Connect with us


Bond Traders Glimpse Yields' Liftoff Potential as Economy Wakens –



(Bloomberg) — Investors in the world’s biggest bond market are starting to see what the other side of America’s worst-ever economic downturn could mean for their portfolios.

With more U.S. regions gradually reopening and investor sentiment picking up, the Treasuries yield curve from 5 to 30 years ended May close to the steepest since the height of the virus-fueled market panic more than two months ago.

Traders are betting short-to-medium term rates will be anchored by Federal Reserve stimulus, including potential steps such as capping yields. Meanwhile, they see scope for higher longer-maturity yields amid signs that the most dire economic reports may soon be in the rear-view mirror. Data suggesting the labor market was beginning to rebound last month could cushion the blow from this week’s labor report, which is forecast to show the highest jobless rate since the Great Depression.

“We are going to get the last of the big job-shedding numbers, and that will be important context to help investors judge the depth of the contraction, and what the process of coming out of it will look like,” said Ian Lyngen, a strategist at BMO Capital Markets. “The steepening trade is going to be thematic over the course of the next 12 to 18 months.”

The gap between 5- and 30-year yields surged to end last week at 110 basis points, touching the widest since mid-March. Benchmark 10-year yields were barely changed on the week, ending at around 0.65%.

Last week delivered a reminder of what could limit the upside in yields, with U.S. President Donald Trump intensifying his confrontation with China on Friday. An escalation of tensions between the world’s two biggest economies threatens to curb demand for risky assets and bolster the appetite for Treasuries.

There’s also the obvious uncertainty over the coronavirus pandemic’s trajectory and the risk of a second wave of infections. Fed Chair Jerome Powell warned on Friday that a full economic recovery “will really depend on people being confident that it’s safe to go out.”

But green shoots are emerging. Continuing jobless claims fell in the most recent week, the first decline during the pandemic. And St. Louis Fed President James Bullard said the unemployment rate could fall below 10% by December. Data this week are forecast to show it reached 19.6% in May, a level unseen since the Depression.

Even so, bond strategists are coalescing round the view that the Fed later this year will implement a policy of yield-curve control — partly as a way to reinforce guidance that it will keep its main policy rate low for an extended period. The consensus expectation revolves around capping yields on maturities from two to five years.

Although the Fed is about to slow its Treasuries buying again, investors will get a reprieve on the issuance front this week, with only bills on the auction docket. So any move toward further steepening in the days ahead could be telling.

“It would signal the curve may be steepening more so for economic reasons,” said Chris Ahrens, a strategist at Stifel Nicolaus & Co. “The long end seems to be pricing that we are getting to the worst of the bottoming of the economy.”

What to Watch

  • Friday’s release of May jobs data is the focus for the economic calendar:
    • June 1: Markit U.S. manufacturing PMI; construction spending; ISM manufacturing
    • June 2: Wards vehicle sales
    • June 3: MBA mortgage applications; ADP employment; Markit U.S. services PMI; factory orders; durable goods; ISM non-manufacturing
    • June 4: Challenger job cuts; trade balance; nonfarm productivity; jobless claims; Bloomberg consumer comfort
    • June 5: Nonfarm payrolls; consumer credit
  • The Fed calendar is empty before the June 10 policy decision
  • Auction calendar:
    • June 1: 13-, 26-week bills
    • June 2: $40 billion 119-day cash-management bill; $65 billion 42-day CMB
    • June 4: 4-, 8-week bills

©2020 Bloomberg L.P.

Let’s block ads! (Why?)

Source link

Continue Reading


Canada should focus on boosting the economy even as debt climbs: analysts – Yahoo Canada Finance



Canada should focus on boosting the economy even as debt climbs: analysts
Outbreak of the coronavirus disease (COVID-19) in Ottawa

By Fergal Smith

TORONTO (Reuters) – Canada should focus on boosting economic growth after getting pummeled by the COVID-19 crisis, analysts say, even as concerns about the sustainability of its debt are growing, with Fitch downgrading the nation’s rating just over a week ago.

Canadian Finance Minister Bill Morneau will deliver a “fiscal snapshot” on Wednesday that will outline the current balance sheet and may give an idea of the money the government is setting aside for the future.

As the economy recovers, some fiscal support measures, which are expected to boost the budget deficit sharply, could be wound down and replaced by incentives meant to get people back to work and measures to boost economic growth, economists said.

“The only solution to these large deficits is growth, so we need a transition to a pro-growth agenda,” said Craig Wright, chief economist at Royal Bank of Canada.

The IMF expects Canada’s economy to contract by 8.4% this year. Ottawa is already rolling out more than C$150 billion in direct economic aid, including payments to workers impacted by COVID-19.

Further stimulus measures could include a green growth strategy, as well as spending on infrastructure, including smart infrastructure, economists said. Smart infrastructure makes use of digital technology.

“We have to make sure that government spending is calibrated to the economy of the future rather than the economy of the past,” Wright said.

Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time, citing the billions of dollars in emergency aid Ottawa has spent to help bridge the downturn caused by COVID-19 shutdowns.

Standard & Poor’s, Moody’s and DBRS still give Canadian debt the highest rating. At DBRS, Michael Heydt, the lead sovereign analyst on Canada, says his concern is about potential structural damage to the economy if the slowdown lingers too long.

Fiscal policymakers “need to be confident that there is a recovery under way before they start talking about (debt) consolidation,” Heydt said.

Fitch expects Canada’s total government debt will rise to 115.1% of GDP in 2020 from 88.3% in 2019.

Royce Mendes, a senior economist at CIBC Capital Markets, said the economy still needs more support.

“Turning too quickly toward austerity would be a clear mistake,” he said.

(Reporting by Fergal Smith; Editing by Dan Grebler)

Let’s block ads! (Why?)

Source link

Continue Reading


US Stock Futures Gain as Market Weighs Virus Cases, Economy – BNN



(Bloomberg) — U.S. stock index futures rose in Asia on Monday as investors focused on the prospects for an expansion of economic stimulus to help counter the impact of the spreading global pandemic.

September contracts on the S&P 500 rose 0.9% as of 11:12 a.m. in Tokyo, after an advance of 4.1% last week. Futures on the Dow Jones Industrial Average rose 1% and those on the Nasdaq 100 Index added 1.2%. U.S. financial markets were closed on Friday before Independence Day on July 4.

“Asia markets look set for mixed moves going into the fresh week with concerns still centered on the continued Covid-19 spread, all weighed against the continued data optimism,” Jingyi Pan, a market strategist at IG Asia, wrote in a note. “With U.S. states continuing to post record cases into the July 4 weekend and the World Health Organization likewise having reported a one-day high in global infections over the weekend, the battle between the Covid-19 drag and improving economic conditions continues.”

Coronavirus cases in the U.S. increased by almost 56,000 on Sunday, a 2% rise that outpaced the 1.8% average daily increase over the past week, according to Johns Hopkins University.

June employment data came in stronger than forecast on Thursday. Goldman Sachs Group Inc. economists revised down their estimates for the U.S. economy this quarter, but predicted it will be back on track in September after some states imposed fresh restrictions to combat the coronavirus. Congress is set to resume talks on the next stimulus bill later this month.

©2020 Bloomberg L.P.

Let’s block ads! (Why?)

Source link

Continue Reading


The TaxLetter: Tax Planning In A Down Economy – COVID-19 Tax Tips – Tax – Canada – Mondaq News Alerts



To print this article, all you need is to be registered or login on

Back in early February, before we all went into lock-down due to
Covid, I wrote about implementing a refreeze in a down economy. Who
knew back then that the economy would continue to drop like it did.
So it made me consider what other tax planning strategies to
consider, in addition to a refreeze, while our economy is still
down (if you haven’t read my February article, consider doing

Triggering losses

I think it would be a safe bet to say that your investments
might have taken a hit in the last few months. So you may want to
consider which of your losers you might want to cut loose. By
triggering the loss in 2020, you can carry it back three years to
offset against any capital gains in previous years, or you can
carry forward the capital loss indefinitely to offset against
future gains. Note: If you are lucky enough to have gains in 2020,
you have to first use the losses against current year gains.

NOTE: Beware of the superficial loss rules when
triggering a loss. If you’re selling on the market to take a
loss, and you buy back an identical investment within 30 days
before or after the sale, the loss will be denied. Although these
rules are designed to counter artificial losses, they could apply
inadvertently – for example if you sell, then change your mind and
buy in again, maybe after the stock has dropped further. The rules
will also apply if your spouse buys back in within the 30-day
period (or a controlled company), but not if a child or parent
reinvests. The rules apply not only to stocks, but to mutual funds
as well. But they only apply if you repurchase an identical asset.
So if you sell Bank A and buy Bank B, you’re OK.

Note 2: When assessing whether you’re in a
loss position, don’t forget that capital gains are calculated
in Canadian dollars – so currency fluctuations can be a key
consideration. If the Canadian dollar has appreciated against the
currency there will tend to be losses.

Crystallizing gains

On the flip side, instead of triggering losses, you may want to
also look at triggering a capital gain. There has been much
speculation about whether the CRA will increase the capital gains
inclusion rate (currently at 50 per cent) in the 2020 Federal
Budget. Before Covid, the concern was due to the political climate
(i.e. the Liberals had a minority government and the NDPs had
campaigned on increasing taxes). The 2020 Budget was delayed with
the onset of Covid; and now the speculation is that perhaps the
government might increase the capital gains inclusion rate as a way
to raise money to fund the various government relief measures
released as a result of Covid. So if you anticipate a liquidity
event in 2020, you may want to consider crystallizing your capital
gain prior to the release of the 2020 Federal Budget, just in case.
And if you are not sure if there will be a liquidity event or not,
you can consider a strategy that would put the pieces in place to
trigger a gain, but still defer that decision until after the
Budget is released (you should reach out to your tax advisor to
discuss possible strategies). As to when the 2020 Federal Budget is
going to be released, your guess is as good as mine. So you should
have these discussions with your tax advisor sooner than later.

Capital Dividend Clean UP

If you hold your investments in a corporation, and are thinking
of triggering losses as discussed above, then the first thing to do
is to first check your corporation’s capital dividend account
(CDA) balance. What is a CDA? Well, as you know, only 50 per cent
of a capital gain is subject to tax. So when your corporation
realizes a capital gain, it only pays tax on 50 per cent of the
gain. The other 50% “tax-free” portion of the capital
gain is added to the corporation’s CDA. A tax-free capital
dividend can then be paid out of the corporation to you, the
shareholder (as long as you are a Canadian resident). However, if
the corporation realizes a capital loss as part of a loss selling
strategy, those losses will grind down the CDA balance and you will
lose the ability to take money out tax-free. So it is very
important to make sure you clear out your CDA by declaring a
taxfree capital dividend to you before you trigger any losses.

And if you don’t have any cash to pay the capital dividend,
the corporation can satisfy the capital dividend with a demand
promissory note so you can always pull that amount out tax-free in
the future.

Income Splitting opportunities

The Tax Act is full of various rules to prevent you from trying
to sprinkle income to lowtax family members (known as income
splitting). The “attribution rules” for example, would
apply where you transfer property or funds to your spouse
(including common law spouse) minor children, minor grandchildren
or minor nieces/nephews (“Family Members”), unless you
fall under certain exceptions. But in down economies, these
exceptions to the attribution rules generally get spotlighted.

One of these exceptions is the prescribed rate loan strategy. As
I have discussed in previous articles, you can avoid the
attribution rules if you, the higher income family member, loan
funds to the low-income Family Members, provided that they pay you
interest at the “prescribed rate” in effect at the time
the loan is made. Moreover, the interest on this loan has to be
paid by no later than January 30 each year. If you miss even one
January 30 deadline, the attribution rules will apply forevermore.
The prescribed rate has been at 2 per cent for the last little
while, but it is going down to 1% on July 1st, 2020 – so the
opportunity to income split through a prescribed loan will become a
lot more attractive.

If you don’t have cash to loan to your Family Member,
consider doing a loan “in kind”. For example, if you have
a securities portfolio in your name, transfer the portfolio to your
low-income spouse and have your spouse issue a demand promissory
note reflecting the prescribed interest rate for an amount equal to
the fair market value of the portfolio at the time of the transfer.
However, this transfer may be subject to capital gains tax by you,
the transferor, as the transfer would have to be made at the
portfolio’s fair market value. But if your portfolio has gone
down in value, then now is time to make that transfer.

NOTE: if you want to loan to any minor Family
Members, you should do so through a family trust, as minors cannot
legally borrow from you.

Defer RRSP Contributions

If your income / salary has gone down this year due to Covid,
you may want to consider deferring any RRSP contributions until
next year, especially if you expect to be in a lower tax bracket
for 2020. So hopefully, when you are back into the top bracket next
year, you can double up your RRSP contributions for 2021.

Originally Published by
The TaxLetter®
June 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


Let’s block ads! (Why?)

Source link

Continue Reading