Desk Strategy 4

5 Table 3: An illustration of seasonals in provincial spreads Average level and change in Ontario 1-year constant maturity spread by month: (i.e., 8 years) Ontario constant maturity spread vs GoC curve: 1-year Average monthly level, Public Sector Strategy January 18, Average Std dev Jan Feb M ar Apr M ay Jun Jul Aug Sep Oct Nov Dec Average Std dev Average monthly change, Average Std dev Jan Feb M ar Apr M ay Jun Jul Aug Sep Oct Nov Dec Average Std dev Source: NBF; shading applied to individual years, with green highlighting greatest relative performance and red consistent with relative weakness Warren Lovely Fixed Income Trading Desk Strategy 5

6 Fixed Income Trading Desk Strategy Public Sector Strategy Corporate Credit Warren Lovely Connor Sedgewick Catherine Maltais Pete Metzger Relative Value Models Drew Lloyd +44 () Important Disclosures General This Report was prepared by National Bank Financial, Inc. (NBF), (a Canadian investment dealer, member of IIROC), an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete and may be subject to change without notice. The information is current as of the date of this document. Neither the author nor NBF assumes any obligation to update the information or advise on further developments relating to the topics or securities discussed. 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