Archive for February, 2011

RON.PR.A Achieves Premium on Good Volume

Wednesday, February 23rd, 2011

Rona Inc. has announced:

that it has closed its previously announced bought deal public offering of Cumulative 5 Year Rate Reset Series 6 Class A Preferred Shares (the “Series 6 Class A Preferred Shares”) at a price of $25.00 per Series 6 Class A Preferred Share purchased by a syndicate of underwriters led by National Bank Financial Inc. and BMO Capital Markets, acting as joint bookrunners. The offering results in a total of 6,000,000 Series 6 Class A Preferred Shares being issued today by RONA for gross proceeds of $150,000,000. The underwriters have an over-allotment option to purchase up to an additional 900,000 Series 6 Class A Preferred Shares at a price of $25.00 per Series 6 Class A Preferred Share, exercisable for a period of 30 days from closing on the same terms and conditions as the offering. If the over-allotment option is exercised in full, the total gross proceeds to RONA will be $172,500,000.

RON.PR.A is a FixedReset, 5.25%+265, announced February 1. The issue traded 454,407 shares today in a range of 25.10-35 before closing at 25.13-15, 2×3.

Vital Statistics are:

RON.PR.A FixedReset YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 5.17 %

RON.PR.A will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

GMP.PR.B Slides on Sub-par Volume

Wednesday, February 23rd, 2011

GMP Capital has announced:

the completion of its offering of 4,000,000 Cumulative 5-Year Rate Reset Preferred Shares, Series B ( the “Series B Shares”) of GMP at a purchase price of $25.00 per Series B Share, for aggregate gross proceeds of $100,000,000. The Series B Shares are expected to commence trading on the Toronto Stock Exchange on February 22, 2011 under the trading symbol “GMP.PR.B”.

The offering was underwritten on a bought deal basis by a syndicate co-led by National Bank Financial Inc., GMP Securities L.P. and Scotia Capital Inc., that included BMO Nesbitt Burns Inc., CIBC World Markets Inc., RBC Dominion Securities Inc., Canaccord Genuity Corp., Macquarie Capital Markets Canada Ltd., Desjardins Securities Inc., Dundee Securities Ltd., Haywood Securities Inc., HSBC Securities (Canada) Inc., Raymond James Ltd. and Wellington West Capital Markets Inc.

GMP has granted to the underwriters an over-allotment option, exercisable for a period of 30 days following closing, to purchase up to an additional 600,000 Series B Shares which, if exercised in full, would increase the gross proceeds to $115,000,000.

GMP intends to use the net proceeds from the offering for general corporate purposes, which will include the redemption of the senior unsecured notes issued on November 1, 2006 by Griffiths McBurney L.P., an indirect wholly-owned subsidiary of GMP, in the aggregate principal amount of $60 million, such redemption to occur in accordance with the note indenture governing the notes, and may include acquisitions and investments with a view to growing or expanding GMP’s businesses.

GMP.PR.B is a FixedReset 5.50%+289 announced February 1. The issue traded 183,700 shares today in a range of 24.63-90 before closing at 24.68-69, 4×20.

Vital Statistics are:

GMP.PR.B FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-22
Maturity Price : 24.63
Evaluated at bid price : 24.68
Bid-YTW : 5.63 %

GMP.PR.B will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Update, 2011-3-1: Despite a quote of 24.75-87 and the fact that the high since issue date is 24.90, they were able to announce full take-up of the greenshoe:

GMP Capital Inc. (“GMP”) (TSX: GMP) announced today that it has closed the over-allotment option granted to the underwriters in connection with GMP’s bought deal public offering of Cumulative 5-Year Rate Reset Preferred Shares, Series B (the “Series B Shares”), which closed on February 22, 2011. As a result of the exercise of the over-allotment option, GMP sold an additional 600,000 Series B Shares at a price of $25.00 per share for additional gross proceeds of $15,000,000. In total, GMP has issued 4,600,000 Series B Shares for aggregate gross proceeds of $115,000,000. The Series B Shares trade on the Toronto Stock Exchange under the trading symbol “GMP.PR.B”.

GMP intends to use the net proceeds from the offering for general corporate purposes, which will include the redemption of the senior unsecured notes issued on November 1, 2006 by Griffiths McBurney L.P., an indirect wholly-owned subsidiary of GMP, in the aggregate principal amount of $60 million, such redemption to occur in accordance with the note indenture governing the notes, and may include acquisitions and investments with a view to growing or expanding GMP’s businesses.

New Issue: BA (sub) FixedReset 4.85%+209

Tuesday, February 22nd, 2011

Bell Aliant has announced:

that its subsidiary Bell Aliant Preferred Equity Inc. (the “Company”) will be issuing 10,000,000 Cumulative Rate Reset Preferred Shares, Series A (the “Series A Preferred Shares”), at a price of $25.00 per Series A Preferred Share, for aggregate gross proceeds of $250 million on a bought deal basis to a syndicate of underwriters led by BMO Capital Markets and Scotia Capital Inc.

The underwriters have been granted an over-allotment option to purchase an additional 1,500,000 Series A Preferred Shares at the offering price. Should the over-allotment option be fully exercised, the total gross proceeds of the Series A Preferred Share offering will be $287.5 million.

The Series A Preferred Shares will pay cumulative dividends of $1.2125 per share per annum, yielding 4.85%, payable quarterly (with the first quarterly dividend to be paid June 30, 2011), for the initial five year period ending March 31, 2016. The dividend rate will be reset on March 31, 2016 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 2.09%. The Series A Preferred Shares will be redeemable by the issuer on or after March 31, 2016, in accordance with their terms.

Holders of the Series A Preferred Shares will have the right, at their option, to convert their shares into Cumulative Floating Rate Preferred Shares, Series B, (the “Series B Preferred Shares”) subject to certain conditions, on March 31, 2016 and on March 31 every five years thereafter. Holders of the Series B Preferred Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.09%.

The Series A Preferred Shares will be offered for sale to the public in each of the provinces and territories of Canada pursuant to a short form prospectus to be filed with Canadian securities regulatory authorities in all Canadian provinces and territories. The offering is scheduled to close on or about March 9, 2011, subject to certain conditions, including obtaining all necessary regulatory approvals.

The net proceeds of this offering will be used to fund a voluntary $200 million contribution to Bell Aliant’s pension plans and for general corporate purposes, including the repayment of indebtedness under Bell Aliant’s commercial paper program and the financing of fibre-to-the-home (FTTH) and other investments.

DBRS comments:

DBRS has today assigned a rating of Pfd-3 (high), with a Stable trend, to Bell Aliant Preferred Equity Inc.’s preferred share issuance totalling $250 million (the Preferred Shares) with a $37.5 million over-allotment option. The Preferred Shares are cumulative five-year rate reset preferred shares with an initial dividend rate of 4.85%.

This share issuance was initiated by Bell Aliant Preferred Equity Inc. today for settlement on or around March 9, 2011.

The preferred shares will be fully and unconditionally guaranteed by Bell Aliant Regional Communications Inc. (Bell Aliant GP), the general partner and guarantor of Bell Aliant Regional Communications, Limited Partnership (Bell Aliant LP; rated BBB (high)/R-1 (low) by DBRS) and its debt obligations.

While normally this type of corporate structure would raise the issue of structural subordination relative to Bell Aliant LP, DBRS believes that provisions undertaken between the various entities – as part of inter-company loans and guarantees – mitigate this concern while appropriately ranking the preferred shares behind the senior indebtedness of Bell Aliant LP and Bell Aliant GP. (Bell Aliant GP has no external debt outstanding.)

DBRS expects Bell Aliant Preferred Equity Inc. to indirectly lend the proceeds to Bell Aliant LP. With the proceeds, Bell Aliant LP intends to make a lump-sum voluntary payment to certain pension plans and use the remainder for general corporate purposes, including the repayment of indebtedness and the financing of investments and acquisitions.

Update 2011-03-09: Closing delayed until 3/15.

What Happened to the BNS.PR.Z Regulatory Event?

Monday, February 21st, 2011

I have been under the impression that BNS.PR.Z has a Regulatory Event clause and made mention of this when the issue was posted for trading. This assertion was based on the December 2 Material Documents:

Lock-Up Agreeement (Material Document, English, Dec. 2, 2010, 310K)

Upon the occurrence of a Regulatory Event, BNS may, at its option, with the prior approval of the Superintendent, on not more than 60 nor less than 30 days’ notice, redeem all or any number of the then outstanding Floating Rate Preferred Shares upon payment in cash for each Floating Rate Preferred Share so redeemed of an amount equal to $25.00 per Floating Rate Preferred Share together with all declared and unpaid dividends to the date fixed for redemption.

“Regulatory Event” means the receipt by BNS of a notice or advice from the Superintendent that all or any portion of the Floating Rate Preferred Shares no longer qualify as Tier 1 capital under the Canadian bank capital guidelines issued by the Superintendent or other governmental authority in Canada concerning the maintenance of adequate capital reserves by Canadian chartered banks, including BNS, from time to time.

Support Agreement (Material Document – English, December 2, 2010, 374K)

Upon the occurrence of a Regulatory Event, the Offeror may, at its option, with the prior approval of the Superintendent, on not more than 60 nor less than 30 days’ notice, redeem all or any number of the then outstanding Offeror Reset Preferred Shares upon payment in cash for each Offeror Reset Preferred Share so redeemed of an amount equal to $25.00 per Offeror Reset Preferred Share together with all declared and unpaid dividends to the date fixed for redemption.

“Regulatory Event” means the receipt by the Offeror of a notice or advice from the Superintendent that all or any portion of the Offeror Reset Preferred Shares no longer qualify as Tier 1 capital under the Canadian bank capital guidelines issued by the Superintendent or other governmental authority in Canada concerning the maintenance of adequate capital reserves by Canadian chartered banks, including the Offeror, from time to time.

However, when looking for definitive, prospectus-like, language to quote to exemplify a Regulatory Event I found:

Security Holders Documents – English, February 1, 2011:

Nothing. There is nothing I can see in the Security Holders’ Documents that would indicate that the bank has the option to call at par given the occurance of a Regulatory Event.

There is also nothing in the Offer to Purchase … DundeeWealth dated 2010-12-15, which is linked on the Scotia preferred share page as the “Prosp.”.

There is also nothing in the similarly linked Share Terms, which I believe is idential to the the “Security Holders Documents” on SEDAR.

So what happened?

February 18, 2011

Friday, February 18th, 2011

No commentary today because … er … because … um … because it’s a full moon! That’s it, full moon tonight, therefore no commentary.

A good day on the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets down 1bp, and DeemedRetractibles gaining 4bp. Volatility continued to be very low, with only one entry in the Performance Highlights table; volume subsided to average levels.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0476 % 2,398.5
FixedFloater 4.75 % 3.47 % 16,920 19.10 1 -0.4348 % 3,584.4
Floater 2.50 % 2.26 % 49,519 21.58 4 0.0476 % 2,589.7
OpRet 4.83 % 3.71 % 62,447 2.21 8 -0.0404 % 2,388.9
SplitShare 5.35 % 0.78 % 261,573 0.81 4 0.0606 % 2,468.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0404 % 2,184.5
Perpetual-Premium 5.74 % 5.48 % 124,486 1.07 9 0.0507 % 2,035.8
Perpetual-Discount 5.54 % 5.61 % 130,461 14.42 15 0.1331 % 2,110.6
FixedReset 5.25 % 3.77 % 183,931 3.03 54 -0.0054 % 2,260.7
Deemed-Retractible 5.20 % 5.23 % 392,981 8.26 53 0.0397 % 2,085.5
Performance Highlights
Issue Index Change Notes
BAM.PR.R FixedReset 1.40 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.16
Bid-YTW : 4.60 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.L Deemed-Retractible 42,490 TD crossed 35,000 at 24.01.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.99
Bid-YTW : 5.04 %
RY.PR.B Deemed-Retractible 38,973 TD crossed 25,000 at 24.20.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 5.08 %
HSB.PR.D Deemed-Retractible 24,700 Desjardins crossed 17,000 at 24.05.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.05
Bid-YTW : 5.59 %
TRP.PR.B FixedReset 22,755 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 4.03 %
GWO.PR.L Deemed-Retractible 20,450 RBC crossed 12,000 at 25.07.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.07
Bid-YTW : 5.75 %
RY.PR.A Deemed-Retractible 20,399 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.82
Bid-YTW : 5.04 %
There were 35 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.24 – 23.89
Spot Rate : 0.6500
Average : 0.4791

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-18
Maturity Price : 22.97
Evaluated at bid price : 23.24
Bid-YTW : 2.24 %

FTS.PR.H FixedReset Quote: 25.50 – 25.95
Spot Rate : 0.4500
Average : 0.3315

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 3.73 %

GWO.PR.F Deemed-Retractible Quote: 25.40 – 25.74
Spot Rate : 0.3400
Average : 0.2389

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 5.43 %

BAM.PR.I OpRet Quote: 25.31 – 25.70
Spot Rate : 0.3900
Average : 0.3014

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 5.17 %

PWF.PR.L Perpetual-Discount Quote: 23.31 – 23.54
Spot Rate : 0.2300
Average : 0.1655

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-18
Maturity Price : 23.10
Evaluated at bid price : 23.31
Bid-YTW : 5.51 %

GWO.PR.M Deemed-Retractible Quote: 25.25 – 25.45
Spot Rate : 0.2000
Average : 0.1360

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 5.81 %

February 17, 2011

Thursday, February 17th, 2011

There’s an interesting claim of regime switching in stock-bond correlations:

Based on his analysis of data over the past 20 years, the tipping point is a yield of about 4 per cent.

When the 10-year government bond yield is below that threshold, bond yields and the S&P/TSX composite index tend to move together, with a positive correlation of 0.49, strategist with UBS Securities Canada] Mr. [George] Vasic found. That’s to be expected, because very low bond yields are usually associated with sluggish or recessionary conditions, and when the economy starts to improve, yields and stocks both rise.

However, when bond yields are between 4 per cent and 6 per cent, stocks and bond yields tend to move in opposite directions, with a correlation of negative 0.56. In other words, when yields are already high and climbing, the stock market starts to feel the brunt of rising interest rates. (A correlation of 1 represents a perfect positive relationship, while negative 1 indicates a perfect inverse relationship.)

One thing that is well known is that correlation signs reverse in times of financial stress; it’s unclear whether this is anything new.

Prices slid somewhat in the Canadian preferred share market today, with PerpetualDiscounts down 7bp, FixedResets losing 6bp and DeemedRetractibles off 8bp. Volatility was low, with only one issue in the Performance highlights. Volume was heavy.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.0476 % 2,397.3
FixedFloater 4.73 % 3.44 % 16,753 19.13 1 0.0000 % 3,600.1
Floater 2.50 % 2.26 % 48,511 21.58 4 -0.0476 % 2,588.5
OpRet 4.82 % 3.70 % 60,009 2.22 8 -0.0579 % 2,389.9
SplitShare 5.35 % 0.78 % 270,715 0.81 4 -0.0940 % 2,467.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0579 % 2,185.3
Perpetual-Premium 5.74 % 5.51 % 122,037 1.08 9 0.1214 % 2,034.8
Perpetual-Discount 5.55 % 5.62 % 129,236 14.35 15 -0.0708 % 2,107.8
FixedReset 5.24 % 3.77 % 180,063 3.03 54 -0.0631 % 2,260.8
Deemed-Retractible 5.20 % 5.26 % 396,341 8.26 53 -0.0799 % 2,084.7
Performance Highlights
Issue Index Change Notes
PWF.PR.I Perpetual-Premium 1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-05-30
Maturity Price : 25.25
Evaluated at bid price : 25.45
Bid-YTW : 4.17 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.B Floater 114,005 Desjardins crossed 45,000 at 18.97, then sold 50,000 to CIBC at 18.98.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 18.95
Evaluated at bid price : 18.95
Bid-YTW : 2.79 %
RY.PR.I FixedReset 79,945 TD crossed blocks of 20,000 and 49,700, both at 25.95.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 25.95
Bid-YTW : 3.66 %
BAM.PR.M Perpetual-Discount 69,545 Desjardins crossed blocks of 23,500 and 35,000, both at 21.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 21.26
Evaluated at bid price : 21.26
Bid-YTW : 5.68 %
BNS.PR.M Deemed-Retractible 63,671 TD crossed 25,000 at 24.02; RBC crossed the same number at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.01
Bid-YTW : 5.03 %
SLF.PR.A Deemed-Retractible 56,567 Desjardins crossed 45,000 at 23.75.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.69
Bid-YTW : 5.50 %
RY.PR.F Deemed-Retractible 49,700 TD crossed 39,200 at 23.85.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.82
Bid-YTW : 5.04 %
There were 51 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.H OpRet Quote: 25.27 – 25.90
Spot Rate : 0.6300
Average : 0.4569

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2012-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 5.47 %

ELF.PR.F Deemed-Retractible Quote: 22.45 – 22.92
Spot Rate : 0.4700
Average : 0.3352

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.45
Bid-YTW : 6.74 %

BAM.PR.J OpRet Quote: 26.80 – 27.00
Spot Rate : 0.2000
Average : 0.1327

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 4.36 %

BAM.PR.R FixedReset Quote: 25.80 – 26.14
Spot Rate : 0.3400
Average : 0.2794

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 4.89 %

PWF.PR.M FixedReset Quote: 26.71 – 27.00
Spot Rate : 0.2900
Average : 0.2352

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.71
Bid-YTW : 3.71 %

POW.PR.D Perpetual-Discount Quote: 23.00 – 23.24
Spot Rate : 0.2400
Average : 0.1855

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 22.79
Evaluated at bid price : 23.00
Bid-YTW : 5.49 %

BoC Releases Winter 2010/2011 Review

Thursday, February 17th, 2011

The Bank of Canada has released its Winter 2010/2011 Review with articles:

  • Competition in the Canadian Mortgage Market
  • Adverse Selection and Financial Crises
  • Payment Networks: A Review of Recent Research
  • Conference Summary: Financial Globalization and Financial Instability

The second article, Adverse Selection and Financial Crises by Koralai Kirabaeva has an interesting chart:


Click for big

The market for subprime mortgages was relatively small, comprising only about 25 per cent of the outstanding amount in the US$6 trillion mortgage-backed securities (MBS) market and about 30 per cent of total nonagency MBS issuance in the years before the crisis (Gorton 2008b). Direct losses from household defaults on subprime mortgages are estimated to be about US$500 billion, but the subprime crisis triggered losses in the U.S. stock market that reached US$8 trillion in October 2008 (Brunnermeier 2009).

In explaining the disproportionate effect of the subprime-mortgage crisis on the financial system, one can identify a number of amplification mechanisms that can significantly increase the initial impact of adverse selection: an increase in uncertainty about asset values, a flight to liquidity, and a misassessment of systemic risk. Increasing uncertainty about asset values contributes to the decline in demand for these assets, while a flight to liquidity and an underestimation of systemic risk cause a shortage of liquid assets in the market.

Direct loss estimates during the crisis ranged from $175-billion to $565-billion. It’s a pity Kirabaeva didn’t footnote his $500-billion figure. The Brunnermeier paper confines itself to “several hundred billion dollars”.

And I am still waiting for somebody, anybody, to estimate how much of these losses were borne by the senior (AAA) tranches of securitized subprime, that (although subjected to very major credit rating downgrades) may well have passed through the cataclysm with only minor losses.

The higher preference for liquid assets during a crisis can be viewed as precautionary liquidity hoarding because of a tightening in funding liquidity. A higher preference for liquidity may alleviate the problem of adverse selection, since assets are more likely to be sold because the seller needs to raise liquidity rather than because of an asset’s low quality. Nevertheless, a higher demand for liquid assets also implies a lower demand for illiquid assets. If the demand for illiquid assets is sufficiently low, then the asset’s price will be determined by the liquidity available in the market rather than by the expected return on the asset (Allen and Gale 2004). Hence, an increase in liquidity preference can lead to fire-sale pricing and possibly to a market freeze.

Government intervention during crises may create a moral hazard problem: if market participants anticipate such interventions, then their optimal holdings of risky assets are larger. Government bailouts (debt guarantees) can be inevitable during crises, and as a result, they lead to the inefficient allocation of capital towards risky investments. The pre-emptive policy response is an ex-ante requirement for larger holdings of safe assets (e.g., capital requirements), which offsets systemic externalities and reduces the probability of market breakdowns during crises (Kirabaeva 2010).

I am disappointed to see that there is no discussion of the possibility that a better policy response might be the provision of liquidity at a penalty rate.

Update: The mortgage article made the Financial Post, in a piece by John Greenwood titled Why do mortgage rates rise fast, fall slowly?

BoC on How Trading Works

Thursday, February 17th, 2011

The Bank of Canada has released a working paper by George J. Jiang and Ingrid Lo titled Private Information Flow and Price Discovery in the U.S. Treasury Market:

Existing studies show that U.S. Treasury bond price changes are mainly driven by public information shocks, as manifested in macroeconomic news announcements and events. The literature also shows that heterogeneous private information contributes significantly to price discovery for U.S. Treasury securities. In this paper, we use high frequency transaction data for 2-, 5-, and 10-year Treasury notes and employ a Markov switching model to identify intraday private information flow in the U.S. Treasury market. We show that the probability of private information flow (PPIF) identified in our model effectively captures permanent price effects in U.S. Treasury securities. In addition, our results show that public information shocks and heterogeneous private information are the main factors of bond price discovery on announcement days, whereas private information and liquidity shocks play more important roles in bond price variation on non-announcement days. Most interestingly, our results show that the role of heterogeneous private information is more prominent when public information shocks are either high or low. Furthermore, we show that heterogeneous private information flow is followed by low trading volume, low total market depth and hidden depth. The pattern is more pronounced on non-announcement days.

I have often made the point that the reverence shown by the media for traders is misplaced. They don’t make huge profits by keen analysis; they only need to be smart enough to sell at higher prices than they buy. The paper describes how this works:

One challenge of our study is that compared to public information flow in the Treasury market, which generally coincides with news announcements, private information flow is not directly observed. In this paper, we use the impact of order flow on bond prices to infer private information flow. For example, Brandt and Kajeck (2004) argue that order flow impact effectively captures heterogeneous information flow in the U.S. Treasury market. Empirically, Green (2004), Pasquariello and Vega (2007) use order flow impact to proxy for the level of information asymmetry on announcement versus nonannouncement days in the Treasury market. Loke and Onayev (2007) also find state-varying level of order flow impact in the S&P futures market. Using information from order flow impact, we specify a Markov switching model to identify private information flow. Using high frequency transaction data for the 2-, 5-, and 10-year Treasury notes, we obtain 5-minute estimates of the probability of private information flow (PPIF hereafter). In this aspect, our model can be viewed as an extension of the existing PIN model by Easley et al. (2002) and Li et al. (2009).

The data used in our study is obtained from the BrokerTec electronic limit order book platform on which secondary interdealer trading occurs. It contains not only tick-by-tick information on transaction and market quotes but also information of the entire limit order book for the on-the-run 2-year, 5-year, and 10-year notes. This allows us to examine the effect of heterogeneous private information in high frequency. The detailed information on the limit order book also allows us to examine how liquidity dynamics interact with private information. A novel aspect of our paper is that we examine how liquidity reacts to information uncertainty. Given that the timing and the context of information arrival is unknown on non-announcement days, we look at how trading activities and placement of limit orders differs from that on announcement days. Data on announcements comes from Bloomberg and includes date, time and values for expected and actual announcements. Since surveys of market participants provide ex ante expectations of major economic announcements, measures of announcement surprises or unexpected information shocks can be constructed.

Our results show that PPIF is higher for longer maturity bonds, and higher on announcement days than on non-announcement days. The finding is consistent with Brandt and Kavajecz (2004) that price discovery manifests in less liquid markets. In addition, on announcement days, PPIF coincides with public information shocks as measured by announcement times.This is consistent with Green(2004) finding that the role of private information is hihger [sic] at and after announcements.

If you’re a trader and do this, you’re smart. But if you create a computerized expert system to do this, you’re an evil High-Frequency Trader.

February 16, 2011

Wednesday, February 16th, 2011

The Boston Fed has released its 2H10 Research Review:

  • Public Policy Discussion Papers
    • Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations, Scott Schuh, Oz Shy, and Joanna Stavins
    • $1.25 Trillion Is Still Real Money: Some Facts about the Effects of the Federal Reserve’s Mortgage Market Investments, Andreas Fuster and Paul S. Willen
    • Reasonable People Did Disagree: Optimism and Pessimism about the U.S. Housing Market Before the Crash Kristopher S. Gerardi, Christopher L. Foote, and Paul S. Willen (discussed on PrefBlog)
    • A Profile of the Mortgage Crisis in a Low-and-Moderate-Income Community, Lynn M. Fisher, Lauren Lambie-Hanson, and Paul S. Willen
  • Working Papers
    • In Search of Real Rigidities, Gita Gopinath and Oleg Itskhoki
    • Strategic Choice of Preferences: The Persona Model, David H. Wolpert, Julian C. Jamison, David Newth, and Michael Harre
    • Some Evidence on the Importance of Sticky Wages, Alessandro Barattieri, Susanto Basu, and Peter Gottschalk
    • Imputing Household Spending in the Panel Study of Income Dynamics:
      A Comparison of Approaches
      , Daniel H. Cooper
    • The Distress Premium Puzzle, Ali K. Ozdagli
    • Characterizing the Amount and Speed of Discounting Procedures, Dean T. Jamison and Julian C. Jamison
    • Internal Sources of Finance and the Great Recession, Michelle L. Barnes and N. Aaron Pancost
    • Affective Decision Making: A Theory of Optimism Bias, Anat Bracha and Donald J. Brown
    • The Financial Structure of Startup Firms: The Role of Asset, Information, and Entrepreneur Characteristics, Paroma Sanyal and Catherine L. Mann
  • Public Policy Briefs
    • Evidence of a Credit Crunch? Results from the 2010 Survey of First District Community Banks, Jihye Jeon, Judit Montoriol-Garriga, Robert K. Triest, and J. Christina Wang
  • Multimedia
    • The Great Recession (video), Christopher L. Foote

My discussion with Assiduous Reader Drew (in the comments to February 11) got me thinking about the propriety of allowing Exchanges to determine who gets listed. For instance, it is possible that this made sense long ago, when (I’m speculating) listing fees were a lower proportion of Exchnge revenue than they were now? Is it possible that the rationale behind the regulatory contracting-out of this gatekeeper function is now obsolete?

I went looking for a chart showing proportions of Exchange revenue over time.

I counldn’t find one, but it turns out – naturally enough – that this has not only been thought of before, but has been a big issue. Jonathan Macey and Maureen O’Hara (who has been mocked on PrefBlog) wrote paper titled From Markets to Venues: Securities Regulation in an Evolving World:

Few issues better reflect this divergence of interests than the listing and delisting of securities. Exchanges have traditionally used listing standards to support their “signaling role” of attesting to the quality of firms trading on the exchange. In return for this endorsement, listing firms paid both initial listing fees and continuing listing fees. These fees have been an important source of revenue for stock markets, particularly in the U.S where listing fees have often been upwards of 30% of the NYSE’s overall revenues.

When it was the case that where firms listed determined where shares traded, these fees could be justified as paying for the ongoing regulation of trading. As we have argued earlier, however, the listing-trading connection has broken down, and trading currently takes place on whichever venue provides the greatest liquidity. There is increased competition for listings. Listing fees now represent almost a fee for access to the US markets, a monopoly rent as it were to the few exchanges and venues empowered to list firms. From a purely economics perspective, since exchanges can list firms whose stocks they may not actually end up trading, the incentives are surely to list more firms than would be optimal if listing and trading were linked. Concerns over such perverse incentives were recently raised in Hong Kong, where a government appointed commission pushed for the transfer of the listing function to the regulator from the exchange arguing that “As a listed company motivated by profitability, the HKEx has a clear interest in listing as many companies as possible since listing fees represent a significant portion of revenues (18% in 2002) and there is a disincentive to allocate revenues to enforcement with is costly and produces no revenues.”

Which is my point exactly. A potential criticism of the TMX-LSE deal is that the TMX has regulatory functions and we might not want those to be under foreign control. But assuming that the functions need to be performed at all, should they be performed by the TMX in the first place? Would it be reasonable, for instance, to say … “OK, go ahead and merge …. on the condition that the Listing Authority gets spun out as a stand-alone company.” … ?

For the security market as a whole, however, listing and delisting standards play an important role by delineating the quality of firms allowed to access a country’s capital markets. Restricting access or denying trading privileges is thus a public good in that it enhances the overall quality of the market. Entrusting this decision to self-regulating exchanges is suboptimal because as with any public good, the social costs exceed the private costs. As we have argued above, self-regulation cannot succeed when this is the case.

Vehemently disagree. This has the implicit view that capital markets are stupid and it is wise regulators who should decide who gets to take advantage of the suckers.

It was another mixed day on the Canadian preferred share market,with PerpetualDiscounts losing 6bp while FixedRestes gained 3bp and DeemedRetractibles were up 6bp. Volatility remained low. but volume picked up and can be described as heavy.

PerpetualDiscounts now yield 5.62%, equivalent to 7.87% interest at the standard equivalency factor of 1.4x. Long corporates continue to yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 225bp, This marks a significant decline from the 240bp recorded February 9; it should be remembered that while the two figures mentioned are compable (with the caveate that there aren’t too many issuers in that index any more), they are less comparable – and a good comparison would require explicit assumptions of spreads between issuers, etc. – with all earlier data.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.0832 % 2,398.5
FixedFloater 4.73 % 3.44 % 17,433 19.13 1 0.8330 % 3,600.1
Floater 2.50 % 2.26 % 48,724 21.58 4 -0.0832 % 2,589.7
OpRet 4.82 % 3.52 % 59,704 2.22 8 -0.0096 % 2,391.3
SplitShare 5.29 % 0.89 % 280,639 0.81 4 0.2703 % 2,469.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0096 % 2,186.6
Perpetual-Premium 5.75 % 5.64 % 117,770 1.22 9 -0.1344 % 2,032.3
Perpetual-Discount 5.55 % 5.62 % 130,626 14.41 15 -0.0622 % 2,109.3
FixedReset 5.24 % 3.74 % 180,359 3.03 54 0.0302 % 2,262.3
Deemed-Retractible 5.19 % 5.22 % 400,665 8.26 53 0.0566 % 2,086.3
Performance Highlights
Issue Index Change Notes
BAM.PR.N Perpetual-Discount -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-16
Maturity Price : 21.10
Evaluated at bid price : 21.10
Bid-YTW : 5.72 %
FTS.PR.F Perpetual-Discount -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-16
Maturity Price : 22.90
Evaluated at bid price : 23.09
Bid-YTW : 5.32 %
CU.PR.A Perpetual-Premium -1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 5.64 %
GWO.PR.H Deemed-Retractible 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.81
Bid-YTW : 5.55 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.B Floater 58,145 TD bought 18,500 from Nesbitt at 19.00; anonymous bought 25,000 from Desjardins at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-16
Maturity Price : 18.99
Evaluated at bid price : 18.99
Bid-YTW : 2.78 %
BNS.PR.R FixedReset 52,425 TD crossed 20,000 at 26.11. Desjardins crossed blocks of 15,000 and 10,000, both at 26.09.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.07
Bid-YTW : 3.58 %
NA.PR.P FixedReset 50,540 Scotia crossed 40,000 at 27.34.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 27.36
Bid-YTW : 3.45 %
BMO.PR.J Deemed-Retractible 48,079 Desjardins crossed 27,800 at 23.81.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 5.09 %
NA.PR.O FixedReset 46,659 Scotia crossed 40,600 at 27.33.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 27.34
Bid-YTW : 3.47 %
CM.PR.J Deemed-Retractible 44,564 TD crossed 29,500 at 23.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.75
Bid-YTW : 5.16 %
There were 49 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.20 – 23.74
Spot Rate : 0.5400
Average : 0.3593

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-16
Maturity Price : 22.93
Evaluated at bid price : 23.20
Bid-YTW : 2.24 %

CU.PR.A Perpetual-Premium Quote: 25.00 – 25.40
Spot Rate : 0.4000
Average : 0.2403

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 5.64 %

BNS.PR.Z FixedReset Quote: 24.30 – 24.80
Spot Rate : 0.5000
Average : 0.4034

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.30
Bid-YTW : 4.26 %

GWO.PR.L Deemed-Retractible Quote: 25.01 – 25.35
Spot Rate : 0.3400
Average : 0.2540

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 5.78 %

RY.PR.X FixedReset Quote: 26.90 – 27.14
Spot Rate : 0.2400
Average : 0.1580

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 26.90
Bid-YTW : 4.02 %

ELF.PR.F Deemed-Retractible Quote: 22.50 – 22.75
Spot Rate : 0.2500
Average : 0.1874

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 6.70 %

February 15, 2011

Wednesday, February 16th, 2011

Daniel K Tarullo, Member of the Board of Governors of the Federal Reserve System, testified before the Committee on Financial Services, US House of Representatives, Washington DC, 15 February 2011, in an effort titled Assessing the regulatory, economic, and market implications of the Dodd-Frank derivatives title. Very non-committal and not much meat, but there was one interesting admission that I believe has been downplayed in the debate so far:

Title VIII of the act complements the role of central clearing in Title VII through heightened supervisory oversight of systemically important financial market utilities, including systemically important facilities that clear swaps. This heightened oversight is important because financial market utilities such as central counterparties concentrate risk and thus have the potential to transmit shocks throughout the financial markets. As part of Title VIII, the Board also was given new authority to provide emergency collateralized liquidity in unusual and exigent circumstances to systemically important financial market utilities. We are carefully considering ways to implement this provision in a manner that protects taxpayers and limits any rise in moral hazard.

Additionally, he floated an idea for discretionary exemptions; seeking these exemptions will create jobs for lobbyists and other smiley-boys:

Within these statutory constraints, the Board and the other prudential regulators are working to implement the margin provisions in a way that takes appropriate account of the relatively low systemic risk posed by most end users. For example, we are considering if it would be appropriate to allow a banking organization that is a dealer or major participant to establish a threshold with respect to an end-user counterparty, based on a credit exposure limit that is approved and monitored as part of the credit approval process, below which the end user would not have to post margin. The Board appreciates that posting margin would impose costs on end users, possibly inhibiting their ability to manage their risks. The Board also believes that the margin regime should be applied only to contracts entered into after the new requirement becomes effective.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 1bp, FixedResets down 7bp while DeemedRetractibles gained 15bp. Not much volatility, volume was average, and the “Last” spread on FTS.PR.G was rather wide. SLF blocks were the volume highlight.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.1189 % 2,400.5
FixedFloater 4.77 % 3.48 % 18,141 19.09 1 0.2197 % 3,570.3
Floater 2.49 % 2.26 % 46,145 21.58 4 0.1189 % 2,591.9
OpRet 4.82 % 3.62 % 60,088 2.22 8 -0.0337 % 2,391.5
SplitShare 5.31 % 1.13 % 283,014 0.82 4 0.0451 % 2,463.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0337 % 2,186.8
Perpetual-Premium 5.74 % 5.40 % 116,951 1.23 9 -0.0352 % 2,035.1
Perpetual-Discount 5.54 % 5.63 % 132,464 14.40 15 -0.0057 % 2,110.6
FixedReset 5.24 % 3.75 % 174,435 3.04 54 -0.0701 % 2,261.6
Deemed-Retractible 5.20 % 5.22 % 404,421 8.27 53 0.1531 % 2,085.2
Performance Highlights
Issue Index Change Notes
BNS.PR.Z FixedReset -1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 4.25 %
SLF.PR.E Deemed-Retractible 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.60
Bid-YTW : 5.80 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.B Deemed-Retractible 71,103 Desjardins crossed 60,000 at 23.65.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 5.50 %
SLF.PR.D Deemed-Retractible 48,064 TD crossed 35,000 at 22.35.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.37
Bid-YTW : 5.87 %
BNS.PR.M Deemed-Retractible 47,211 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 5.03 %
TD.PR.M OpRet 46,847 RBC crossed 28,900 at 25.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-05-30
Maturity Price : 25.25
Evaluated at bid price : 25.60
Bid-YTW : 3.72 %
SLF.PR.F FixedReset 43,525 RBC crossed blocks of 30,000 and 10,700, both at 27.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.00
Bid-YTW : 3.81 %
SLF.PR.A Deemed-Retractible 39,075 Desjardins crossed 15,000 at 23.50.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.53
Bid-YTW : 5.58 %
There were 34 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.G FixedReset Quote: 25.75 – 26.48
Spot Rate : 0.7300
Average : 0.4738

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-01
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 3.94 %

BAM.PR.H OpRet Quote: 25.37 – 25.87
Spot Rate : 0.5000
Average : 0.3736

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2012-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 5.07 %

BNA.PR.D SplitShare Quote: 27.00 – 27.29
Spot Rate : 0.2900
Average : 0.1808

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-03-17
Maturity Price : 26.00
Evaluated at bid price : 27.00
Bid-YTW : -21.51 %

RY.PR.Y FixedReset Quote: 26.90 – 27.27
Spot Rate : 0.3700
Average : 0.2723

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 26.90
Bid-YTW : 3.99 %

CIU.PR.C FixedReset Quote: 25.02 – 25.35
Spot Rate : 0.3300
Average : 0.2361

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 3.78 %

CM.PR.H Deemed-Retractible Quote: 24.25 – 24.48
Spot Rate : 0.2300
Average : 0.1483

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 5.22 %