PrefBlog

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.

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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:

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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.

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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 17.96 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.

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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 17.07, 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.

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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?

You know what Russia needs? Russia needs another James Coyne, that’s what Russia needs:

The message some Russia watchers are getting from Friday’s surprise interest-rate cut is this: Start listening more to what President Vladimir Putin’s aides say about monetary policy and less to central bankers.

Here’s the key evidence. In comments made just nine days ago, the country’s central bank chief indicated she saw no chance of a rate cut any time soon after inflation soared to a five-year high. A week earlier, though, one of Putin’s most vocal economic aides urged the exact opposite, saying a reduction was needed to bolster the ailing economy.

So when the Bank of Russia shocked traders and analysts alike by announcing it was lowering the benchmark rate from an 11-year high, the words spoken by that aide, Andrey Belousov, left many to speculate that the Kremlin is exerting more pressure on central bank policy makers. The rate cut — to 15 percent from 17 percent — triggered a wave of ruble selling that drove the currency down as much as 4 percent, adding to a year-long selloff that’s left it down 50 percent percent [sic] against the dollar.

How ’bout that loonie performance, eh?

Canada’s dollar fell for a 10th week, the longest losing streak since 2000, after a report showing the economy unexpectedly shrank bolstered speculation the central bank will cut interest rates again.

The currency reached the weakest level in almost six years as data showed gross domestic product contracted 0.2 percent in November. Government bonds climbed, pushing yields to record lows. The Bank of Canada reduced borrowing costs last week for the first time since 2009, saying the surprise move was meant to provide insurance as the slump in crude oil, the nation’s biggest export, weighed on the economy.
…
The loonie, as Canada’s dollar is known for the image of the aquatic bird on the C$1 coin, depreciated 0.9 percent to C$1.2732 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.2799, the weakest since March 2009, and sank 2.5 percent on the week. One loonie buys 78.54 U.S. cents.

The Canadian currency dropped 8.7 percent since Dec. 31, the fifth consecutive monthly loss and the biggest since October 2008.
…
The yield on Canada’s benchmark 10-year bond sank to as low as 1.246 percent, while two-year yields touched 0.391 percent and 30-year yields reached 1.830 percent, all records.

The nation’s largest trade partner expanded less than forecast in the fourth quarter. U.S. GDP grew at an annualized 2.6 percent, the Commerce Department in Washington reported, fanning concern the global slowdown is becoming a drag on the world’s biggest economy. Economists surveyed by Bloomberg had forecast a 3 percent advance after a 5 percent gain from July through September.

The median forecast in a Bloomberg survey for Canada’s monthly GDP was for little change after 0.3 percent growth in October. Instead, it shrank the most in 11 months. The economy grew 1.9 percent in November from a year earlier, versus a forecast of 2.1 percent and an advance of 2.3 percent in October.

Long Canadas at 1.83%. If I had a fifteen year old hat, I’d have to eat it. But honestly, who owns Canadas any more? That’s, like, so 20th century:

With years of income and investing ahead, the Canada Pension Plan Investment Board can afford to own more risky assets such as real estate and stocks, according to Chief Executive Officer Mark Wiseman. Pension contributions will continue to grow through 2022, allowing the fund to reduce its 28 percent holdings in fixed income, he said.

“We’re an 18-year-old investor,” Wiseman, who’s 44, said during an interview Tuesday at Bloomberg’s Toronto office. “The portfolio can afford to have less bonds than it has today.”
…
The 28 percent allocation to bonds and money market securities the CPPIB lists on its website as of March of last year is already below the 29 percent average for private pension plans in Canada, according to data from Towers Watson. In 2000, the Canada Pension Plan was 95 percent invested in fixed income, according to its latest annual report.

Caisse CEO Michael Sabia, who oversees the management of pensions in Quebec, said in November that it’s looking to cut its bond holdings to 30 percent from 35 percent. Ontario Teachers’ Pension Plan, the country’s third biggest pension plan, has a 41 percent allocation to fixed income.

Quick! Enact some more regulations to force the banks to buy more! Not that there’s any shortage of buyers now, but there will be, once the tide turns. I’m just waiting for the first big wave of private equity / infrastructure valuation scandals, which I see as being inevitable. Figures can lie and liars can figure. Deal with it.

The politicians will be telling us that economic decline is all oil’s fault, but what are the numbers?

Canada’s economy shrank in November on manufacturing and oil production, pushing the dollar to the weakest in almost six years on speculation the central bank will make another rate cut following last week’s surprise move.

Gross domestic product shrank by 0.2 percent, the most in 11 months, to an annualized C$1.65 trillion ($1.30 trillion), Statistics Canada said Friday in Ottawa. The median forecast in a Bloomberg economist survey was for output to be little changed. Manufacturing declined by 1.9 percent, the most since January 2009, mining and quarrying fell by 2.5 percent, and oil and gas extraction by 0.7 percent.

The IMF recommendations won’t be popular in the halls of power:

Canada’s policy makers should maintain accommodative measures to ensure the economy isn’t sidetracked by the oil shock, the IMF said today in a report.

The Bank of Canada’s decision this month to counter falling oil prices with a rate cut was appropriate, while the federal should consider putting future fiscal tightening on pause once it balances its budget this year to promote growth, the International Monetary Fund said.

Trouble is, the pseudo-conservatives first goosed the economy when it didn’t need it, eliminating the $10-billion surplus. Then there was nothing in reserve when a recession hit. Holy smokes! A recession! Who would have thought they were still possible? And now politics will lead to a tightening – or at least, non-relaxation – in fiscal policy.

I used to be a Conservative. But then my party was taken over by ultra-partisan apparatchiks and sloganeering charlatans.

All over Canada, preferred share investors are telling their buddies about their investments!

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About the best thing one can say about the Canadian preferred share market today is that it wasn’t as bad as yesterday! PerpetualDiscounts were off 2bp, FixedResets were down 149bp (bringing their two day loss to a staggering 3.23%) and DeemedRetractibles gained 4bp. ENB and BAM FixedResets are prominent at the extreme bad end of the very length Performance Highlights table – but not much escaped! Volume was 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

It’s surpising to see that after such a wild day, there is such an excellent fit to theory for the TRP FixedResets!

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MFC.PR.F is now back on the line defined by its peers; additionally, as a result of today’s big moves in BAM FixedReset prices, Implied Volatility has markedely increased from 20% yesterday.

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).

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A very strange distinction from the MFC series, because the Implied Volatility for the BAM FixedResets has declined markedly, from 19% yesterday. I would like to think that this means the BAM Implied Volatility will permanently settle to single digits – where I think it should be for true perpetual FixedResets – while MFC Implied Volatility will permanently increase to 40%, where I think it should be for issues with a DeemedRetraction … but I’ll see if this lasts before I start thinking that!

The cheapest issue relative to its peers is now BAM.PF.G, resetting at +284bp on 2020-6-30 (more than five years hence!), bid at 24.10 to be $0.57 cheap. BAM.PF.B, resetting at +263bp 2019-3-31 is bid at 24.30 and appears to be $0.58 rich. With all the fuss over Issue Reset Spreads, it is interesting to see that the relationship between bid and spread is inverted for these two issues.

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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 17.05, looks $0.66 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.50, is still $0.80 expensive after losing $1.71 on the day!

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What can I say? Every Investment Grade FixedReset/FloatingReset pair but one (RY.PR.I / RY.PR.K) is now showing a negative break-even average three month bill rate until interconversion … and the exception is showing only a 0.02% breakeven average rate! Meanwhile, the DC.PR.B / DC.PR.D pair (not shown) clocks in at -1.22%, while the other two junk pairs are strongly positive. You guys interpret this, it’s beyond me; but it does show, overall, the market’s extreme distaste for Floating Rate product.

On the other hand, this distaste 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?