PrefBlog

Say what you like about the Occupy Wall Street crowd, there can be no doubt about their realism and effectiveness:

About 1,000 people gathered in the heart of Toronto’s financial district beginning at 10 a.m. local time to protest inequality and advocate higher taxes for the wealthy. About an hour later, organizers began moving the demonstration to nearby St. James Park.

“To see people take action like this is amazing,” said Neal Hamell, a student from London, Ontario, who traveled to Toronto today to join the protests. “I’d like to see change. If this doesn’t do anything, then something is wrong with the world.”

I understand that on Wednesday they’re going to bring peace to the Middle East, but have not yet decided what to do in the afternoon.

Sparks are flying over the Tobin Tax:

German Chancellor Angela Merkel criticized governments including President Barack Obama’s administration for refusing to make the financial sector pay for the global financial crisis, and vowed to push for a financial transaction tax until it applies at least in Europe.

“It’s not acceptable that especially those outside the euro region, who are time and again pushing us to take broad- based action to manage the debt crisis, are at the same time flatly refusing to impose a financial transactions tax,” Merkel said at a labor union congress in the city of Karlsruhe yesterday. “I think this is not okay. We want, and we have to make, financial market participants contribute to the costs of crisis management.”

SLF is forecasting a big loss for 11Q3:

Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) announced preliminary estimates for the third quarter of 2011. The Company expects to report a loss of $621 million for the quarter. On an operating basis, the loss is expected to be $572 million. Results for the third quarter include losses related to substantial declines in both equity markets and interest rate levels, which particularly impacted the individual life and variable annuity businesses in SLF U.S. The third quarter was a period of exceptional market volatility. North American equity markets dropped by 12% – 14%, while yields on fixed income securities fell amid economic uncertainty in the European Union and U.S. monetary policy actions aimed at lowering interest rates on long-term treasuries. In the U.S., treasury rates reached historic lows, with 30-year yields down 146 basis points to 2.91%. Under the Canadian insurance accounting model, the future impact of September 30, 2011, market conditions is reflected in our current period results.

Losses from equity market and interest rate movements were at the high end of the ranges previously disclosed in the Company’s Management’s Discussion and Analysis for the second quarter of 2011. Key drivers which resulted in market impacts at the high end of the estimated ranges included uneven movements across the yield curve and the impact of large, simultaneous movements in both interest rates and equity markets. Updates to the Company’s actuarial methods and assumptions, which generally take place in the third quarter of each year, contributed approximately $200 million to the loss. Sun Life Assurance Company of Canada remains well capitalized, with a Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio that is estimated to be approximately 210% as at September 30, 2011.

The Company currently expenses hedging costs for variable annuities and segregated funds in the period in which they are incurred. In the fourth quarter of 2011, the Company plans to make a method and assumption change related to the valuation of its variable annuity and segregated fund liabilities whereby it will provide for the estimated future lifetime hedging costs of these contracts in its liabilities. This change is expected to result in a higher level of future earnings from in-force contracts than would be the case using the current methodology. The impact of this change on the net income of the Company in the fourth quarter will depend on interest rates and other market conditions as at December 31, 2011, as well as further refinements to the valuation methodology. If this change was made under current market conditions the expected one-time reduction in fourth quarter net income is estimated to be approximately $500 million. The impact of this change on the MCCSR ratio of Sun Life Assurance is expected to be positive, as the increase in variable annuity and segregated fund liabilities will reduce the amount of regulatory required capital for these products.

How ’bout those Germans, eh? Refusing to write Europe a blank cheque!

.Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline.

Lapdog Carney’s getting a lot of press, shilling for his political master.

Fortis Alberta issued 30-year paper at 4.54%.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts winning 23bp, FixedResets up 2bp and DeemedRetractibles losing 13bp. Insurers figured prominently on the wrong side of the performance table, presumably due to Sun Life’s announcement. Volume was above average.

DBRS has released its 11Q3 Review of the SplitShares Market.

The Europeans may be facing reality:

European officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases as key planks in a revamped strategy to combat the debt crisis, people familiar with the discussions said.

The Greek bond losses may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people, who declined to be identified because the negotiations will run for another week.

And you see that? They’ll pledge that this will be absolutely the last time! We’re saved!

However, they have take decisive steps to prove they’re the same old clowns:

The European Union may impose position limits for commodities derivatives and curbs on high- frequency trading as part of plans to overhaul the region’s financial-market rules.

The European Commission, the 27-nation EU’s executive arm, is seeking limits on the number of commodity derivative contracts “any given market members or participants can enter into over a specified period of time, or alternative arrangements” with the same impact, according to copies of proposals set for release on Oct. 20 that were obtained by Bloomberg News.
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Algorithmic and high-frequency trading can give rise to risks such as systems “overreacting” to market events and causing “volatility” according to the draft EU measures. These types of trading can also lend themselves to “certain forms of abusive behavior if misused.”

Planned measures include requiring high-frequency trading firms to prove that they have sufficient risk controls in place and to ensure that clients with direct access to the markets are “properly qualified.”

“Detailed organizational requirements regarding these new forms of trading” will be set out in subsequent EU laws, according to the documents. The EU also plans to list specific examples of trading strategies that should be banned and punished by regulators as market manipulation.

On market abuse, the EU proposals include ensuring that firms found guilty of illegal practices can be fined up to ten percent of annual sales, and that criminal sanctions can be used against traders.

“requiring high-frequency trading firms to prove that they have sufficient risk controls in place”! Hah! There’s a good little avenue for regulatory extortion right there! That is not a thing susceptible to proof – you show me a system that’s 99.999999% effective, then it’s a trivial matter for me to show you the 99.9999995 percentile. However, the demagoguery will serve to distract attention from the mess the politicians have made of sovereign finances, so who cares?

Now that his boss has provided the script, Lapdog Carney is eager to show his loyalty:

The Occupy Wall Street demonstrations and other expressions of frustration with the global economic and financial system highlight the need for policy makers to show they are serious about forcing change, Bank of Canada governor Mark Carney says.

This is all about protests across Canada, intended to raise awareness about what Good People the protesters are. I understand that afterwards they’re going to have a Slut Walk!

It was another strong day for the Canadian preferred share market, with PerpetualDiscounts winning 38bp, FixedResets up 26bp and DeemedRetractibles gaining 27bp. Volatility was good. Volume was a touch on the light side.

Back in 2005-07, Wall Street’s biggest problem was they just couldn’t write enough mortgages. Times have changed, and now their biggest problem is they can’t write enough mortgages (emphasis added):

Wall Street firms are in discussions to pool as much as $1.5 billion of property loans they’ve amassed this year after a slowdown left them unable to stockpile enough mortgages to sell as securities.

Citigroup Inc. (C), Deutsche Bank AG (DBK), Guggenheim Securities LLC, and UBS AG (UBSN) are among lenders in talks to bundle commercial mortgages to be sold as bonds during the fourth quarter, said people familiar with the talks. The firms want to clear their books before year-end and avoid risking drops in value by holding the debt, said the people, who declined to be identified because the plans are preliminary.
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Wall Street has arranged about $25.6 billion in commercial mortgage-backed securities this year, compared with about $11.5 billion in all of 2010, according to data compiled by Bloomberg. Sales plummeted to $3.4 billion in 2009 compared with a record $234 billion in 2007, the data show.

Credit Suisse, which hasn’t offered a deal since sales revived in 2009, informed about 50 employees yesterday that their jobs were likely to be eliminated, said two people with knowledge of the matter, who declined to be identified because the matter isn’t public. The bank is keeping the division that trades the debt, the people said. Jack Grone, a spokesman in New York, for Switzerland’s second-largest bank, declined to comment.

You see that emphasis???? They want to avoid possible drops in value????? And so they want to sell it to their clients????? Betting against their clients????? Isn’t that EVIL?????? How dare they even dream of buying something from one party and selling it to another?????? Occupy Wall Street!

Fitch is warning of rating carnage:

UBS AG (UBSN), Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc had long-term issuer default grades cut by Fitch Ratings, which put more than a dozen other lenders on watch negative as part of a global review.

UBS’s long-term issuer default rating and its “support rating floor” were cut to “A” from “A+” on a “view that the one-notch uplift for close affiliation with the Swiss state is no longer warranted,” the ratings firm said in a statement. Lloyds and RBS were lowered two steps to A from AA- as Fitch said the U.K. is less likely to provide future support.

Fitch also placed viability ratings, and in some cases credit grades, on negative watch for seven global banks including Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) because of new regulations and economic developments. It put European banks such as Credit Agricole SA on watch, based on sovereign debt concerns and said it would review Bank of America Corp. (BAC)’s mortgage-litigation risks.

Placement of the seven global banks — also including Deutsche Bank AG (DBK), Credit Suisse AG, BNP Paribas (BNP) SA, Societe Generale (GLE) SA and Barclays Plc (BARC) — on watch “reflects Fitch’s view that these institutions’ business models are particularly sensitive to the increased challenges the financial markets are facing,” Fitch analysts wrote in a statement. “These challenges result from both economic developments, particularly in the euro area, as well as a myriad of regulatory changes.”

More dissent in the FOMC:

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank has put its credibility at risk by easing during a year in which inflation rose and unemployment fell.

“The committee’s actions at the last two meetings are inconsistent with a systematic pursuit of its communicated objectives,” Kocherlakota said today in a speech in Sidney, Montana. “It follows that these actions diminish the committee’s credibility and so reduce the effectiveness of future committee actions and communications.”

The speech marked the first time Kocherlakota has spoken about policy since opposing a Federal Open Market Committee decision to sell $400 billion of short-term Treasury securities and replace them with $400 billion of longer-term securities.

S&P downgraded Spain:

Spain had its credit rating cut one level by Standard & Poor’s as rising defaults threaten efforts to stem Europe’s sovereign-debt crisis and limit risks for the region’s banks.

The ranking slid to AA-, with a negative outlook, in the third reduction by S&P in three years. The ratings company announced the change in a statement.

“Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects,” S&P said in the statement. “The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further.”

It was a good solid day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets gaining 21bp and DeemedRetractibles up 17bp. Volatility was good, with SLF issues prominent on the plus side, contrary to recent experience. Volume was actually above average! RBC had a good day, shutting out the opposition as far as my block reporting goes.

The Kansas City Fed has released the Fall, 2011 edition of TEN Magazine, with an interesting article on farmland prices:

As crop prices pushed toward record highs in 2011, farmland values have followed. After slowing somewhat during the 2007-09 recession, cropland has surged since 2010, with values jumping 20 percent or more compared to a year earlier. In some cases, fertile land that sold for $6,000 an acre in 2009 is now going for $12,000 an acre.

But, this surge in farmland values has raised some concerns about its sustainability. Recent figures from the U.S. Department of Agriculture show that while farmland values have risen 40 percent since 2004, cash rents
have risen only 17 percent.

and another on the knock-on effects of payday-loan regulation:

However, restricting payday loans could lead to some inadvertent outcomes, says Kelly Edmiston, a senior economist at the Federal Reserve Bank of Kansas City, who recently researched the effects of payday loan restrictions. His research shows consumers without access to legal payday loans, for the most part, don’t use traditional credit as an alternative.

“This suggests these consumers don’t have access to short-term credit of any type or may end up turning to other options that are more costly than payday loans,” he says, citing over-the-limit credit card purchases, bounced checks, pawn brokers and loan sharks as examples.

My latest sure-fire money-making bumper-sticker idea is: “If payday loans are outlawed – only outlaws will make payday loans.” I’ll make a fortune, I tell you, a fortune!

Herman Cain, a front-runner for the Republican nomination is being criticized for not knowing in 2005 that there was a housing bubble. Was it forseeable? Some say yes. Some say no. What bugs me about the US is that they have so many smart guys doing all kinds of really good research on public policy issues – and none of this makes it into the political arena. Canadian political and regulatory decisions are also a pile of hopeless crap, of course, but since the research performed is also a pile of hopeless crap it doesn’t bother me so much.

It was quite a strong day for the Canadian preferred share market,with PerpetualDiscounts winning 61bp, FixedResets up 23bp and DeemedRetractibles gaining 41bp. With numbers like that, there can be no surprise that the Performance Highlights table is lengthy today – but there was one loser! Volume soared, all the way back up to average levels.

PerpetualDiscounts now yield 5.41%, equivalent to 7.03% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 5.0%, so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 205bp, a sharp plunge from the 240bp reported on October 5, with bond yields up 20bp and interest-equivalent preferred yields down about 15bp.

Yo-ho-ho and a bottle of rum! Buried treasure!:

If you’re looking for a safe place to put your investments, Chad Venzke has a suggestion: Dig a hole in the ground four feet deep, pack gold and silver in a piece of plastic PVC pipe, seal it, and bury it.

The 30-year-old central Wisconsin resident trusts no one but himself to store and protect his gold and silver—not banks, not investment funds, and certainly not the government. It’s precisely because of this suspicion of institutions that he invests in those metals to begin with. In case of emergency, “you always want to have your precious metals within arms reach,” he says.
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From mid-2010 to mid-2011, U.S. investors bought up more than 100 tonnes of physical gold coins and bars, up from 15.2 tonnes in 2007, according to the World Gold Council.
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For those storing gold and silver in or around their home, the most immediate danger isn’t a crisis or a dip in metal prices. It’s theft. The FBI, which tallies the theft of precious metals and jewelry in one category, says $1.6 billion was stolen in 2010, up 51 percent from 2005. Just 4.2 percent of the lost loot was recovered last year.

Metal detectors are a big worry. Basic detectors can find metal on the surface or in the first 12 inches to 14 inches below ground, depending on soil conditions, says Louis Mahnken Jr., a sales representative for Kellyco Metal Detectors in Winter Springs, Fla. That’s why Venzke advises burying it at least four feet deep. There are online debates about the best way to frustrate such thieves, including using scrap metal as decoys or hiding metal by covering it underground with asbestos or mirrors.

Still, this makes more sense to me than some of the other options. I don’t understand some investors, who want gold due to a fear of total collapse of the financial system, then buy an ETF based on futures contracts. There may be a lot of slips between the cup and those lips!

Civil servants working on implementation of the proprietary trading ban have come up with a civil-service solution – concentrate more responsibility at the top than can possibly fit:

Chief executive officers and directors of Wall Street banks would have to personally approve compliance with a ban on proprietary trading under the so-called Volcker rule, according to a draft of the proposal.

Financial regulators would require senior management to establish detailed programs for ensuring their banks are following the new rules, according to the 288-page proposal dated Sept. 30 and labeled “confidential and predecisional.” A copy was obtained by Bloomberg News.

Each bank’s CEO and board would be “responsible for setting an appropriate culture of compliance” and the board would be responsible for ensuring compensation structures are aligned with the rule, according to the draft.
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The draft, which has a 205-page preamble and an 83-page text, is being written by four federal agencies and is scheduled to be released for comment on Oct. 11 by the Federal Deposit Insurance Corp.

Coming up next: a requirement that CEOs publicly attest that every single on of their employees is morally pure and kind to small furry animals; any violations found will result in jail time.

There are also concerns that the Volcker Rule will reduce the profitability of fixed-income trading:

Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under a Volcker rule proposal that may outlaw so-called flow trading, according to brokerage analyst Brad Hintz.

The draft proposal, written by regulators including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp., forbids market-makers who trade debt securities for customers from amassing positions “in expectation of future price appreciation,” Hintz, of Sanford C. Bernstein & Co., wrote today in a note to investors. “Thus flow trading may be prohibited.” Such a move would cut fixed-income revenue by 25 percent and reduce profit margins by 18 percent, Hintz estimated.
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Fixed-income traders have become more reliant on reaping revenue from price moves in the market because the profit margins from buying and selling to clients, known as the bid- offer spread, have shrunk in recent decades, Hintz wrote.

“As bid-offer pricing narrowed, the Street increased risk- taking when facilitating client trades, which enabled them to respond quickly and profit from changing demand conditions,” Hintz wrote. “By deploying balance sheet to amass inventory ahead of demand, flow trading allowed the firms to partially offset the deteriorating economics in pure execution.”

Less profitability means less capital will be deployed means thinner, more brittle markets. But nobody cares.

The Federal Reserve released, and is seeking comment on, the proposed rule – all 298 pages of it.

The BoC has released a working paper by Bruno Feunou and Roméo Tedongap titled A Stochastic Volatility Model with Conditional Skewness:

We develop a discrete-time affine stochastic volatility model with time-varying conditional skewness (SVS). Importantly, we disentangle the dynamics of conditional volatility and conditional skewness in a coherent way. Our approach allows current asset returns to be asymmetric conditional on current factors and past information, what we term contemporaneous asymmetry. Conditional skewness is an explicit combination of the conditional leverage effect and contemporaneous asymmetry. We derive analytical formulas for various return moments that are used for generalized method of moments estimation. Applying our approach to S&P500 index daily returns and option data, we show that one- and two-factor SVS models provide a better fit for both the historical and the risk-neutral distribution of returns, compared to existing affine generalized autoregressive conditional heteroskedasticity (GARCH) models. Our results are not due to an overparameterization of the model: the one-factor SVS models have the same number of parameters as their one-factor GARCH competitors.

Those able to plough through that will also be interested in Christoersen, P., Heston, S., and Jacobs, K., (2009) The Shape and Term Structure of the Index Option Smirk: Why Multifactor Stochastic Volatility Models Work So Well,” Management Science, 55 (12), 1914{1932.

Everybody should buy equities! Merkel and Sarkozy are going to save the world!

The S&P 500 has rebounded about 8 percent from a 13-month low on Oct. 3 amid optimism that European leaders will succeed in taming the debt crisis and as economic data topped estimates. German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday they will deliver a plan to recapitalize European banks and address the Greek debt crisis by the Nov. 3 Group of 20 summit.

Here’s a cheerful story on malware in USAF Predator drones:

The virus, first detected nearly two weeks ago by the military’s Host-Based Security System, has not prevented pilots at Creech Air Force Base in Nevada from flying their missions overseas. Nor have there been any confirmed incidents of classified information being lost or sent to an outside source. But the virus has resisted multiple efforts to remove it from Creech’s computers, network security specialists say. And the infection underscores the ongoing security risks in what has become the U.S. military’s most important weapons system.

“We keep wiping it off, and it keeps coming back,” says a source familiar with the network infection, one of three that told Danger Room about the virus. “We think it’s benign. But we just don’t know.”

The new Nobel laureates in economics are bearish on Europe:

New York University’s Thomas J. Sargent and Princeton University’s Christopher A. Sims shared the 2011 Nobel Prize in Economic Sciences for their work in sorting out cause from effect in the economy and policy.
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The two economists voiced pessimism about the outlook for the 17-member euro zone at a joint press conference at Princeton University in New Jersey.

Sims called the foundation of the monetary regime “precarious” because of the lack of a unified fiscal authority that can issue bonds and raise taxes. The departure of one or more nations from the union would not resolve that, he added.

“The prospects for the euro are dim” if the region can’t find a way to share its fiscal burden, Sims said.

Sargent likened the situation facing the euro zone to that which the U.S. confronted early in its history, when the 13 states were each running their own economic policies and issuing their own debt. “The difficult thing is the politics,” he said.

Politics are also the trouble now in the U.S. as well, Sims suggested. There’s broad agreement among economists on what strategy the U.S. should follow, he said: adopt a plan to deal with the budget deficit while avoiding fiscal stringency in the short-run and maintaining an accommodative monetary policy.

The FDIC is rebuilding its reserves:

U.S. bank failures through 2015 will drain $19 billion from the Federal Deposit Insurance Corp. fund for covering losses from shutdowns, the agency said in an update of its reserve ratio projections.
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The fund, pushed into deficit by the wave of failures stemming from the 2008 credit crisis, turned positive as of June 30 after seven consecutive quarters of negative balances.
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Under current projections, FDIC assessment rates will boost the insurance fund to 1.15 percent of insured deposits in 2018, according to the agency’s statement. The regulator is required by the Dodd-Frank Act to increase the ratio to 1.35 percent by Sept. 30, 2020.

Today’s report shows that the FDIC may have gone farther than it needed to in increasing assessments, according to James Chessen, chief economist for the American Bankers Association.

“The FDIC had set aside $17.7 billion for possible bank failures losses at the start of 2011, twice what the actual losses are likely to be this year,” Chessen said in a statement. “Banks are paying $13.5 billion in yearly premiums to the FDIC, which is far in excess of the yearly costs expected by the FDIC over the next several years.”

Looks pretty good compared to CDIC funding:

The target range for the amount of ex ante funding is currently between 40 and 50 basis points of insured deposits—which translates into a range of between $2,410.0 million to $3,012.5 million based on insured deposits as at April 30, 2010. The reported amount as at March 31, 2011, was $2,213.5 million, representing 37 basis points of insured deposits (March 31, 2010: $1,958.1 million representing 33 basis points of insured deposits at April 30, 2009).

… especially since the size of the Canadian banking system is so much larger relative to GDP than is the case in the States – or most other places. The Ministry of Finance has been drinking too much of its ‘strong regulatory framework’ Kool-Aid and some day – hopefully not in my lifetime, but that’s just pious hope – the lack of disaster preparation is going to bite all of us in the ass.

DBRS has released its Unified Interest Rate Model for U.S. RMBS Transactions, which looks most interesting; unfortunately I have not yet had time to give it the attention it deserves.

FCS.PR.B has been confirmed at Pfd-3(low) by DBRS:

DBRS has today confirmed the rating of Pfd-3 (low) on the 6.25% Preferred Securities (the Preferred Securities) issued by Faircourt Split Trust (The Trust).
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From October 2010 to August 2011, the performance of the Trust was fairly stable, with downside protection fluctuating between 32% and 40%. The Trust’s net asset value (NAV) experienced downward pressure in September 2011 and the current downside protection available to holders of the Preferred Securities was approximately 27% (as of September 30, 2011). Today’s rating confirmation of the Preferred Securities is based on (1) the downside protection available; (2) testing of NAV floors for targeted and special distributions; and (3) the diversification of the underlying assets included in the Portfolio.

The main constraints to the rating are (1) The Trust’s dependence on the value and dividend policies of the securities in the investment portfolio and (2) the reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

The 6.25% Preferred Securities are scheduled to mature on December 31, 2014.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 24bp, FixedResets gaining 3bp and DeemedRetractibles up 10bp. Volatility was good, mostly towards the upside. Volume was pathetic. Doesn’t anybody trade anymore?