Archive for October, 2013

October 15, 2013

Tuesday, October 15th, 2013

There’s an interesting comment in the BoC’s 2014–15 Debt Management Strategy Consultations:

Non-residents now hold about 28 per cent of Government of Canada marketable debt securities, approximately double the average for the five years preceding the financial crisis. Increased demand for Government of Canada securities by non-residents helps to diversify the investor base. At the same time, some market participants suggest that the growing share of securities held by foreign institutional investors, in particular, central banks and sovereign wealth funds, may be affecting the liquidity of certain sectors of the Government of Canada securities market, since some of these investors may not actively lend their securities in the repo market. Anecdotal evidence gathered by the Bank of Canada suggests that large increases in foreign official Canadian-dollar holdings have coincided with the more frequent “specials” in the Canadian debt markets. [Footnote] More research is necessary, however, to determine to what extent this relationship is causal and not explained by other factors.

Footnote reads: A security that is “on special” is an asset that is subject to elevated demand in the repo market. This causes securities borrowers in the repo market to compete for the asset by offering to lend cash below prevailing interest rates.

Specials are a wonderful opportunity for alert active portfolio managers to outperform, since the price of ‘special’ securities will rise as the shorts frantically try to square their positions. Regrettably, this may be exploited only from a ‘long-only’ perspective: shorting the temporarily expensive security carries a very high probability that all your profits from price movements will be eaten up by the cost of borrowing the security.

There is also an acknowledgment of the regulatory aspect of financial repression:

Demand for Government of Canada securities is being affected by several other important factors. Regulatory initiatives are increasing the need for high-quality collateral, which in Canada is reflected in greater demand for treasury bills and short-term bonds. In addition, the federal government and a number of provincial governments, as well as some corporations have put in place new prudential liquidity and contingency measures that have large, stable allocations to Government of Canada securities, especially treasury bills and short-term bonds. Structural changes, such as Canada’s new central counterparty for the fixed-income market and, in particular, the introduction of central clearing for blind repo trades for interdealer brokers, may also be influencing dynamics in the repo market.

One of the questions is of great interest:

In the Debt Management Strategy for 2013–14, the government announced the continuation of the temporary increase in the issuance of 10- and 30-year bonds and signalled that it would be assessing the potential benefits of issuing bonds with a maturity of 40 years or longer.

How would you characterize the demand for long-term bonds since yields began rising in May 2013 and how do you see it evolving?

All together, folks! WE WANT FORTIES! WE WANT FORTIES!

Many readers will find the following section fascinating:

Fixed-income products in Canada are typically traded over the counter (OTC), whereas equities are traded on public exchanges. Many financial institutions, institutional investors and wealth managers participate in electronic marketplaces to facilitate the trading of fixed-income securities. However, for retail investors, acquiring a position in fixed-income securities often involves buying money market and bond mutual funds or exchange-traded funds (ETFs). Wealth managers offer another avenue for retail investors to acquire fixed-income securities by leveraging institutional buying of fixed-income securities. Retail investors that prefer not to pay the asset-management fees associated with mutual funds, ETFs
and wealth managers can buy and sell fixed-income securities through an online or discount brokerage account. However, the relative opaqueness of the OTC market has led to criticism of broker compensation, transaction fees and the cost of trading from one’s own broker account. Changes implemented by the Canadian Securities Administrators to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations seek to enhance registrants’ relationships with their clients (retail investors) through an expansion of cost and registrant compensation disclosure, as well as the introduction of performance reporting.

16. Of those retail investors with an online or discount brokerage account, what proportion use their account to buy fixed-income securities in general and Government of Canada securities specifically?

17. What are your views on the impact of the additional fee, commission and cost transparency required under National Instrument 31-103 for dealer and broker activities? Will these changes help to promote greater price transparency for retail investors?

18. What measures could the Government of Canada take to facilitate easier retail investor access to its debt securities?

I would be very pleased to see a Canadian programme run along the lines of Treasury Direct. On the other hand, retail is grossly over-invested in Canadas – they’re paying an enormous liquidity premium that they will never, ever need, and a smaller, but still large, regulatory premium that is simply not applicable.

Market-Timers are busily retiming the timing of their timing:

Incredibly, retail investors are now moving back into bonds. September U.S. mutual fund flow data is now out, and last month three of the four highest net inflows went into bond and credit funds, according to Morningstar. Non-traditional bonds led the way, then high yield bonds, then short-term bonds. Institutional clients don’t seem so scared either, considered how they plowed money into the Verizon Communication’s record debt offering.

Given all this data, there’s a growing counter-theory, one that hails the ‘not-so-great rotation.’ Last year Bank of America Merrill Lynch put out a report that called “The Bond Era Ends.” Morgan Stanley’s pushing back with its own report, titled “Great Rotation? Probably not.”

On the other hand, market timers are also winning the Nobel Prize, so take your pick:

Fama helped revolutionize the practice of investing by showing it was difficult to predict individual stock prices in the short run. That led to the emergence of index funds as a common investment.

Shiller showed that there’s more predictability in stock and bond markets in the long run. That encouraged the creation of institutional investors, such as hedge funds, that take bets on market trends.

In the late 1990s, Shiller said the stock market was overvalued “and lo and behold he was proven right” when the dot-com bubble burst in 2000, said Nobel committee secretary Peter Englund.

“He also predicted for a long time that the housing market was overvalued and again he was proven right,” Englund said. The U.S. property market suffered a crash in 2007 that helped fuel the global financial crisis.

Englund said he believes the three laureates agree on the findings for which they were awarded. However, Fama and Shiller have different “interpretations of the real world,” he added.

“It’s no secret that for Eugene Fama the sort of null hypothesis is that markets work well and he is willing to believe that until he is proven otherwise whereas for Robert Shiller, I think his null hypothesis is that there are periods of excessive optimism and pessimism,” Englund said.

Swiss Re may join the exodus from US life insurance:

Swiss Re Ltd. (SREN) is considering selling Aurora National Life Assurance Co. as it retreats from the U.S. life and health insurance market, people familiar with the matter said.

The world’s second-largest reinsurer is working with Barclays Plc to find buyers for Aurora National and some other U.S. assets, two people said, asking not to be identified because the matter isn’t public. The sale could fetch more than $400 million, one person said.
The deal would include about $5 billion in insurance assets, including corporate-owned and other life-insurance policies and annuities, said one person.

Corporate bond trading is entering a new era and nobody knows (or cares) where it will end:

A record share of U.S. corporate-bond trading has moved to computers as buyers who traditionally transacted over the phone seek faster ways to buy and sell in a market where Wall Street’s human traders are retreating.

Investment-grade volumes on MarketAxess Holdings Inc.’s electronic system are on pace to exceed $400 billion in 2013 after surging 45 percent to $44 billion in September from a year earlier, according to data from the company, which estimates it captures about 90 percent of electronic trades among the dollar-denominated notes. That’s equal to 14.3 percent of all market activity, including business done over the phone, up from 12.2 percent a year earlier.

While the dollar-denominated investment-grade bond market has increased 71 percent since 2008 to about $4.3 trillion, the size of each transaction declined to about $565,000 in the three months ended June 30, compared with about $970,000 in the first three months of 2007, according to Trace, Finra’s bond-price reporting system, which tracks both electronic transactions and those negotiated over the phone. The average investment-grade trade on MarketAxess’ system was $600,000, according to Rick McVey, the company’s chief executive officer.

“Dealers do not have the balance-sheet capacity to warehouse large block trades from investors the way they used to, so investors are breaking trades down into smaller sizes,” he said in a telephone interview.

The biggest U.S. banks’ fixed-income trading revenue probably fell 20 percent in the third quarter from a year earlier on lower volumes, Richard Staite, an analyst at Atlantic Equities LLP, said in a Sept. 23 report.

“It’s a reasonable-size business in terms of revenues for them, but they don’t have the balance sheet capacity to be the backstop for the market,” said Roger Rudisuli, a partner in McKinsey’s corporate and investment banking practice, speaking about dealers generally. “They cannot play this role anymore.”

Fitch placed the US on Watch-Negative:

The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This “faith” is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.

The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the U.S. economy.

In the event of a deal to raise the debt ceiling and to resolve the government shutdown, which Fitch expects, the outcome of a subsequent review of the ratings would take into account the manner and duration of the agreement and the perceived risk of a similar episode occurring in the future. It would also reflect Fitch’s assessment of the following main factors:

– The impact of the debt ceiling brinkmanship and government shutdown on our assessment of the effectiveness of government and political institutions, the coherence and credibility of economic policy, the potential long-term impact on the U.S. sovereign’s cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth.

– Our assessment of the prospects for further deficit-reduction measures in future years necessary to contain government deficits in the face of long-term spending pressures and place public debt on a downward path over the medium to long term.

There’s some interesting data on fast-food wage scales:

Data from the U.S. Census Bureau and public benefit programs show 52 per cent of fast-food cooks, cashiers and other “front-line” staff had relied on at least one form of public assistance, such as Medicaid, food stamps and the Earned Income Tax Credit program, between 2007 and 2011, researchers at the University of California-Berkeley and the University of Illinois said.

In a concurrent report, the pro-labor National Employment Law Project found that the 10 largest fast-food companies in the United States cost taxpayers more than $3.8 billion each year in public assistance because the workers do not make enough to pay for basic necessities themselves.

The Employment Policies Institute, which has opposed calls for higher fast-food wages in the past, said in a statement that the reports “ignore economic evidence that dramatic wage hikes would make fast food workers worse off” when employers “replace employees with less-costly automated alternatives.”

Replace order-takers? That’s what’s happening in Europe:

McDonalds recently went on a hiring binge in the U.S., adding 62,000 employees to its roster. The hiring picture doesn’t look quite so rosy for Europe, where the fast food chain is drafting 7,000 touch-screen kiosks to handle cashiering duties.

The move is designed to boost efficiency and make ordering more convenient for customers. In an interview with the Financial Times, McDonald’s Europe President Steve Easterbrook notes that the new system will also open up a goldmine of data. McDonald’s could potentially track every Big Mac, McNugget, and large shake you order. A calorie account tally at the end of the year could be a real shocker.

The touch screens will only accept debit or credit cards, adding to the slow death knell of cash and coins.

So we have the slightly unusual situation of Europe being ahead in automation because of low US labour costs. I suggest that this, rather than any bleeding-heartedness, is a good reason to raise the minimum wage. The burger flippers will then, perforce, find something more useful to do.

Everybody’s preparing for a US default:

A default may not disrupt markets as long as the U.S. alerted traders the night before a payment was due that it was probably going to default, giving the Federal Reserve’s Fedwire, an electronic service that transfers securities and payments, enough time to adjust its programs and allow the defaulted debt to be “transferable,” according to JPMorgan Chase & Co. That would allow them to continue to be used as collateral in repo markets.

The Securities Industry and Financial Markets Association, or Sifma, in a statement this month said if the Treasury were to delay payments on debt it would extend the payment date of the securities one day at a time. The Treasury Market Practice Group, an industry organization sponsored by the Federal Reserve Bank of New York that advises on transactions in U.S. securities, said last month contingency planning developed since the 2011 debt-limit crisis would mitigate yet not eliminate the operational risk posed by government-debt payment delays.

Some clearing firms are preparing for a default, with Citigroup Inc. and State Street Corp. discussing ways to limit the use of short-term Treasury bills as collateral in coming weeks, the Wall Street Journal reported on its website yesterday, citing people familiar with the matter. Citigroup told some clients it would prefer not to take U.S. government debt maturing Oct. 24 or Oct. 31 as security for transactions, the newspaper reported.

Norway has a very good Sovereign Wealth Fund policy – but even they have a problem involving politicians on one hand and a large pot of money on the other:

The Labor government, which resigned yesterday, presented what it called a “cautious” budget, saying it would use 135 billion kroner ($22 billion) of Norway’s oil wealth to plug deficits next year, equal to 5.5 percent of mainland gross domestic product. That leaves Solberg’s administration with 54 billion kroner to spend before it breaches the nation’s fiscal policy rule.

Solberg and her coalition partner, the Progress Party, have until early November to adjust the spending plan put forward by the outgoing administration. While she has promised to stick to the fiscal rule, which caps expenditure of Norway’s oil income at 4 percent of its wealth fund, the two parties have signaled they want to spend more on infrastructure, education and health care. Those measures will come on top of planned tax cuts.

DBRS has published its Quarterly Split Share Market Report:

DBRS has today published its quarterly surveillance report covering the Canadian split share market for Q3 2013. The report provides insight into recent market activity and summarizes the performance of split share funds rated by DBRS. Three main areas are covered in the report: equity performance, existing fund activity and new fund market activity. The appendix provides details on all of the preferred shares and securities rated by DBRS, including current ratings and recent downside protection levels.

A copy of this commentary is available by contacting us at info@dbrs.com.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets off 2bp and DeemedRetractibles gaining 1bp. The Performance Highlights table is longer than one might expect given these quiet figures, but Floaters continued to plunge. Volume was low.

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 -1.0948 % 2,442.9
FixedFloater 4.32 % 3.58 % 29,284 18.26 1 -0.6321 % 3,888.9
Floater 2.77 % 2.99 % 64,564 19.76 5 -1.0948 % 2,637.6
OpRet 4.62 % 2.16 % 63,641 0.45 3 -0.0897 % 2,644.6
SplitShare 4.76 % 4.99 % 63,575 4.00 6 0.1353 % 2,946.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0897 % 2,418.2
Perpetual-Premium 5.80 % 0.44 % 109,920 0.08 8 0.0399 % 2,279.0
Perpetual-Discount 5.58 % 5.60 % 159,991 14.44 30 0.0663 % 2,333.1
FixedReset 4.97 % 3.75 % 236,380 3.59 85 -0.0239 % 2,445.0
Deemed-Retractible 5.15 % 4.40 % 192,480 3.70 43 0.0067 % 2,373.2
Performance Highlights
Issue Index Change Notes
TRI.PR.B Floater -2.94 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-15
Maturity Price : 19.81
Evaluated at bid price : 19.81
Bid-YTW : 2.66 %
CIU.PR.C FixedReset -1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-15
Maturity Price : 19.00
Evaluated at bid price : 19.00
Bid-YTW : 4.44 %
GWO.PR.N FixedReset -1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.76
Bid-YTW : 4.84 %
SLF.PR.A Deemed-Retractible -1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.60
Bid-YTW : 6.53 %
TRP.PR.C FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-15
Maturity Price : 22.20
Evaluated at bid price : 22.51
Bid-YTW : 3.92 %
BAM.PR.K Floater -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-15
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 3.02 %
TRP.PR.D FixedReset 1.22 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 4.03 %
IFC.PR.A FixedReset 1.71 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.36
Bid-YTW : 4.19 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.D FixedReset 182,975 Nesbitt crossed blocks of 100,000 and 30,000, both at 25.02, and bought 10,000 from TD at 25.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 4.03 %
BMO.PR.P FixedReset 86,910 RBC crossed 75,000 at 26.21.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.13
Bid-YTW : 2.58 %
PWF.PR.S Perpetual-Discount 72,150 TD crossed 58,000 at 22.55.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-15
Maturity Price : 22.15
Evaluated at bid price : 22.49
Bid-YTW : 5.33 %
TD.PR.R Deemed-Retractible 51,280 RBC crossed 50,000 at 25.95.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.75
Evaluated at bid price : 25.95
Bid-YTW : 3.50 %
BNS.PR.N Deemed-Retractible 44,450 Nesbitt crossed 15,000 at 25.70; RBC crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-01-27
Maturity Price : 25.00
Evaluated at bid price : 25.69
Bid-YTW : 4.29 %
TD.PR.A FixedReset 38,689 Scotia bought 11,900 from Nesbitt at 25.19, then crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.19
Bid-YTW : 1.68 %
There were 22 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSE.PR.A FixedReset Quote: 22.65 – 23.39
Spot Rate : 0.7400
Average : 0.4209

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-15
Maturity Price : 22.28
Evaluated at bid price : 22.65
Bid-YTW : 4.12 %

TRI.PR.B Floater Quote: 19.81 – 20.49
Spot Rate : 0.6800
Average : 0.5015

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-15
Maturity Price : 19.81
Evaluated at bid price : 19.81
Bid-YTW : 2.66 %

GWO.PR.N FixedReset Quote: 21.76 – 22.29
Spot Rate : 0.5300
Average : 0.3768

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.76
Bid-YTW : 4.84 %

MFC.PR.F FixedReset Quote: 22.36 – 23.08
Spot Rate : 0.7200
Average : 0.5749

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.36
Bid-YTW : 4.82 %

CU.PR.E Perpetual-Discount Quote: 23.40 – 23.83
Spot Rate : 0.4300
Average : 0.2899

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-15
Maturity Price : 23.09
Evaluated at bid price : 23.40
Bid-YTW : 5.29 %

BNS.PR.K Deemed-Retractible Quote: 25.02 – 25.25
Spot Rate : 0.2300
Average : 0.1449

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-28
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 4.23 %

October PrefLetter Released!

Tuesday, October 15th, 2013

The October, 2013, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”. Those who subscribe for a full year receive the “Previous edition” as a bonus.

The regular appendices reporting on DeemedRetractibles and FixedResets are included.

PrefLetter may now be purchased by all Canadian residents.

Until further notice, the “Previous Edition” will refer to the October, 2013, issue, while the “Next Edition” will be the November, 2013, issue, scheduled to be prepared as of the close November 8 and eMailed to subscribers prior to market-opening on November 11.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

Note: My verbosity has grown by such leaps and bounds that it is no longer possible to deliver PrefLetter as an eMail attachment – it’s just too big for my software! Instead, I have sent passwords – click on the link in your eMail and your copy will download.

Note: The PrefLetter website has a Subscriber Download Feature. If you have not received your copy, try it!

Note: PrefLetter eMails sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository – there are some hints in the post Sympatico Spam Filters out of Control. If it’s not there, contact me and I’ll get you your copy … somehow!

Note: There have been scattered complaints regarding inability to open PrefLetter in Acrobat Reader, despite my practice of including myself on the subscription list and immediately checking the copy received. I have had the occasional difficulty reading US Government documents, which I was able to resolve by downloading and installing the latest version of Adobe Reader. Also, note that so far, all complaints have been from users of Yahoo Mail. Try saving it to disk first, before attempting to open it.

Note: There have been other scattered complaints that double-clicking on the links in the “PrefLetter Download” email results in a message that the password has already been used. I have been able to reproduce this problem in my own eMail software … the problem is double-clicking. What happens is the first click opens the link and the second click finds that the password has already been used and refuses to work properly. So the moral of the story is: Don’t be a dick! Single Click!

CGI: 13H1 Semi-Annual Report

Monday, October 14th, 2013

Canadian General Investments Limited has released its Semi-Annual Report to June 30, 2013.

Figures of interest are:

MER: The MER per unit of the Fund, excluding the cost of leverage, was 1.76% as at June 30, 2013.

Average Net Assets: We need this figure to calculate portfolio yield. [(456.1-million (NAV, beginning of period) + 443.9-million (NAV, end of period)] / 2 = about $450.0-million.

Underlying Portfolio Yield: Total income of 7.340-million times two (semi-annual) divided by average net assets of 450.0-million is 3.26%

Income Coverage: Total Investment Income of 7.340-million divided by Expenses and Preferred Share Distributions of 7.224-million is 102%.

Unit Value: To use the Split Share Credit Quality Model, we need a unit value, but the company does not keep the number of capital units equal to the number of preferred shares. However, shareholders’ equity is 442.1-million, compared to preferred shares outstanding of 150-million, so we can say that the Unit Value is 3.95x the preferred share value, so call it (equivalent to) 98.68.

Capital Unit Dividends: Dividends of 2.503-million were paid to capital unitholders in 13H1; this was 34% of total investment income, which we determined above was 3.26% of total assets. Therefore 1.11% of total assets were paid as capital unit dividends. Total assets can be modelled as 25.00 (preferred) + 98.68 (capital units) = 123.68 and 1.11% of that is $1.37.

CGI has two series of preferred shares outstanding: CGI.PR.C and CGI.PR.D.

DGS.PR.A: 13H1 Semi-Annual Report

Sunday, October 13th, 2013

Dividend Growth Split Corp. has released its Semi-Annual Report to June 30, 2013.

Figures of interest are:

MER: The MER per unit of the Fund, excluding the cost of leverage, was 1.03% as at June 30, 2013.

Average Net Assets: We need this figure to calculate portfolio yield. [(106.7-million (NAV, beginning of period) + 108.9-million (NAV, end of period)] / 2 = about $108-million.

Underlying Portfolio Yield: Total income of 2,347,802 times two (semi-annual) divided by average net assets of 108-million is 4.35%

Income Coverage: Net Investment Income of 1,789,415 divided by Preferred Share Distributions of 1,653,042 is 108%.

October 11, 2013

Friday, October 11th, 2013

The witch-hunt against traders continues:

The U.S. Justice Department has opened a criminal investigation of possible manipulation of the $5.3 trillion-a-day foreign exchange market, a person familiar with the matter said.

The Federal Bureau of Investigation, which is also looking into alleged rigging of interest rates associated with the London interbank offered rate, or Libor, is in the early stages of its currency market probe, said the person, who asked not to be identified because the inquiry is confidential.

The U.S. investigation comes as the U.K. Financial Conduct Authority said in June it was reviewing potential manipulation of exchange rates. That month, allegations that dealers at banks pooled information through instant messages and used client orders to move benchmark currency rates were reported by Bloomberg News. Regulators are probing the alleged abuse of financial benchmarks used in markets from oil to interest rate swaps by the firms that play a central role in setting them.

Readers will remember that the shocking allegations are that traders would position their inventories to meet known pending client orders.

You can like or dislike Obama but he’s got one thing right:

President Barack Obama knows who is the boss: the bond market.

“Ultimately, what matters is: What do the people who are buying Treasury bills think?” the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation’s debt.

Coming up next: courses on how to cheat on personality tests:

They can drive cars, win Jeopardy and find your soon-to-be favorite song. Machines are also learning to decipher the most human qualities about you — and help businesses predict your potential to be their next star employee.

A handful of technology companies from Knack.it Corp. to Evolv Inc. are doing just that, developing video games and online questionnaires that measure personality attributes in a job applicant. Based on patterns of how a company’s best performers responded in these assessments, the software estimates a candidate’s suitability to be everything from a warehouse worker to an investment bank analyst.

Once in my twenties, when I was so desperate for work I would apply for jobs at banks and undergo the ordeal of speaking to stupid people, I was required to take a personality test. Multiple choice. Page one of the test was how you thought of yourself with respect to various attributes. Page two – cunningly designed so you couldn’t see your answsrs to page 1 when filling in page 2 – was how you thought other people perceived you with respect to those same attributes. Fortunately, I’d heard of this ridiculous piece of HR ass-covering, and knew that what you said didn’t matter much – they were interested in how closely page 1 and 2 matched. So I made the responses almost identical.

In many ways, it must be nice to be American. A constitution that actually means something, a culture that supports it and an independent judiciary that enforces it:

New York’s ban on outdoor smoking in state parks was blocked by a judge after a smokers’-rights group argued that the Office of Parks, Recreation & Historic Preservation exceeded its authority.

Supreme Court Justice George B. Ceresia Jr. in Troy, in a ruling dated Oct. 8 and made public today, permanently blocked the office from implementing or enforcing the ban and ordered it to remove any signs referring to it.

The office “extended its reach beyond interstitial rule-making and into the realm of legislating,” Ceresia wrote in his ruling, saying state law doesn’t give the parks office the right to promulgate rules “regulating conduct bearing any tenuous relationship to park patrons’ health or welfare.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 9bp, FixedResets off 3bp and DeemedRetractibles gaining 1bp. No particular patterns are observable on the moderately sized Performance Highlights table. Volume was very low.

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 -0.6320 % 2,469.9
FixedFloater 4.29 % 3.55 % 30,410 18.32 1 1.0032 % 3,913.6
Floater 2.74 % 2.97 % 62,086 19.82 5 -0.6320 % 2,666.8
OpRet 4.61 % 1.70 % 64,511 0.46 3 0.1154 % 2,647.0
SplitShare 4.77 % 5.04 % 64,312 4.01 6 0.0745 % 2,942.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1154 % 2,420.4
Perpetual-Premium 5.80 % 0.65 % 105,015 0.10 8 0.0924 % 2,278.1
Perpetual-Discount 5.59 % 5.58 % 165,538 14.47 30 0.0948 % 2,331.6
FixedReset 4.97 % 3.73 % 229,984 3.42 85 -0.0311 % 2,445.6
Deemed-Retractible 5.15 % 4.41 % 184,660 6.86 43 0.0115 % 2,373.0
Performance Highlights
Issue Index Change Notes
TRI.PR.B Floater -2.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 20.41
Evaluated at bid price : 20.41
Bid-YTW : 2.58 %
HSB.PR.D Deemed-Retractible -1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.76
Bid-YTW : 5.20 %
PWF.PR.A Floater -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 22.21
Evaluated at bid price : 22.48
Bid-YTW : 2.32 %
MFC.PR.K FixedReset -1.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.75
Bid-YTW : 4.58 %
BAM.PR.G FixedFloater 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 22.52
Evaluated at bid price : 22.15
Bid-YTW : 3.55 %
SLF.PR.H FixedReset 1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 3.98 %
BAM.PF.D Perpetual-Discount 1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 20.10
Evaluated at bid price : 20.10
Bid-YTW : 6.15 %
Volume Highlights
Issue Index Shares
Traded
Notes
CU.PR.D Perpetual-Discount 229,500 Nesbitt crossed blocks of 150,000 and 75,000, both at 23.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 23.14
Evaluated at bid price : 23.45
Bid-YTW : 5.28 %
SLF.PR.A Deemed-Retractible 70,782 Scotia crossed 25,000 at 21.85; Nesbitt crossed two blocks of 20,000 each, both at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.84
Bid-YTW : 6.39 %
PWF.PR.R Perpetual-Discount 68,910 Nesbitt crossed blocks of 20,000 and 40,000, both at 24.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 24.28
Evaluated at bid price : 24.69
Bid-YTW : 5.56 %
MFC.PR.E FixedReset 60,344 Nesbitt crossed 35,000 at 25.61; TD crossed 17,500 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.17 %
CU.PR.E Perpetual-Discount 54,955 TD crossed 51,600 at 23.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 23.09
Evaluated at bid price : 23.40
Bid-YTW : 5.29 %
TD.PR.Y FixedReset 41,300 Will reset at 3.5595%.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.53
Bid-YTW : 3.86 %
There were 17 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.F FixedReset Quote: 22.47 – 23.06
Spot Rate : 0.5900
Average : 0.4159

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.47
Bid-YTW : 4.76 %

GWO.PR.P Deemed-Retractible Quote: 24.31 – 24.67
Spot Rate : 0.3600
Average : 0.2505

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 5.80 %

IAG.PR.A Deemed-Retractible Quote: 22.39 – 22.79
Spot Rate : 0.4000
Average : 0.2912

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.39
Bid-YTW : 5.93 %

TRP.PR.B FixedReset Quote: 20.18 – 20.47
Spot Rate : 0.2900
Average : 0.1824

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 20.18
Evaluated at bid price : 20.18
Bid-YTW : 4.04 %

PWF.PR.K Perpetual-Discount Quote: 22.17 – 22.49
Spot Rate : 0.3200
Average : 0.2177

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 21.83
Evaluated at bid price : 22.17
Bid-YTW : 5.58 %

ELF.PR.G Perpetual-Discount Quote: 21.10 – 21.45
Spot Rate : 0.3500
Average : 0.2503

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-11
Maturity Price : 21.10
Evaluated at bid price : 21.10
Bid-YTW : 5.66 %

AQN.PR.A Upgraded to P-3(high) from P-3 by S&P

Friday, October 11th, 2013

Standard & Poor’s has announced:

  • We are raising our long-term corporate credit rating on Algonquin Power & Utilities Corp. (APUC) and subsidiaries Algonquin Power Co. (APCO) and Liberty Utilities Co. to ‘BBB’ from ‘BBB-‘.
  • We are also raising our senior unsecured debt rating on APCO to ‘BBB’ from ‘BBB-‘.
  • In addition, we are raising our global scale and Canada scale preferred stock ratings on APUC to ‘BB+’ and ‘P-3 (High)’ from ‘BB’ and ‘P-3’, respectively.
  • We base the upgrade on the increase in regulated cash flow, which is currently at 40%-45% of consolidated cash flow and which we forecast will continue to increase in the medium term.
  • The stable outlook reflects our assessment of relatively stable cash flows supported by regulated cash flow from Liberty’s regulated utility business and APCO’s largely contracted power asset portfolio.


The stable outlook reflects our assessment of relatively stable cash flows, supported by regulated cash flow from Liberty’s regulated utility business, and APCO’s largely contracted power asset portfolio.

We could take a negative rating action if APUC fails to execute its development projects and acquisitions with financing arrangements that allow it to maintain its key financial measures. We expect APUC to achieve AFFO-to-total debt of greater than 15% within the next 12 to 24 months, with at least 45% of its consolidated cash flows supported by regulated cash flows from Liberty. Failure to achieve this expectation could also result in a negative rating action.

We could raise the rating if APUC achieves sustained AFFO-to-debt of greater than 25%, with a higher proportion of cash flow contributions from Liberty, all else being equal.

TXPR / TXPL Index Revision

Friday, October 11th, 2013

Standard & Poor’s has announced:

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Venture Select Index Reviews. These changes will be effective at the open on Monday, October 21, 2013.

S&P/TSX Preferred Share Index

ADDITIONS
Symbol Issue Name CUSIP
BMO.PR.R BANK OF MONTREAL FLTG RATE CL ‘B’ PR SER 17 063671 77 0
BNS.PR.O BANK OF NOVA SCOTIA (THE) PR SERIES ’17’ 064149 75 0
FTS.PR.K FORTIS INC. 1ST PR SERIES ‘K’ 349553 78 4
L.PR.A LOBLAW COMPANIES LIMITED 2ND PR SERIES ‘A’ 539481 60 6
PPL.PR.A PEMBINA PIPELINE CORPORATION CL ‘A’ PR SER 1 706327 20 2
POW.PR.D POWER CORPORATION OF CANADA 5.00% SER ‘D’ PR 739239 86 1
POW.PR.A POWER CORPORATION OF CANADA 5.60% SER ‘A’ PR 739239 88 7
RY.PR.G ROYAL BANK OF CANADA 1ST PR NON-CUM SER ‘AG’ 780102 55 4
TD.PR.T TORONTO-DOMINION BANK(THE) FLTG RT PR SER T 891145 72 4
W.PR.H WESTCOAST ENERGY INC. 5.50% 1ST PR SERIES ‘7’ 95751D 88 8
DELETIONS
Symbol Issue Name CUSIP
CIU.PR.B CU INC. CUMULATIVE PR SERIES ‘2’ 22944C 30 4

S&P/TSX Preferred Share Laddered Index

ADDITIONS
Symbol Issue Name CUSIP
PPL.PR.A PEMBINA PIPELINE CORPORATION CL ‘A’ PR SER 1 706327 20 2

October 10, 2013

Thursday, October 10th, 2013

Maneuvering continues on the US debt limit:

The White House endorsed a short debt-limit increase with no policy conditions attached, signaling potential support for House Republicans’ plan for a month-long reprieve from a default.

The idea, proposed today by House Speaker John Boehner, wouldn’t end the 10-day old partial shutdown of the federal government. The plan would push the lapse of U.S. borrowing authority to Nov. 22 from Oct. 17.

It was a rather strangely mixed day on the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles both flat, while FixedResets were down 23bp. BAM issues were notable losers on the Performance Highlights table. Volume was quite high.

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 -0.2583 % 2,485.6
FixedFloater 4.33 % 3.59 % 30,899 18.24 1 -0.1914 % 3,874.7
Floater 2.72 % 2.97 % 61,485 19.81 5 -0.2583 % 2,683.8
OpRet 4.62 % 3.18 % 61,408 0.63 3 0.2829 % 2,643.9
SplitShare 4.77 % 5.08 % 65,038 4.01 6 0.1491 % 2,940.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2829 % 2,417.6
Perpetual-Premium 5.80 % 1.42 % 108,513 0.10 8 -0.0948 % 2,276.0
Perpetual-Discount 5.59 % 5.56 % 160,692 14.45 30 -0.0015 % 2,329.4
FixedReset 4.97 % 3.74 % 235,995 3.60 85 -0.2346 % 2,446.4
Deemed-Retractible 5.15 % 4.46 % 187,539 6.87 43 0.0000 % 2,372.7
Performance Highlights
Issue Index Change Notes
BAM.PF.D Perpetual-Discount -1.74 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 6.25 %
BAM.PR.T FixedReset -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 22.58
Evaluated at bid price : 23.33
Bid-YTW : 4.52 %
IFC.PR.A FixedReset -1.47 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 4.27 %
BAM.PR.K Floater -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 17.57
Evaluated at bid price : 17.57
Bid-YTW : 3.00 %
BAM.PR.X FixedReset -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 21.96
Evaluated at bid price : 22.37
Bid-YTW : 4.29 %
MFC.PR.F FixedReset -1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.42
Bid-YTW : 4.76 %
TRP.PR.C FixedReset -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 22.40
Evaluated at bid price : 22.80
Bid-YTW : 3.82 %
BAM.PR.B Floater -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 17.74
Evaluated at bid price : 17.74
Bid-YTW : 2.97 %
ENB.PR.H FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 22.43
Evaluated at bid price : 23.26
Bid-YTW : 4.27 %
CU.PR.F Perpetual-Discount 1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 21.06
Evaluated at bid price : 21.06
Bid-YTW : 5.42 %
CU.PR.G Perpetual-Discount 1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 21.05
Evaluated at bid price : 21.05
Bid-YTW : 5.42 %
PWF.PR.A Floater 2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 22.49
Evaluated at bid price : 22.75
Bid-YTW : 2.30 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.A OpRet 304,000 TD crossed blocks of 199,500 and 50,000 at 25.55. RBC crossed 49,400 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-19
Maturity Price : 25.25
Evaluated at bid price : 25.43
Bid-YTW : 3.39 %
MFC.PR.I FixedReset 109,600 RBC crossed two blocks of 49,400 each, both at 25.48.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : 3.98 %
MFC.PR.H FixedReset 60,270 TD crossed 49,000 at 25.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 3.77 %
TD.PR.Y FixedReset 57,075 Maple (who?) bought 19,300 from Hampton (who?) at 19,300.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.77
Bid-YTW : 3.70 %
CU.PR.G Perpetual-Discount 54,779 Nesbitt crossed 30,000 at 21.05.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 21.05
Evaluated at bid price : 21.05
Bid-YTW : 5.42 %
CU.PR.F Perpetual-Discount 44,800 RBC crossed 35,000 at 21.05.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 21.06
Evaluated at bid price : 21.06
Bid-YTW : 5.42 %
There were 49 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IFC.PR.A FixedReset Quote: 24.15 – 24.52
Spot Rate : 0.3700
Average : 0.2250

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 4.27 %

TD.PR.S FixedReset Quote: 24.48 – 24.78
Spot Rate : 0.3000
Average : 0.1785

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.48
Bid-YTW : 3.69 %

IFC.PR.C FixedReset Quote: 25.51 – 25.79
Spot Rate : 0.2800
Average : 0.1674

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.53 %

TD.PR.I FixedReset Quote: 25.62 – 25.90
Spot Rate : 0.2800
Average : 0.1774

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 2.70 %

CIU.PR.C FixedReset Quote: 19.36 – 20.15
Spot Rate : 0.7900
Average : 0.6938

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 19.36
Evaluated at bid price : 19.36
Bid-YTW : 4.31 %

FTS.PR.J Perpetual-Discount Quote: 22.45 – 22.98
Spot Rate : 0.5300
Average : 0.4366

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-10
Maturity Price : 22.16
Evaluated at bid price : 22.45
Bid-YTW : 5.34 %

October 9, 2013

Thursday, October 10th, 2013

It’s official – Yellen is the nominee for Fed governor:

President Barack Obama will nominate Janet Yellen as chairman of the Federal Reserve, which would put the world’s most powerful central bank in the hands of a key architect of its unprecedented stimulus program and the first female leader in its 100-year history.

Obama will announce the nomination at 3 p.m. today in Washington, a White House official said in an e-mailed statement. Yellen, 67, would succeed Ben S. Bernanke, whose term expires on Jan. 31.

Bernanke says:

President Obama has made an outstanding choice in nominating my colleague and friend Janet Yellen to chair the Federal Reserve Board. Janet is exceptionally well qualified for the position, with stellar academic credentials and a strong record as a leader and a policymaker.

Yellen says:

Thank you, Mr. President, I am honored and humbled by the faith you have placed in me. If confirmed by the Senate, I pledge to do my utmost to keep that trust and meet the great responsibilities that Congress has entrusted to the Federal Reserve–to promote maximum employment, stable prices, and a strong and stable financial system.

I’d also like to thank my spouse, George, and my son, Robert. I couldn’t imagine taking on this new challenge without their love and support.

The past six years have been tumultuous for the economy and challenging for many Americans. While I think we all agree, Mr. President, that more needs to be done to strengthen this recovery, particularly for those hardest hit by the Great Recession, we have made progress. The economy is stronger and the financial system sounder. As you said, Mr. President, considerable credit for that goes to Chairman Bernanke for his wise, courageous, and skillful leadership. It has been my privilege to serve with him and learn from him.

While we have made progress, we have farther to go. The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they will pay their bills and provide for their families. The Federal Reserve can help, if it does its job effectively. We can help ensure that everyone has the opportunity to work hard and build a better life. We can ensure that inflation remains in check and doesn’t undermine the benefits of a growing economy. We can and must safeguard the financial system.

The Fed has powerful tools to influence the economy and the financial system, but I believe its greatest strength rests in its capacity to approach important decisions with expertise and objectivity, to vigorously debate diverse views, and then to unite behind its response. The Fed’s effectiveness depends on the commitment, ingenuity, and integrity of the Fed staff and my fellow policymakers. They serve America with great dedication.

Mr. President, thank you for giving me this opportunity to continue serving the Federal Reserve and carrying out its important work on behalf of the American people.

Iceland has foreign exchange problems:

Iceland’s private sector is running out of cash to repay its foreign currency debt, according to the nation’s central bank.

Non-krona debt owed by entities besides the Treasury and the central bank due through 2018 totals about 700 billion kronur ($5.8 billion), the bank said yesterday. The projected current account surpluses over the next five years aren’t estimated to reach even half of that and will equal a shortfall of about 20 percent of gross domestic product.

Prime Minister Sigmundur David Gunnlaugsson has said Iceland’s foreign exchange shortfall is “a matter of huge concern” as he tries to scale back currency controls in place since 2008. The government’s biggest challenge is to allow capital to flow freely without triggering a krona sell-off that would cause Iceland’s foreign debt to spike and undermine the nation’s economic recovery.

I find it hard to get excited about the US debt shennanigans and tapering … the real problem is in the real economy:

The U.S. Federal Reserve has tripled the size of its balance sheet by “printing” an ocean of money. But despite the hand-wringing of the gold bugs, recent data proves that deflation, not inflation, remains the biggest threat to the U.S. economy.

The loan-to-deposit ratio for U.S. banks explains why Fed stimulus is not translating into inflationary pressure – the added funds remain trapped in the banking system and are not reaching the real economy.

The intention behind the Fed’s stimulus program was that by expanding bank balance sheets, customer lending would rise, and this would create consumer and corporate demand for products and services. The loan-to-deposit ratio illustrates that the process is stalled at step two – big bank balance sheets are bloated but aggregate demand in the U.S. economy has barely improved. The output gap remains.

I suggest that investors in long-term fixed income should be cheering the dysfunction and sending large donations to the Republican Party. While long-term fixed income is priced on expected inflation, it realizes based on realized inflation. Recessions are good! Depressions are wonderful! And here’s what the OECD honcho has to say:

“We still see the probability of failing to raise the debt ceiling as low, but as the government shutdown drags on, the level of concern is ratcheting up,” said [secretary-general of the Organization for Economic Co-Operation and Development] Mr [Angel] Gurria.

“If the debt ceiling is not raised – or, better still, abolished – our calculations suggest that the OECD region as a whole will be pushed back into recession next year, and emerging economies will experience a sharp slowdown.”

The OECD projects U.S. government consumption would contract immediately by the equivalent of at least four percentage points of gross domestic product, shaving that amount from economic growth next year.

A default, of course, would be even worse, he warned, and would hit other countries hard.

Meanwhile, DBRS has put the US under Review-Negative:

This action reflects the growing risk of a selective default by the federal government on its debt securities as a result of the lack of an agreement to raise the statutory limit on federal debt (the debt ceiling). According to the U.S. Treasury, its ability to borrow will be exhausted no later than October 17, 2013, leaving a cash balance of approximately $30 billion. If the debt ceiling is not raised or eliminated by October 17, it is unclear how the Treasury would operate. While a low probability, missing payments on selected government securities cannot be ruled out. In the view of DBRS, the longer it takes for an agreement to be reached on the debt ceiling, the greater the risk of missed payments.

The review for downgrade reflects the increasing uncertainty over the debt ceiling outcome, combined with the potential lingering repercussions on both domestic and international investor sentiment, and therefore the U.S. economy and financial markets. DBRS notes that the magnitude of these repercussions could increase each day this impasse continues.

If by October 17 there is still no agreement to raise the debt ceiling and the United States subsequently misses a debt payment, DBRS would assign a Selective Default rating to the affected securities, as long as we expect the Treasury to meet its other obligations in a timely manner. If there is a full-fledged default involving a wide array of securities, the magnitude of the downgrade would be greater.

It is an article of faith that Congress’ dysfunction is due to gerrymandering and the consequent importance of primaries. There’s at least some evidence that polarization of Congress reflects polarization of the electorate – extending beyond ideology to geography:

The real reason for our increasingly divided political system is much simpler: The right wing of the Republican Party has embraced a fundamentalist version of free-market capitalism and succeeded in winning elections. (The Democrats have moved to the left, but less so.)

The Republican shift is the result of several factors. The realignment of Southern white voters into the Republican Party, the branch of conservative activism created by Barry Goldwater’s 1964 presidential campaign and the party’s increasingly firm stance on issues such as income inequality and immigration, can all be important to Republicans’ rightward shift.

The “blame it on the gerrymanders” argument mistakenly assumes that because redistricting created more comfortable seats for each party, polarization became inevitable. Our research, however, casts serious doubt on that idea.

Many districts are safe for one party or the other because of how Americans have sorted themselves geographically — choosing to live closer to people who are politically or culturally like-minded. In Florida, for example, Palm Beach County will be reliably Democratic and the Panhandle will consistently vote for Republicans. These geographic shifts mean that state legislatures, which approve congressional district lines, can tweak but not fundamentally alter the ideological makeup of Congress.

The research cited is a paper titled Does Gerrymandering Cause Polarization?

Arthur Heinmaa of Toron observes:

This chart continues to really worry me. There is no stopping the Canadian trend.


Click for Big

I will laugh through my tears if popping our bubble is as painful (and my guess would be more painful) than it was in America. That would put paid to the ‘Canadian financial stability due to wise regulation’ argument, which I consider ridiculous.

Louis Vachon, CEO of National Bank, the man who led the bank while it was stuffing its Money Market Fund to the nuts with ABCP issued by related companies, is now touting his Capital Markets unit:

The knock on National Bank has long been that it is too Quebec-focused, and that its capital markets earnings, which comprise 38 per cent of its net income, are inherently volatile. For these reasons, the bank trades at a lower price-earnings multiple than its Big Six peers.

Mr. Vachon is now on a crusade of sorts to “demystify” the financial markets arm. While he is realistic about his efforts – “we cannot turn lead to gold” – he argues a major point: “All we’re saying is [the unit] does not deserve the extensive discount” it receives relative to the retail operation.

Prior to 2004, he elaborates, there was never a discount for wholesale banking. And although it is understandable why the financial crisis altered that, much has changed since those tumultuous years. Any argument in favour of a discount is “passé,” he said. “If you look forward now, we’re back to more normal times and client-driven activities,” like corporate lending.

It was another negative day for the Canadian preferred share market, with PerpetualDiscounts down 24bp, FixedResets flat and DeemedRetractibles off 14bp. A lengthy Performance Highlights table is dominated by losers. Volume was low.

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield about 4.8% (OK, a smidgen more), so the pre-tax interest-equivalent spread is now about 245bp, with everything basically unchanged from the October 2 report.

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 -1.1845 % 2,492.0
FixedFloater 4.28 % 3.60 % 30,776 18.08 1 1.1384 % 3,882.1
Floater 2.71 % 2.94 % 63,781 19.90 5 -1.1845 % 2,690.7
OpRet 4.63 % 3.16 % 61,098 0.63 3 -0.1156 % 2,636.4
SplitShare 4.78 % 5.05 % 65,829 4.01 6 -0.3453 % 2,935.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1156 % 2,410.8
Perpetual-Premium 5.80 % 0.26 % 105,518 0.10 8 -0.1071 % 2,278.2
Perpetual-Discount 5.59 % 5.57 % 158,188 14.46 30 -0.2430 % 2,329.4
FixedReset 4.96 % 3.71 % 234,017 3.60 85 -0.0013 % 2,452.1
Deemed-Retractible 5.15 % 4.49 % 187,711 6.83 43 -0.1358 % 2,372.7
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -1.98 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 22.07
Evaluated at bid price : 22.30
Bid-YTW : 2.35 %
FTS.PR.J Perpetual-Discount -1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 22.18
Evaluated at bid price : 22.47
Bid-YTW : 5.34 %
BAM.PR.K Floater -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 17.80
Evaluated at bid price : 17.80
Bid-YTW : 2.96 %
BNA.PR.E SplitShare -1.25 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 24.45
Bid-YTW : 5.60 %
FTS.PR.F Perpetual-Discount -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 22.82
Evaluated at bid price : 23.11
Bid-YTW : 5.36 %
BAM.PR.C Floater -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 17.73
Evaluated at bid price : 17.73
Bid-YTW : 2.97 %
MFC.PR.B Deemed-Retractible -1.21 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.29
Bid-YTW : 6.60 %
TRP.PR.A FixedReset -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 23.34
Evaluated at bid price : 23.83
Bid-YTW : 4.02 %
GWO.PR.P Deemed-Retractible -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 5.75 %
BAM.PR.G FixedFloater 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 22.56
Evaluated at bid price : 22.21
Bid-YTW : 3.60 %
FTS.PR.H FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 21.03
Evaluated at bid price : 21.03
Bid-YTW : 4.08 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.L Deemed-Retractible 95,200 Nesbitt crossed blocks of 48,800 and 40,000, both at 25.10.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 5.76 %
PWF.PR.R Perpetual-Discount 86,551 Nesbitt crossed two blocks of 40,000 each, both at 24.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 24.29
Evaluated at bid price : 24.70
Bid-YTW : 5.56 %
BAM.PR.B Floater 60,083 Nesbitt crossed 50,000 at 17.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 17.94
Evaluated at bid price : 17.94
Bid-YTW : 2.94 %
TD.PR.Y FixedReset 54,359 Will reset at 3.5595%.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.75
Bid-YTW : 3.71 %
BNS.PR.Q FixedReset 38,583 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 3.81 %
TD.PR.C FixedReset 26,955 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.19
Bid-YTW : 2.07 %
There were 23 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: 22.30 – 23.30
Spot Rate : 1.0000
Average : 0.7840

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 22.07
Evaluated at bid price : 22.30
Bid-YTW : 2.35 %

CU.PR.F Perpetual-Discount Quote: 20.77 – 21.21
Spot Rate : 0.4400
Average : 0.3020

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-10-09
Maturity Price : 20.77
Evaluated at bid price : 20.77
Bid-YTW : 5.49 %

GWO.PR.P Deemed-Retractible Quote: 24.40 – 24.67
Spot Rate : 0.2700
Average : 0.1636

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 5.75 %

BNA.PR.E SplitShare Quote: 24.45 – 24.74
Spot Rate : 0.2900
Average : 0.1844

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 24.45
Bid-YTW : 5.60 %

TD.PR.P Deemed-Retractible Quote: 25.67 – 25.92
Spot Rate : 0.2500
Average : 0.1464

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-11-01
Maturity Price : 25.00
Evaluated at bid price : 25.67
Bid-YTW : 4.22 %

MFC.PR.B Deemed-Retractible Quote: 21.29 – 21.64
Spot Rate : 0.3500
Average : 0.2512

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.29
Bid-YTW : 6.60 %

New Issue: VSN FixedReset, 5.00%+301

Wednesday, October 9th, 2013

Veresen Inc. has announced:

it has agreed to issue 6,000,000 Cumulative Redeemable Preferred Shares, Series C (“Series C Preferred Shares”) at a price of $25.00 per share (the “Offering”) for aggregate gross proceeds of $150 million on a bought deal basis. The Series C Preferred Shares will be offered to the public through a syndicate of underwriters co-led by Scotiabank,TD Securities Inc. and CIBC.

The holders of Series C Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of 5.00%, representing $1.25 per share, payable quarterly for an initial period up to but excluding March 31, 2019, as and when declared by the Board of Directors of Veresen. The first quarterly dividend payment date is scheduled for December 31, 2013. The dividend rate will reset on March 31, 2019 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 3.01%. The Series C Preferred Shares are redeemable by Veresen, at its option, on March 31, 2019 and on March 31 of every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.

Holders of Series C Preferred Shares will have the right to convert all or any part of their shares into Cumulative Redeemable Preferred Shares, Series D (“Series D Preferred Shares”), subject to certain conditions, on March 31, 2019, and on March 31 of every fifth year thereafter. The holders of Series D Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of Veresen, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 3.01%.

Veresen has granted the underwriters an option to purchase at the offering price an additional 2,000,000 Series C Preferred Shares at a price of $25.00 per share exercisable in whole or in part at any time up to 6:30 AM (Calgary time) on the date that is two business days prior to closing. Should the option be fully exercised, the total gross proceeds of the Offering will be $200 million.

The Offering is expected to close on or about October 21, 2013, subject to customary closing conditions. Net proceeds from the Offering will be used to reduce indebtedness, partially fund capital expenditures and for other general corporate purposes.

The Series C Preferred Shares will be issued pursuant to a prospectus supplement that will be filed with the securities regulatory authority in each of the provinces of Canada under Veresen’s short form base shelf prospectus dated September 20, 2013. An application has been made to list the Series C Preferred Shares and the Series D Preferred Shares on the Toronto Stock Exchange. The Offering is subject to receipt of all necessary regulatory and stock exchange approvals.

Update: This issue is somewhat overpriced. I calculate the Yield-to-Worst on the new issue as 4.81% to perpetuity at issue price, while VSN.PR.A (FixedReset, 4.40%+292) which commenced trading in February, 2012, is bid at 23.75 to yield 4.92% to perpetuity. The new issue should yield more to account for negative convexity (see the comments), but doesn’t … the issuer and underwriters are hoping everybody looks at the Initial Rate rather than the very similar Issue Reset Spreads.