Price of XSB.TO

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asked Nov 08, 2017 11:08 AM by
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Hi Jin:

What is behind the recent price plunge in XSB.TO? I'm assuming this has to do with rising interest rates, but I was surprised how much it dropped with just a 50 basis point hike. Would the prospect of more rate hikes force the price down even more? As older bonds mature and new ones are bought will the price come back up?

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answered Nov 08, 2017 01:07 PM by
Jin Won Choi gravatar image Administrator

Hi bmclean,

I would argue that a 50 basis point hike is actually pretty substantial. Remember, interest rates rose from a base of 0.75%/year 6 months ago, so a jump to about 1.4%/year currently is actually an increase of about 90% from the base (i.e. 1.4/0.75 - 1).

If you want to assess the impact of interest rates on XSB, a good rule of thumb is to take the interest rate differential and multiply it by 3. So given that rates increased by roughly 0.65%, 3 times that number is about 1.95%. That's close to what XSB lost in the past 6 months.

Given the substantial rise in interest rates, you might wonder why XBB, which holds longer maturity bonds, hasn't taken a larger hit than XSB. The answer is that long term interest rates haven't moved nearly as much as short term interest rates. In other words, the "yield curve has been flattening".

Now that short term interest rates are pretty close to long term interest rates, I think it's even more appealing to hold on to short term bonds (i.e. hold XSB). Short term rates can only rise so fast relative to long term rates.

Hope that helps,


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