PrefBlog

The major strength of capitalism is that people will make and sell what other people want. The major weakness of capitalism is that sometimes the appeal is not in the actual product. The random nature of mutual fund fees is basically a truism:

It seems reasonable to believe that investors would be willing to pay more if they received a higher rate of return. However, expense ratios and turnover are negatively correlated with return (Carhart, 1997; Dellva & Olson, 1998; O’Neal, 2004). Funds with low expense ratios outperform those with high expense ratios (Haslem, Baker, & Smith, 2008). Similarly, lower performing fund have higher fees, and high-quality funds do not charge comparatively higher fees (Gil-Bazo & Ruiz-Verdu, 2008). In general, mutual funds underperform by about the amount of fees and expenses (Carhart, 1997; Fama & French, 2008).
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Mutual funds on average underperform benchmarks by approximately the amount of fees and expenses (Fama and French, 2008). As a result of lower expenses, broad index funds tend to outperform actively managed funds with equivalent risk (Malkiel, 2003). Therefore, the best way for most investors to improve performance is to have a broad index fund with minimal costs (Malkiel, 2003).

Do consumers tend to follow this advice? Mahoney (2004) finds that mutual funds with low fees tend to be larger than funds with high fees, suggesting that many investors follow the wisdom of minimizing expenses. However, such investments in a broad market index fund do not necessarily coincide with low costs. For example, S&P 500 index funds are designed to follow the index and should be relatively similar. As a result, investors should seek the lowest costs for such funds. Surprisingly, returns vary by 2% per year, and expense ratios range from 6 bps to 135 bps per year (Elton, Gruber, & Busse, 2004). Even though less expensive alternatives exist, S&P fund investors also buy funds with loads and funds that spend more on marketing (Elton et al., 2004).

As noted above there is great emphasis on marketing:

Once invested in a high expense fund, investors may be less willing to search for lower cost alternatives. With thousands of mutual funds offered by hundreds of fund families, sorting through the choices is daunting. Sirri and Tufano (1998) contend that when search costs are high, individual investors turn to rating services and periodicals for advice. They document that fund flows relate directly to the size of the fund complex and level of media attention received by the fund. Since most mutual fund advertising focuses on past performance rather than cost, funds that spend disproportionately on marketing and distribution will tend to attract the less knowledgeable investors that rely on these publications.

This marketing-that-misses-the-point has spread to universities:

Harvard University said applications for this fall’s freshman class jumped 9 percent, to a record 37,305, after the school heightened recruiting on social media and publicized a $150 million gift mostly for financial aid.

Harvard joins six of eight Ivy League schools announcing more hopefuls this year, suggesting their admit rates may decline when decisions are announced next month. Columbia, Princeton, Brown and the University of Pennsylvania also reported records.

Colleges say they are increasing marketing efforts to reach top students, especially those from underrepresented groups. Some high school advisers wonder whether the institutions are trying to buff up their images of selectivity.

This has not gone unnoticed:

Colleges also boost applications by deluging students with brochures and book-length “viewbooks” featuring attractive students and famous alumni. Further tactics have included waiving application fees, making essays optional, and counting incomplete entries in application statistics. Colleges track down kids after buying names of students after they take SAT or ACT college entrance exams. Taking the bait isn’t cheap: Colleges typically charge from $50 to $75 to apply.

A survey last year of 1,500 university deans and high school counselors by the National Association for College Admission Counseling reported concern about a shift toward a “sales culture in college admission.” Non-emergency deadline extensions are the latest example, according to David Hawkins, the trade group’s executive director for policy.

Bloomberg’s got its own marketing to do … the phrase “sales culture” appears in the press release announcing the availability of survey report but not in the report itself.

But the report gets close enough:

College admission has become big business over the last decade. At some schools, vice presidents of enrollment oversee multi-million dollar admission budgets and hire high-priced marketing consultants to improve brand recognition and manage search campaigns. Our national conferences resemble trade shows, with massive vendor halls and corporate sponsors. Institutional pressures have increased in this competitive and public admission environment, leading to a shift in how admission offices operate. Institutional interest in selectivity and rankings can influence decisions on recruitment and review strategies.

This has bothered me for quite some time, and has come to a head with a report on Colby College:

Maine’s Colby College, founded in 1813, doubled its debt load last month by borrowing about $101 million for athletics, performing arts and other upgrades on its campus in Waterville. The plans reflect the ambitions of David Greene, the school’s president since last year, who’s seeking to boost applications and improve its standing in national rankings.
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“There is a tremendous risk taking on debt to build facilities that don’t serve the educational goals and are just to attract a particular type of student,” said David Bergeron, a vice president in Washington at Center for American Progress, a nonprofit that promotes access to higher education. “The bigger concern is that all of these efforts just lead to greater expense.”

This is craziness and just adds to the problem of student loan debt, which is beginning to have a significant economic effect as discussed on December 10, 2014. But it’s a crazy world.

The US Treasury is extending term:

As the insatiable demand for Treasuries pushes down yields, the U.S. has locked in low-cost financing for years to come by issuing more long-term debt. The average maturity of Treasuries is now poised to reach an all-time high this year.

The shift is saving money for American taxpayers — but it’s also made Treasuries more perilous for bond investors as the strength of the U.S. economy bolsters the Federal Reserve’s case for raising interest rates. Holders stand to lose about $570 billion if yields rise by a percentage point, data compiled by Bloomberg show. In 2009, it was $170 billion.
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The 30-year bond, the longest maturity security issued by the Treasury, returned 29 percent, double that for U.S. equities. The rally accelerated in 2015, pushing down yields to a record-low 2.22 percent on Jan. 30.

A year ago, yields were closer to 4 percent.
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Treasuries due three years or less make up 48 percent of the market for U.S. debt, versus 58 percent six years ago.

The share of bills, due in one year or less, is approaching the least since the 1950s.

That’s given the U.S. more time to repay its obligations. The average maturity has reached 68.7 months, or two months short of its high in 2001. With the U.S. budget deficit falling to a six-year low, the government is in better shape to finance its record debt burden when interest rates do rise.

The U.S. pays less in interest now than it did in 2008, even after the amount of U.S. debt outstanding more than doubled to $12.5 trillion.

There has been some echo of this in Canada:

In the 2012–13 Debt Management Strategy, the Government announced a temporary increase in 10-year bond issuance through an additional 10-year bond auction in the first quarter of 2012–13 and the discontinuation of regular bond buyback operations on a cash basis for the 10-year sector.

In September 2012, the Minister of Finance announced that a further $10 billion of issuance would be temporarily reallocated into 10- and 30-year nominal bonds (split 75/25 per cent) over a two-year period. Details were provided in a market notice accompanying the Quarterly Bond Schedule for the third quarter.[1]

These adjustments are advantageous and prudent because they contribute to a reduction in refinancing risk at a low cost, consistent with the key objectives of the Government’s medium-term debt strategy.

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.. and in 2013-14:

In 2013–14, there was a further transition towards a more even distribution of market debt by remaining term to maturity to help reduce exposure to debt rollover risk. As projected in the Debt Management Strategy for 2013–14, the stock of treasury bills declined mainly as a result of about $42 billion of mortgage-backed securities purchased under the IMPP maturing in the latter half of 2013–14. The increase in the stock of bonds with remaining terms to maturity of 10 years or more reflects the temporary increase in longer-term issuance first announced in Budget 2012 and confirmed again in Budget 2013 (see Chart 2).

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How the mighty have fallen! Sprott is accentuating its survivor bias:

Sprott Inc. has abruptly shuttered one of its hedge funds after it was hammered by the Swiss National Bank’s shocking mid-January decision to drop its currency peg to the euro.

The Sprott Absolute Return Income Fund, launched in Aug. 31, 2010, had $21-million in assets under management and a stated investment objective to “maximize absolute total returns on investments with low volatility” primarily by investing in fixed income securities, currencies and derivatives. It had just enjoyed a solid 2014, generating an 11.6-per-cent return – well in excess of the main hedge fund indexes – when disaster struck on Jan. 15.
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Its managers had staked 10 per cent of the fund’s assets selling a Euro-Swiss franc put, an option that would generate value for the fund as long as the Swiss central bank held to the currency peg.
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Sprott closed out the position at a huge loss: by the end of January, the fund’s assets under management had fallen by 17.8 per cent over the month, almost entirely due to the euro-Swiss franc put bet gone bad. By contrast, the index which tracks similar hedge funds, the HFRX Absolute Return Index, posted a 0.6 per cent gain.

Another media favourite is beating his breast and flaunting crocodile tears:

Famed investor Jeremy Grantham is still kicking himself for missing out on one of the more lucrative trading opportunities in recent years – buying put options on oil in 2014.

The sharp decline in crude prices was both inevitable and predictable, because global demand was not growing fast enough to absorb the increased supply coming from U.S. frackers, Mr. Grantham writes in his latest quarterly letter to institutional clients
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He exclaims: “How on Earth did I miss this!” Psychologists might label this a classic case of hindsight bias – the tendency to regard market-shifting developments as entirely predictable.

If you can’t actually foresee anything, the next best thing is to tell your clients that to a person of your calibre it should have been obvious. But I’ve had a look at Grantham’s firm’s performance – well, he’s better than the average stockbroker, anyway. No more than that.

Longevity risk is getting more important all the time:

AT&T Inc. last month absorbed a $7.9 billion non-cash charge from rising pension costs, including retirees’ longer lifespans. At Northrop Grumman Corp., updated mortality estimates boosted its pension obligations by $1.8 billion to $30.5 billion, while shareholders in International Business Machines Corp. saw their equity shrink by around $6 billion after the company recalculated its pension bill, in part because of the mortality changes.
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In September, Motorola Solutions Inc. cut its pension obligations by $4.2 billion by transferring responsibility for 30,000 retirees to Prudential Financial Inc. and offering others lump sum payments. Now, if Motorola retirees live longer, Prudential will be on the hook, not their former employer.

Dozens of additional deals are likely this year. In a MetLife Inc. survey of 228 pension plans, 29 percent said they are considering similar transactions over the next two years.

Demand for such pension risk transfer deals eventually will eclipse the insurance industry’s capacity and provide an opening for investment banks to sell securities known as “death derivatives,” some experts say.
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The trigger for corporate pension plans to update their lifespan assumptions was the October release of new mortality tables from the Society of Actuaries in Schaumburg, Illinois. Starting in 2009, society researchers pored over private pension plan data on 220,000 deaths and 10.5 million life-years, said Dale Hall, the society’s managing director for research.

The new estimates, the first update since 2000, were designed to provide more realistic guidance for plan sponsors who have generally done a poor job of keeping pace with the steady improvement in life expectancy in recent decades.

A 65-year-old male now can expect to live 21.6 additional years, two years longer than in the old tables.

Publication of the new tables — a standard reference for plan sponsors — began having a financial impact in fourth-quarter earnings statements.

That’s a double whammy for some:

U.S. public pensions reported median returns of 6.8 percent last year, the sixth year in a row of gains after the financial crisis, according to Wilshire Associates.

The gains, though, are less than the annual investment returns of 7.5 percent to 8 percent that many state and local governments count on to pay benefits for teachers, police and other employees. In the 10 years through Dec. 31, public pensions had a median return of 6.6 percent.
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Assets of the 100 largest U.S. public pension funds rose to $3.31 trillion in the third quarter of 2014 from $3.06 trillion in the same period of 2013, according to the U.S. Census Bureau. The average funding of state and local pensions has deteriorated even though investment returns have improved, partly because of inadequate contributions by governments, according to a report last year from Moody’s Investors Service on the 25 largest public plans. Unfunded liabilities tripled to almost $2 trillion from 2004 through 2013.

Nationwide, state and local pensions had a median allocation of 45.4 percent in U.S. stocks and 13 percent in foreign stocks, according to Wilshire’s Trust Universe Comparison Service.

Greece is planning to borrow now, default later:

Greece will seek about 10 billion euros ($11.3 billion) in short-term financing as it tries to stave off a funding crunch while buying time to push its creditors to ease austerity demands.

Greece’s Finance Minister Yanis Varoufakis will present a proposal at a Wednesday meeting of euro area finance ministers in Brussels that will ask for an 8 billion-euro increase in the stock of Treasury Bills the country is allowed, said a government official who asked not to be named as the negotiations are confidential. It will also seek the disbursement of 1.9 billion euros of profits that euro area central banks made on their Greek bonds holdings.
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Investors are less enthusiastic. Greek government bonds fell for a fourth day on Feb. 9, with yields on three-year notes jumping 308 basis points to 21.08 percent, while bank stocks fell 12.2 percent in the Athens Stock Exchange.

And here’s some more proof that millennials are useless:

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Note that the figures represent the percentage of respondents who have personally observed this behaviour, not the percentage of parents who indulge. Respondents were 725 employers who responded to the Michigan State University’s 2006-2007 recruiting survey.

It was another good day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets winning 22bp and DeemedRetractibles up 10bp. The Performance Highlights table is lengthy again, dominated by winning FixedResets. Volume was low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.33 to be $0.85 rich, while TRP.PR.A, resetting 2019-12-31 at +192, is bid at a very suspicious 19.00 (with an enormous spread) to be $1.23 cheap.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.J, resetting at +281 on 2018-3-19, bid at 25.45 to be $0.27 rich, while MFC.PR.K, resetting at +222 on 2018-9-19, is bid at 23.62 to be $0.50 cheap.

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Here’s another good fit to reasonable numbers (it’s the scale that makes it look so awful!). I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.68 to be $0.45 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.34 and appears to be $0.68 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.00, looks $0.86 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.63, and is $0.96 rich.

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All the break-even rates are scattered around zero – which is at least somewhat more reasonable than being negative!

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Jobs, jobs, jobs!

The U.S. labor market leaped forward in January, capping the greatest three-month jobs gain in 17 years and delivering the biggest wage increase since 2008.

Payrolls advanced by 257,000 last month following increases in December and November that were even bigger than previously reported, figures from the Labor Department showed Friday in Washington. The unemployment rate rose to 5.7 percent from 5.6 percent as more than a million Americans streamed into the labor force seeking work.
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Average hourly earnings jumped 0.5 percent, the most since November 2008, from the prior month. They were up 2.2 percent over the past year, the biggest advance since August.
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A striking aspect of the report was a revision that added 147,000 jobs to the payroll tally for the previous two months, which also incorporated adjustments back to 2010.

Employment in November was revised up to a 423,000 gain, the most since May 2010. Private payrolls, which exclude government agencies, soared 414,000 that month, the biggest advance since September 1997.

Job gains in January were led by retailers, construction firms and health-care companies.

So, previously scheduled deflation has been cancelled:

After the jobs report, traders pulled forward their expectations for when the Fed will raise borrowing costs from near zero, where they’ve been since 2008. Futures contracts show a 27 percent chance of a June rate increase, up from 18 percent on Thursday.

It’s not just the labor market that’s giving ammunition to to the view that higher rates are coming. Oil is also headed for its biggest two-week rally since March 1998, alleviating concerns that the commodities drop will ruin the U.S. outlook.

The bond market is now pricing in annual inflation of 1.49 percent for the next five years, up from 1.07 percent just a month ago, according to break-even rates on Treasury Inflation Protected Securities. That’s a lot closer to the Fed’s 2 percent target.

At the same time, derivatives traders still don’t see the economy strengthening enough to compel the Fed to raise its benchmark rate above 2 percent by the end of 2018. The Fed’s longer-run forecast for rates is about 4 percent.

Canada was not left out – McJobs, McJobs, McJobs!

The Canadian economy created a greater-than-expected 35,400 jobs last month, fuelled by growth in part-time positions, the self employed and Alberta’s non-energy sector.

The country’s unemployment rate fell to 6.6 per cent in January from 6.7 per cent a month earlier, Statistics Canada said Friday.

The gains topped forecasts and show some resilience in the face of lower oil prices and weakening business investment. But some of the details were weaker, showing part-time work and self employment led last month’s gains while the country’s participation rate remains at its lowest level since 2000.
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In the last year, full-time employment has risen 0.8 per cent and part-time climbed 0.6 per cent. The total number of hours worked is slightly higher, up 0.3 per cent.

The numbers come after Statscan recently revised its estimates for job growth in 2014. Employment gains were the slowest since 2009 last year, at 121,000, a third lower than the originally estimated increase of 186,000.

Canada’s participation rate was unchanged at 65.7 per cent last month.

So, given that future Canadian jobs will depend on demand for domestic staff in the States, the dollar fell:

The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, declined 0.8 percent to C$1.2529 per U.S. dollar at 2:52 p.m. in Toronto. One loonie buys 79.82 U.S. cents.
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Canada’s currency depreciated 1.8 percent on Jan. 21 after the central bank trimmed its main rate to 0.75 percent from 1 percent. On Jan. 30 it touched C$1.2799 per U.S. dollar, the lowest level in nearly six years, part of the currency’s worst monthly start to a year in Bloomberg records going back to 1971.

Bank of Canada policy makers next meet March 4, with swaps traders seeing 60 percent chance they will cut the rate to 0.5 percent, according to Bloomberg calculations based on trading in overnight index swaps. Yesterday, the odds were 64 percent.

But we’re doing better than Greece!

Standard & Poor’s cut Greece’s long-term sovereign credit rating to B– from B on Friday, warning that liquidity restraints on Greek banks would limit the time the new government has to clinch a deal with its creditors.
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“Liquidity constraints have narrowed the time frame during which Greece’s new government can reach an agreement with its official creditors.”

The rating agency said both Greece’s long and short-term ratings remained on creditwatch negative, meaning they could be lowered again, and warned that drawn out talks could produce a worsening economic situation in the country.

“A prolongation of talks with official creditors could also lead to … deposit withdrawals and, in a worst-case scenario, the imposition of capital controls and a loss of access to lender-of-last-resort financing, potentially resulting in Greece’s exclusion from the Economic and Monetary Union.”

I couldn’t find a news story on it – stories on Canada bonds are rare – but yields popped today CBID:

2 Year 0.49%
5 Year 0.78%
10 Year 1.45%
30 Year 2.03%

Which can be compared to the BoC’s numbers as of yesterday:

2 Year . 0.43%
5 Year 0.68%
10 Year 1.35%
30 Year 1.94%-ish

The Canadian preferred share market did very well again today, with PerpetualDiscounts and DeemedRetractibles both gaining 4bp and FixedResets up 65bp. The Performance Highlights table is suitably lengthy, suitably dominated by winning FixedResets. Volume was slightly below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.32 to be $0.75 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is bid at 16.90 to be $0.57 cheap.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.20 to be $0.41 rich, while MFC.PR.H, resetting at +313 on 2017-3-19, is bid at 25.80 to be $0.49 cheap.

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Here’s another good fit to reasonable numbers (it’s the scale that makes it look so awful!). I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.63 to be $0.45 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.25 and appears to be $0.57 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.00, looks $0.87 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.73 after poor performance on the day, and is $1.11 rich.

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All the break-even rates are scattered around zero – which is at least somewhat more reasonable than being negative!

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Despite the best efforts of the Europeans to prohibit criticism, DBRS placed Greece on Review-Negative:

DBRS, Inc. has today placed the Hellenic Republic’s long-term foreign and local currency issuer ratings of B and short-term foreign and local currency issuer ratings of R-4 Under Review with Negative Implications.

As defined in EU Regulation 462/2009, amending Regulation 1060/2009 on credit rating agencies, DBRS’s ratings on Greece are subject to certain publication restrictions, as set out in Article 8a of the Regulation, including publication in accordance with a pre-established calendar (see “2015 Planned Publication Calendar for EU Sovereign Rating Reports,” published 19 December 2014). Under Article 8a, deviation of the publication of sovereign ratings from the calendar must be accompanied by a detailed explanation of the reasons for the deviation. While the next scheduled publication date for our ratings on Greece is 12 June 2015, the deviation has been caused by DBRS’s elevated concern over the potential for a deterioration in Greece’s creditworthiness as a result of actions of the new Greek government following the general elections on 25 January 2015, and subsequent developments. Reviews are typically concluded within three months.

With respect to Greece:

If a bridging program can be agreed to at the Eurogroup meeting, there will then be some months of difficult negotiation ahead for Greece and its lenders. With Varoufakis today saying that he did not even reach an agreement to disagree with Schäuble, all parties still have a long way to go to reach the necessary common ground for a sustainable agreement.

Absent that agreement, Greek banks can continue to rely on ELA funding for the moment. (See an explainer here for how ELA works)

If there is a complete breakdown in negotiations, however, it is likely that the ECB will then take the view that the Greek banks will have become insolvent at that point, due to their holdings of Greek debt.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets winning 22bp and DeemedRetractibles up 13bp. Despite the relatively calm index numbers, the Performance Highlights table is quite lengthy, dominated by winning FixedResets. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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The respite from bad behaviour for the TRP FixedResets is over; TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.30 to be $0.85 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is bid at 16.70 to be $0.48 cheap.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.50 to be $0.44 rich, while MFC.PR.H, resetting at +313 on 2017-3-19, is bid at 25.71 to be $0.45 cheap.

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Here’s another good fit to reasonable numbers. I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is now BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.49 to be $0.47 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.20 and appears to be $0.66 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.90, looks $1.03 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 24.20, and is $1.22 rich.

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All the break-even rates are scattered around zero – which is at least somewhat more reasonable than being negative!

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

The EU is tightening the screws on Greece:

The European Central Bank heaped pressure on Greece’s new government by restricting access to its direct liquidity lines, citing concerns about the country’s commitment to existing bailout pledges.

The decision marks an escalating standoff between Greek politicians and other officials in the euro area. It came hours after new Greek Finance Minister Yanis Varoufakis met ECB President Mario Draghi to garner support for his government’s plans to tear up its 240 billion-euro ($272 billion) rescue package and renegotiate the nation’s debt.

“The ECB today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic,” the Frankfurt-based central bank said in an e-mailed statement on Wednesday. “The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing Eurosystem rules.”

Greek lenders, who since 2010 had been able to access funds from the ECB against junk-rated collateral, must now apply for funding from their national central bank at higher rates. While a similar shut-off occurred briefly in 2012, the government and its creditors are this time at odds on how to proceed and the current move risks precipitating a Greek exit from the euro.

It was a rip-roaring day for the Canadian preferred share market, with PerpetualDiscounts winning 62bp, FixedResets up 57bp and DeemedRetractibles gaining 13bp. The Performance Highlights table is, well, about what you’d expect, heavily dominated by winning FixedResets. Volume was very high.

[Added 2015-2-5]: PerpetualDiscounts now yield 4.94%, equivalent to 6.42% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.6% (!) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 280bp, a significant widening from the 260bp reported January 28.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

Still a very good fit for the TRP FixedResets; the maximum error is for TRP.PR.E, which resets 2019-10-30 at +235, bid at 23.92 to be $0.43 rich.

Click for Big

Another excellent fit, but this time the numbers are more perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.34 to be $0.66 rich, while MFC.PR.H, resetting at +313 on 2017-3-19, is bid at 25.66 to be $0.61 cheap.

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Here’s another good fit to reasonable numbers. I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is now BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 17.87 to be $0.36 cheap. BAM.PF.B, resetting at +263bp 2019-3-31 is bid at 24.46 and appears to be $0.55 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.00, looks $0.73 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.70, and is $0.92 rich.

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Three Investment Grade FixedReset/FloatingReset pair are now showing positive break-even average three month bill rates until interconversion!

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Stop me if you’ve heard this one before:

Denmark’s central bank sold a record amount of kroner last month to weaken the currency and preserve its peg to the euro as speculators test policy makers’ resolve.

The bank, which cut rates three times in January to fight back capital flows, has delivered an unprecedented package of measures to defend its currency regime. It sold 106.3 billion kroner ($16.3 billion) last month, bringing foreign reserves to a record 564.1 billion kroner. Its benchmark deposit rate is now minus 0.5 percent.
…
The krone amount sold by the central bank in January was almost three times the previous record of 38.5 billion kroner, set in May 2010. Denmark’s foreign currency reserves now equal about 29 percent of the country’s gross domestic product, Nykredit Markets said in a note. Switzerland’s foreign reserves were 80 percent of GDP before the country dropped its cap Jan. 15, according to Nykredit.
…
Record-low rates have already pushed a number of mortgage banks to say they’re looking into issuing 30-year fixed-rated loans at 1.5 percent, the lowest ever for that maturity.

Yields on Danish government bonds all traded at record lows this week. Danske Bank estimates the yield on the 10-year benchmark bond may even drop below zero. It traded at about 0.2 percent today. Danish five-year yields have been negative for much of this year while two-year yields dropped below zero in December.

Short the Euro to buy oil?

Oil prices rose on Tuesday, headed for the biggest four-day advance since January 2009 as a tumbling dollar sent commodities rallying.

Despite signs that U.S. crude supplies had registered another heavy build last week, investors were growing more confident that oil prices have hit a bottom after a seven-month rout. Traders said oil bulls were encouraged by BP’s plan to cut capital expenditure by 13 per cent to $20-billion (U.S.) in 2015, which came after reductions announced by other major energy companies.
…
On Tuesday, the dollar dropped more than 1 per cent against a basket of currencies, heading for its biggest daily drop since July 2013 and boosting the value of commodities priced in the currency.

But cutting rates is becoming alarmingly popular:

As central banks outside of the United States race to the bottom on interest rates, the flight to the U.S. dollar on the promise of rising rates by the Federal Reserve is creating a new risk: That the healthy American economy could catch cold from the global rate-cutting frenzy.

Australia added to the fast-growing list of countries easing their monetary policy, cutting its key rate to 2.25 per cent from 2.5 per cent Tuesday.
…
As the rate-cutting snowballed in recent weeks, market watchers say “competitive devaluation” is playing a growing role. Countries appear to be lowering rates at least in part to discourage investors from buying their currency, as they jockey for position with trading partners doing the same.

Rob Carrick of the Globe writes a piece titled Value the dividend in your beaten down preferred shares:

One of the more shocking investing stories of this year has to be the carnage in the preferred share market.

Some preferreds were hammered during that brief hiccup in the summer of 2013 when interest rates appeared to be set for a sustained rise, and others have been brutal in early 2015, as interest rates slide. Investors who own preferred shares have to be reeling at this point. Will these popular bond alternatives ever find favour again?
…
Rate reset preferreds are designed to protect investors against rising interest rates; in a falling rate environment, they’re dead weight in the eyes of some investors.

In fact, it’s rate resets that are producing particularly bad results for investors right now. The S&P/TSX preferred share index was down 4.9 per cent for the year through Feb. 3, while the BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR-T), an ETF that holds rate reset preferreds, fell 7.6 per cent.
…
It’s worth noting that ZPR’s yield has reached 4.7 per cent. In a non-registered account, that yield looks even better on an after-tax basis thanks to the dividend tax credit.

I am appalled at that last paragraph. The CURRENT YIELD on ZPR may well be 4.7%, but since when is Current Yield worth any consideration at all? Particulary in an article that emphasizes the influence of a “falling rate environment”?

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts down 10bp, FixedResets up 35bp and DeemedRetractibles gaining 4bp. The Performance Highlights table is its usual incredible length, and still with a high proportion of FixedResets on the bad side … but at least this time there is a large contingent of FixedReset winners! Volume was very high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

Still a very good fit for the TRP FixedResets; the maximum error is for TRP.PR.B, which resets 2015-6-30 at +128, bid at 14.71 to be $0.27 cheap.

Click for Big

Another excellent fit, but this time the numbers are more perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.85 to be $0.57 rich, while MFC.PR.F, resetting at +141 on 2016-6-19, and MFC.PR.H, resetting at +313 on 2017-3-19, are bid at 19.05 and 25.86 respectively to be $0.28 cheap.

Click for Big

Here’s another good fit to reasonable numbers. I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is now BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 17.96 to be $0.32 cheap. BAM.PF.B, resetting at +263bp 2019-3-31 is bid at 24.30 and appears to be $0.43 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.70, looks $0.80 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.15, and i $0.74 rich.

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What can I say? Every single Investment Grade FixedReset/FloatingReset pair is now showing a negative break-even average three month bill rate until interconversion.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

The prospects for global deflation are attracting a lot of ink:

European and Chinese factories slashed prices in January as production flat-lined, heightening global deflation risks that point to another wave of central bank stimulus in the coming year.

While the pulse of activity was livelier in other parts of Asia – Japan, India and South Korea – they too shared a common condition of slowing inflation.
…
Markit’s final PMI reading for the euro zone, published on Monday, was 51.0, in line with the flash estimate. Although at a six-month high, it was only just above the 50 mark that separates growth from contraction. In December the index came in at 50.6.

Worryingly for policymakers, firms cut prices in January at the steepest rate since mid-2013. Data on Friday showed annual inflation was a record-equalling low of –0.6 per cent in January across the 19 nations using the euro.

In Britain, manufacturing grew slightly faster but factories cut prices at the fastest pace since 2009.

There’s a new estimate for Treasury liquidity:

For decades, the $12.5 trillion market for U.S. government debt was renowned for its “depth,” Wall Street’s way of talking about a market’s ability to handle large trades without big moves in prices. But lately, that resiliency has practically vanished — and that’s a big worry.

Less depth has meant greater volatility. So Treasuries — the world’s haven asset during turmoil — may be prone to more disruptions, particularly as the Federal Reserve prepares to raise interest rates. And if investors begin to doubt whether they’ll still be able to buy and sell on a moment’s notice, that has the potential to elevate the U.S.’s cost to borrow.

How much depth has the market lost? A year ago, you could trade about $280 million of Treasuries without causing prices to move, according to JPMorgan Chase & Co. Now, it’s $80 million.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 54bp, FixedResets gaining 9bp and DeemedRetractibles off 6bp. The relatively mild index numbers masked a lot of individual changes, as the Performance Highlights table is its usual lengthy self. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

The TRP FixedResets are very well behaved, with an excellent fit to reasonable numbers!

Click for Big

Another excellent fit, but this time the numbers are more perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

Here’s another good fit to reasonable numbers. I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is now BAM.PF.E, resetting at +255bp on 2020-3-31 (more than five years hence!), bid at 22.82 to be $0.59 cheap. BAM.PF.B, resetting at +263bp 2019-3-31 is bid at 24.25 and appears to be $0.43 rich.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.07, looks $0.64 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.51, and is still $0.82.

Click for Big

What can I say? Every Investment Grade FixedReset/FloatingReset pair but one (TRP.PR.A / TRP.PR.F) is now showing a negative break-even average three month bill rate until interconversion.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?