PrefBlog

It’s nice to see my number one market worry get some play in the press:

1. Fund managers decide how much their assets are worth

Legalese: “Asset valuations will be determined by managers. The fund does not intend to commission periodic appraisals of the investments and will not be obligated to provide fair market value estimates.”

What that means: Private equity managers often have large holdings in illiquid assets such as troubled companies and real estate, which are, in fact, difficult to value. That said, it’s in the managers’ best interests to assign generous values because the managers typically get to keep 20 percent of profits and rely on historical returns to pitch new funds to investors.

Fed watching has become more intensive:

The euro made its third attempt this month to climb and stay above $1.10 as Federal Reserve Vice Chairman Stanley Fischer added to speculation U.S. interest rates will increase at a limited pace as stimulus expands in Europe.

The single currency extended its biggest weekly gain in three years on Monday after Fischer said there won’t be a “smooth upward path” for interest rates even as the first increase may be warranted before the end of 2015.
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San Francisco Fed President John Williams, who votes on central bank policy this year, said in remarks prepared for delivery in Sydney Tuesday that a discussion should happen mid-year about tightening policy. He also said that he sees a stronger dollar pushing down growth.

“Williams gave dollar a bit of a lift because he didn’t rule out a tightening in June,” said Yuji Saito, director of foreign exchange at Credit Agricole SA in Tokyo. “Markets remain mixed over the outlook of the Fed tightening with Fischer’s comments blending with that of Williams’.”

Fischer said Monday in New York that “a smooth path upward in the federal funds rate will almost certainly not be realized” as the economy will encounter headwinds such as the surprise plunge in oil prices. He said while forward guidance on rates remains important, its role may diminish.

Traders predict 56 basis points of increases to the federal funds target rate over the next 12 months, down from 62 on March 6, according to a Credit Suisse Group AG swaps index.

Stanford’s just hired a new honcho for their $21-billion endowment fund. I know nothing more about the guy than what’s in the Bloomberg notice – but what I do know, I like!

Wallace graduated from Yale in New Haven, Connecticut, in 2002 and went to work for the university’s renowned investment arm, which is run by David Swensen, according to the office. In 2005, he joined Alta Advisers, an investment company serving the family of Swedish industrialist Hans Rausing.

Before his career in investment management, Wallace danced professionally for 16 years with the American Ballet Theater, the Boston Ballet and the Washington Ballet, according to a profile. He has also served on an investment committee for Cambridge University and as a governor of the Royal Ballet School in London.

See – he’s buy-side! Always has been buy-side! Uncontaminated by any sell-side idiocy and – presumably! – with a good record of buy-side performance. And the fact that he had an actual career before going into the biz is also a plus – it increases the chance that he’s not a dork, although you never can be sure …

Did you load up on debt in the past couple of years? You’re in good company:

Vancouver, B.C. – TELUS announced today it is offering $1.75 billion of senior unsecured notes in three series, the first with a 3-year maturity, the second with a 7-year maturity and the third with a long 30-year maturity. The notes are offered through a syndicate of agents led by CIBC World Markets, Scotia Capital, and TD Securities. Closing of the offering is expected to occur on or about March 27, 2015.

The 1.50 per cent 3-year Notes, Series CS, were priced at $99.962 per $100 principal amount for an effective yield of 1.513 per cent per annum and will mature on March 27, 2018. The 2.35 per cent 7-year Notes, Series CT, were priced at $99.731 per $100 principal amount for an effective yield of 2.392 per cent per annum and will mature on March 28, 2022. The 4.40 per cent long 30-year Notes, Series CU, were priced at $99.972 per $100 principal amount for an effective yield of 4.402 per cent per annum and will mature on January 29, 2046.

The net proceeds will be used to fund all or a portion of the remaining $1.2 billion required to acquire the AWS-3 spectrum licences and repay short term indebtedness, with any remaining balance used for general corporate purposes.

Of course, all that debt comes with a price:

DBRS Limited (DBRS) has today placed the Issuer Rating, Notes rating and Commercial Paper rating of TELUS Corporation (TELUS or the Company; rated A (low), A (low) and R-1 (low), respectively) and the Senior Debentures rating of TELUS Communications Inc. (rated A (low)) Under Review with Negative Implications. The rating action follows the Company’s announcement that it has secured 15 megahertz (MHz) of AWS-3 (advanced wireless services) spectrum for $1.5 billion. While DBRS recognizes the importance of investing sufficiently in spectrum over the long term, the Negative Implications of the review status reflect DBRS’s concern that this particularly large spectrum purchase will likely be financed with debt and weaken the financial risk profile of TELUS well beyond its previously stated policy range (net debt-to-EBITDA of 1.5 times (x) to 2.0x) and levels appropriate for the current rating categories. Operationally and financially, DBRS expects TELUS will continue to perform well and deliver mid-single digit growth in EBITDA to approximately $4.4 billion in 2015, based on the Company’s growing subscriber bases across both wireless and wireline, increasing revenues per user and ongoing network expansion.
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Notwithstanding the Company’s prospects for growth in earnings over the near to medium term, DBRS questions TELUS’ willingness and ability to deleverage toward its previously stated leverage target within a reasonable time frame (i.e., two years), given its capital investment plan and anticipated returns to shareholders. In its ongoing review with management, DBRS will focus on an update of the Company’s business strategy going forward (including capital investment and spectrum purchases) and its financial management intentions (including dividend distributions, share repurchases and financing sources) in order to determine whether a downgrade is warranted. DBRS aims to receive clarity from TELUS management on the aforementioned issues in the coming weeks in order to resolve the Under Review status of the ratings.

But don’t worry! All that debt will be inflated away:

Data today showed the cost of living in the U.S. excluding food and fuel rose more than forecast in February, reflecting broad-based gains that helped keep a floor under inflation.

The so-called core consumer-price index climbed 0.2 percent for a second month, a Labor Department report showed Tuesday in Washington. A broader measure of prices overall also climbed 0.2 percent, the first advance in four months, as fuel costs stabilized.

Purchases of new homes in the U.S. unexpectedly rose in February to a seven-year high as stronger job gains helped bolster industry activity amid severe weather. Sales climbed 7.8 percent to a 539,000 annualized pace, the most since February 2008.

But the US has a problem: too many jobs:

Now, Goldman Sachs Group Inc. is weighing in. Job growth will have to slow going forward to catch down to the rest of the data, according to David Mericle, a Goldman Sachs economist, who says the pace of employment gains has “been running ‘too hot’ recently” relative to overall economic growth.

“Our model suggests that the recent 275-300k rate of monthly payroll gains is likely to be as good as it gets,” Mericle wrote in a note to clients. “Under our baseline forecast for 3% real GDP growth this year and next, we expect a gradual deceleration to a roughly 200k rate. The risks to both the GDP and employment numbers in 2016 are a bit to the downside.”

Outsize payroll growth in recent months has helped generate a swift decline in the unemployment rate. In February, it was 5.5 percent, down from 6.7 percent a year earlier.

The speed of the drop has taken Federal Reserve policy makers by surprise, and it prompted them to lower their year-end forecasts for the unemployment rate at the Federal Open Market Committee’s March meeting. The central tendency of those projections, which excludes the top and bottom three of the 17 committee members’ forecasts, fell to 5 percent to 5.2 percent from 5.2-5.3 percent in December, when the previous set of projections were published.

That 5-5.2 percent range matches the central tendency of what Fed officials deem to be “full employment.” Fed officials would say lower rates of unemployment would start to spur an acceleration in consumer price increases

It isn’t just Big Data that’s watching you … it’s your colleagues!

Stroz Friedberg, a New York-based consulting firm that specializes in digital forensics, is rolling out software called Scout, which evaluates users through the content of their e-mails and other communications using linguistic and behavioral analysis techniques developed by the FBI. The software establishes a base line and then scans for variations that may signal that an employee presents a growing risk to the company. Red flags could include a spike in references to financial stresses such as “late rent” and “medical bills.”

Edward Stroz, the firm’s founder and a former FBI agent, says that while companies may have found this idea too intrusive in the past, he’s seen a change in perception in the past year. He’s still careful when discussing the software, describing it as a way to help employers build a “caring workplace.”
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Some of the methods at companies that hire Securonix make even Baikalov wonder how much is too much. He cites the practice of matching information on user behavior online with feeds from video cameras and other systems that monitor physical locations. Some companies, he says, have created ticket systems so employees can report suspicious behavior by colleagues. “Is it too much, or is it actually the right amount of diligence?” he says. “I’m really curious how much we will get out of it. It’s really the extreme in kind of Orwell-like monitoring.”

And it’s been too long since my last rant on university tuition:

Some top-ranked business schools are raising tuition by between 2 percent and 10 percent this fall, bumping up the cost of classes for the 2015-16 academic year to nearly $66,000 at the high end. Throw in room and board, fees, and textbooks, and it will cost as much as $99,000 to attend B-school next year, according to data compiled by Bloomberg Business.

Half of the MBA programs ranked in Bloomberg Businessweek’s top 20 have announced updated tuition numbers so far this year. Of that group, the University of Maryland’s Smith School of Business has biggest tuition hike, with tuition up by 9.9 percent next year for out-of-state residents, bringing the cost of classes to $52,380 from $47,655.

It’s ridiculous. How can a university education possibly cost that much? How can it possibly be worth that much?

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both gaining 13bp, while DeemedRetractibles were off 8bp. The Performance Highlights table is back to it’s usual (for the past four months) length. Volume was on the high side of average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.75 to be $1.23 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.24 cheap at its bid price of 24.95.

Click for Big

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

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.41 to be $0.74 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.54 to be $0.64 cheap.

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The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.36 to be $0.61 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.30 and appears to be $0.70 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.32, looks $1.47 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $1.06 rich.

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Investment-grade pairs predict an average over the next five years of about 0.10% – except for one outlier, TRP.PR.A / TRP.PR.F, which has a break-even of -0.48%. The DC.PR.B / DC.PR.D pair has gone completely insane and now predicts an average bill rate over the next 4 3/4 years of -5.15% … but the indicated bid of 19.08 on DC.PR.D is just a little bit more Toronto Stock Exchange idiocy, since the low for the day was 21.65 on frenetic volume of 1,500 shares.

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

Negative yields bring reaching for yield:

Norway’s $870 billion sovereign wealth fund said this month that it added Nigeria and lifted its share of lower-rated company debt to the highest since at least 2006. Allianz SE, Europe’s biggest insurer, is shifting from German bunds to bulk up on mortgages. JPMorgan Asset Management is buying speculative-grade corporate debt to boost returns.
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Norges Bank Investment Management, the world’s largest sovereign wealth fund, increased corporate bonds rated BBB or lower to 8.3 percent of its debt assets at the end of last year from 7.5 percent in the prior quarter, the fund said March 13.

Among those assets are about $200 million of bonds issued by Petroleo Brasiliero SA. Brazil’s state-controlled oil company, the biggest corporate debt issuer in emerging markets, has seen its benchmark 2024 bonds tumble almost 10 percent since allegations of kickbacks and bribes emerged in November.

The fund also added developing countries such as Ghana and Mauritius and invested in Nigeria’s currency for the first time. It has just 0.1 percent in top-rated corporate bonds.

Scotia has announced a sub-debt offering with a coupon of 2.58% to its pretend-maturity of 2022-3-30:

The Bank of Nova Scotia (“Scotiabank”) (TSX: BNS) (NYSE: BNS) today announced an inaugural Basel III-compliant offering of $1.25 billion of 2.58% Subordinated Debentures due 2027 (the “Debentures”) pursuant to its June 27, 2014 base shelf prospectus.

The Debentures, to be sold through an agency syndicate led by Scotiabank Global Banking & Markets, are expected to be issued on March 30, 2015. Interest will be payable semi-annually from the date of issue until March 30, 2022 at a rate of 2.58% per annum. From March 30, 2022 to maturity on March 30, 2027, the Debentures will pay a quarterly coupon at a rate equal to the 90 day bankers’ acceptance plus 1.19%, beginning June 30, 2022.

On or after March 30, 2022, Scotiabank may, at its option, with the prior approval of the Superintendent of Financial Institutions (Canada), in whole at any time or in part from time to time at a redemption price which is equal to par, plus accrued and unpaid interest, redeem the Debentures, on not less than 30 nor more than 60 days’ notice to registered holders.

Net proceeds from this transaction will be used for general banking purposes.

Scotiabank intends to file, in Canada, a pricing supplement to its June 27, 2014 base shelf prospectus. A copy of this document as well as the base shelf prospectus can be obtained at www.sedar.com.

This issue is rated A(low) by DBRS (emphasis added):

DBRS assigned the NVCC Sub Debt a rating equal to the Bank’s intrinsic assessment of AA (low) less three rating notches because the NVCC Sub Debt has the Office of the Superintendent of Financial Institutions (OSFI)-required non-viability contingent capital (NVCC) triggers and no additional triggers. Furthermore, DBRS has assumed that Scotiabank will follow the market precedent if issuing NVCC preferred shares in the future. Under this assumption, in the event of a conversion to common shares, the NVCC Sub Debt would have a potential for recovery that is sufficiently better than the NVCC Preferred Shares to allow for a differentiation in the NVCC Sub Debt rating relative to the NVCC Preferred Shares rating. Please see the DBRS press release entitled “DBRS Provides Guidance on Canadian Bank Non-Viability Contingent Capital Ratings” dated January 10, 2014, for more details.

I was hoping to learn today about the extent of the exercise of the hypothetical Unit Special Retraction Right of BSD / BSD.PR.A (discussed in the post BSD.PR.A Hypothetical Preferred Special Retraction Right: 44% Tender) but sadly there is nothing as yet.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 36bp, FixedResets off 4bp and DeemedRetractibles gaining 4bp. Volatility was much lower than what has become normal over the last four months. Volume was below average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.72 to be $1.25 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.21 cheap at its bid price of 24.95.

Click for Big

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

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.30 to be $0.62 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.57 to be $0.61 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.50 to be $0.54 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.52 and appears to be $0.92 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.51, looks $1.31 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.70 and is $0.99 rich.

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Investment-grade pairs predict an average over the next five years of a little under 0.10% – except for one outlier, TRP.PR.A / TRP.PR.F, which has a break-even of -0.47%. The DC.PR.B / DC.PR.D pair has gone from the extreme to the ludicrous and now predicts an average bill rate over the next 4 3/4 years of -2.30%.

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

Greek bank depositors not only have to deal with the potential for bank failure should Greece exit the Euro, but I’m sure they’re also worried about a punitive tax on deposits in good banks. So they’ve found another option:

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It nice to see a supervisor fired for poor supervision:

Citigroup Inc. fired a trader on Friday for allegedly mismarking an inflation-options book and dismissed his boss for lax oversight, according to a person familiar with the matter.

Carl Bonde lost his job in New York after the bank determined he’d inflated the value of his trading positions by less than $30 million, the person said. Keith Price, head of U.S. inflation trading, was dismissed for his failure to supervise Bonde, said the person, who asked not to be identified discussing a personnel matter.

How ’bout them equities, eh?

Global stocks powered to their best weekly rally in nearly two years, sending two of the biggest equity benchmarks to the brink of records, on speculation the U.S. Federal Reserve will leave interest rates at zero past mid-year while European policy makers press stimulus.

The MSCI All-Country World Index surged 3.2 percent for the five days, pushing the Nasdaq Composite Index to within 7 points of wiping out all its losses since the Internet bubble. The Stoxx Europe 600 Index soared 1.9 percent to close 0.4 percent from its March 2000 high.
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Other benchmark indexes also gained during the week. The Standard & Poor’s 500 Index rose 2.7 percent to 2,108.10 in the five days, 0.4 percent away from a record. In London, the FTSE 100 Index hit a fresh record, climbing above 7,000 for the first time. The Russell 2000 Index gained 2.8 percent to an all-time high.

Capital Power Corporation, proud issuer of CPX.PR.A, CPX.PR.C and CPX.PR.E, has been confirmed at Pfd-3(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares of Capital Power Corporation (CPC or the Company) at Pfd-3 (low) with a Stable trend. CPC’s Preferred Shares rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB). Please see the CPLP rating report dated March 20, 2015, for more information on the credit quality of CPLP. The one-notch differential in the ratings of CPC and CPLP reflects the structural subordination at CPC.
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CPC’s financial risk profile is based on its deconsolidated credit metrics. As CPC has no bonds/debentures issued at the parent level and is not expected to issue any debt in the foreseeable future, its adjusted leverage primarily consists of its preferred shares outstanding, which are treated as debt by DBRS. In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferreds and minority interest) is treated as debt by DBRS. In 2014, CPC had $464 million of preferred shares outstanding, of which $67 million was treated as debt. As such, CPC’s unconsolidated debt-to-capital ratio was approximately 3% in 2014, which remains supportive of the current rating category. In addition, the unconsolidated fixed charge coverage ratio is expected to remain high at around five times.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 78bp, FixedResets up 10bp and DeemedRetractibles gaining 2bp. The Performance Highlights table has a good length, capped by winning PerpetualDiscounts. Volume was extremely high.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.81 to be $1.31 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.37 cheap at its bid price of 24.92.

Click for Big

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

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.48 to be $0.72 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 26.05 to be $0.63 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.53 to be $0.56 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.51 and appears to be $0.93 rich

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.60, looks $1.28 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.70 and is $0.92 rich.

Click for Big

Investment-grade pairs predict an average over the next five years of about 0.00% – except for one outlier, TRP.PR.A / TRP.PR.F, which has a break-even of -0.63%. The DC.PR.B / DC.PR.D pair has gone from the extreme to the ludicrous and now predicts an average bill rate over the next 4 3/4 years of -2.36%

Click for Big

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

TIPS are in high demand:

The U.S. Treasury Department can thank the Federal Reserve for the surge in demand at Thursday’s auction of inflation-protected bonds.

The $13 billion in 10-year Treasury Inflation-Protected Securities, or TIPS, were sold at a yield of 0.2 percent, the lowest at an auction of the debt since May 2013. The Fed indicated Wednesday it isn’t in a rush to raise interest rates, leaving the door open for economic growth to stoke inflation.
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Ten-year break-evens, the difference between yields on 10-year Treasury inflation protected securities and nominal equivalents, show investors expect U.S. consumer prices to rise 1.79 percent a year for the coming decade, up from a 2015 low of 1.49 percent on Jan. 14.

The gauge rose as much as 0.09 percentage point Thursday as rising prices for TIPS pulled their yields down and further away from yields on benchmark 10-year notes.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 11bp, FixedResets gaining 10bp and DeemedRetractibles off 2bp. There was no real pattern in the Performance Highlights table, other than that it was dominated by winners; Floaters did well. Volume was well above average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.68 to be $1.23 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.40 cheap at its bid price of 24.85.

Click for Big

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

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.20 to be $0.47 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.85 to be $0.82 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.29 to be $0.71 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.45 and appears to be $0.90 rich

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.70, looks $1.23 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $0.91 rich.

Click for Big

Investment-grade pairs predict an average over the next five years of about 0.00% – except for one outlier, TRP.PR.A / TRP.PR.F, which has a break-even of -0.40%. The DC.PR.B / DC.PR.D pair has gone from the extreme to the ludicrous and now predicts an average bill rate over the next 4 3/4 years of -2.78%

Click for Big

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

Lucky Assiduous Readers! It’s time for me to get on my favourite hobby-horse again … one I’ve been riding for over twenty five years now … and will probably keep flogging even if it dies:

GICs also have a psychological benefit because, unlike bonds, GIC prices don’t change when interest rates rise or fall.

” GIC prices don’t change when interest rates rise or fall.”

This is not correct. Reported GIC prices generally don’t change, but the actual price you can get for it (if transferable) does – and so does the actual value of the cash flows.

The brokerage industry’s obfuscation of value with respect to GICs is going to be yet another competitive advantage for the banks when CRM2 and mandatory performance reporting come into force.

For a longer rant, see my essay Preferred Shares and GICs; those who are more interested in cheap entertainment can just look at the comments to the Globe story.

But the big news of the day was FOMC press release:

Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
…
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

There was no dissent.

And the markets went wild!

The Federal Reserve dropped an assurance it will be “patient” in raising interest rates, ending an era in its communications policy and opening the door for higher borrowing costs as early as June.

“An increase in the target range for the federal funds rate remains unlikely at the April” meeting, the Federal Open Market Committee said in a statement Wednesday in Washington. Fed officials also lowered their median estimate for the federal funds rate at the end of 2015 to 0.625 percent, compared with 1.125 percent in December forecasts.
…
Stocks rose, erasing earlier losses, after the FOMC announcement. The Standard & Poor’s 500 Index was up 0.6 percent at 2,087.04 as of 2:11 p.m. in New York. Ten-year Treasury notes yielded 1.99 percent, down 6 basis points.
…
In December, the FOMC dropped a clause from its statement that it would hold rates low for a “considerable time” and instead said it would be “patient” in weighing an increase.

In fact, the market took the release as a whole to be a dovish indicator:

Money-market futures traders cut the odds of a Federal Reserve interest-rate increase below 50 percent until December after Chair Janet Yellen lowered her outlook for growth and the pace of policy tightening.

The likelihood that policy makers will lift their benchmark rate from near zero in September fell to 39 percent from 55 percent on Tuesday, according to calculations by Bloomberg using federal fund futures contracts. Futures traders have wiped out the chance of an increase in June, assigning it an 11 percent probability.

While the policy-setting Federal Open Market Committee dropped a commitment to be “patient” when raising rates, a key shift was policy makers’ lowering of their median estimate for benchmark borrowing costs during the next two years, according to Brian Smedley, an interest-rate strategist at Bank of America Corp. in New York. The fresh set of estimates reduced the median for the federal funds rate at the end of 2015 to 0.625 percent, compared with a December forecast of 1.125 percent.

The OECD is not impressed by Canada’s prospects:

Smacked by the oil crash, Canada has taken a big hit in a new OECD economic forecast.

In its updated projections released Wednesday, the Organization for Economic Co-operation and Development cut its outlook for growth in Canada this year to 2.2 per cent, down from 2.6 per cent in its November forecast.

For 2016, the group now sees growth of 2.1 per cent, down from 2.4 per cent.

“Oil and commodity exporters are facing weaker growth prospects as the result of lower prices,” the OECD said.
…
Like Canada, the forecast for Brazil has been cut.

“The main class of countries for which near-term growth prospects have worsened since the November 2014 economic outlook is the commodity exporters,” the OECD said.

“The interim projections are significantly lower for oil-exporters Canada and Brazil, with short-term growth prospects in Brazil also being restrained by monetary and fiscal tightening and increasing political uncertainty,” it added.

“Growth has already slowed in many other oil-exporting countries, and with the fall in commodity prices going well beyond oil, exporters of metals, coal and some agricultural commodities also face less favourable growth prospects this year.”

It was a mildly positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets flat, and DeemedRetractibles up 6bp. The overall calmness masked a lot of volatility, with a fairly lengthy Performance Highlights table dominated by losing FixedResets. Volume was very high.

PerpetualDiscounts now yield 4.99%, equivalent to 6.49% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.7%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 280bp, a widening from the 270bp reported March 11.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.55 to be $1.15 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.32 cheap at its bid price of 24.90.

Click for Big

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

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 24.95 to be $0.40 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.99 to be $0.67 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.33 to be $0.61 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.41 and appears to be $0.91 rich.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.42, looks $1.45 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.82 and is $1.09 rich.

Click for Big

Investment-grade pairs predict an average over the next five years of about 0.00% – except for one outlier, TRP.PR.A / TRP.PR.F, which has a break-even of -0.75%. The DC.PR.B / DC.PR.D pair has gone from the extreme to the ludicrous and now predicts an average bill rate over the next 4 3/4 years of -2.06%

Click for Big

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

The Bank of Canada rate cut is making a difference where it counts:

Bank of Montreal has renewed the mortgage war among Canada’s banks, slashing the posted rate on its five-year fixed mortgage to 2.79 per cent from 2.99 per cent, even as Ottawa and the International Monetary Fund fret over the state of Canada’s overheating housing market.

Toronto-Dominion Bank quickly rushed to match BMO’s rate special, saying it will drop its five-year fixed mortgage rate from 3.09 per cent to 2.79 starting Wednesday.

It hadn’t occurred to me that deferred prosecution settlements for criminal charges were actually bureaucratic job creation schemes, but that’s the way it is!

Deferred prosecution and non-prosecution agreements, as they are called, have been widely used by the Justice Department in recent years in investigations ranging from sanctions violations to market manipulation. A decision to revoke such a deal with a bank would be unprecedented.

Such settlements require the banks to admit responsibility and cooperate with ongoing investigations. Critics including Securities and Exchange Commission Chair Mary Jo White, who pioneered such agreements, argue the deals have been overused and don’t curb misconduct. The Justice Department defends the settlements, saying they force banks to correct wrongdoing and allow oversight.

There’s a fascinating article on Bloomberg about the mystic quality of private equity valuations:

For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they’ll get their money back first if the company goes public or sells. They can also negotiate to receive additional free shares if a subsequent round’s valuation is less favorable. Interviews with more than a dozen founders, venture capitalists, and the attorneys who draw up investment contracts reveal the most common financial provisions used in private-market technology deals today.

The backroom agreements are becoming more common as tech companies stay private longer, according to the interviews and financial documents obtained by Bloomberg Business. The practice obfuscates the meaning of a valuation, which can become dangerous down the road because private investors aren’t taking the same risks a public-market shareholder would. By the time a company does go public, the valuation it got from VCs may not align with its balance sheet.
…
Each provision covers different ways to make sure new investors get paid back, even if disaster strikes, if an initial public offering gives the company a market cap far less than its private number, or, more commonly, if the startup has to raise money again at a lower valuation. One stipulation, called senior liquidation preference, ensures that a certain group gets its money back before anyone else, including employees. Another class, called downside protection or ratchets, automatically grants additional shares in the event of a declining valuation, removing a great deal of risk that the stake will ever lose value.

The Obama administration is proposing to impose a fiduciary standard on brokers handling retirement accounts:

The plan to be issued by the Labor Department would require brokers to act in a customer’s best interest, a change that could limit the earnings of financial advisers in the handling of Americans’ $11 trillion of retirement savings.
…
At the heart of the proposal is an effort to tighten the legal standard for brokers handling retirement funds in individual retirement accounts and 401(k)s, which now hold more than $11 trillion. Under current rules, brokers can sell any product that is “suitable” for an investor, meaning it fits the client’s needs and tolerance for risk.

Brokers typically earn money from upfront sales commissions or fees paid by investors who purchase mutual funds. White House officials said that kind of compensation arrangement provides an incentive to recommend products that net higher fees or commissions without yielding better returns for investors. Clients lose as much as $17 billion a year from such conflicted advice, according to the Obama administration.
…
Subjecting brokers to a fiduciary duty, a standard that now applies to professional money managers, will lead to more lawsuits against the industry and add burdensome compliance requirements, industry groups argue.

The added costs will probably prompt brokers to drop client accounts with less than $50,000 of assets, leaving those investors to manage their own savings, according to the Securities Industry and Financial Markets Association.

So naturally every office-seeker in town is jumping on the bandwagon:

The SEC should “implement a uniform fiduciary duty for broker-dealers and investment advisers where the standard is to act in the best interest of the investor,” White said Tuesday at a conference sponsored by the Securities Industry and Financial Markets Association in Phoenix.

The SEC, which oversees the brokerage industry as a whole, has studied the issue for years without taking any regulatory action. The agency now finds itself in the middle of what promises to be one of the most bruising Wall Street lobbying battles in years.

The financial industry has been watching closely for White to reveal her position, which would break a standoff between the two Democrat and two Republican commissioners. White said she will begin talking with other commissioners about the outlines of new rules.
…
Some investor groups say the current rules don’t go far enough to limit conflicts of interests for brokers, who are paid by mutual funds and other companies for selling their products.
…
White’s support for the measures aligns her with the Obama administration and congressional Democrats. It pits her against many Republicans, who have said a fiduciary standard will be costly for brokers and could make them drop less wealthy clients.

So who’s going to sell anything? And what will happen to new issue commissions, which are formally paid by the issuer? Proxy solicitation fees?

The only way fiduciary duty can work is if it exists in isolation. Perfect isolation. That means that one guy can’t be a fiduciary to somebody and a broker to somebody else; and it means that one firm can’t have both fiduciaries and brokers, and it means that one firm can’t have subsidiaries – or even significant stock holdings – in both fiduciary firms and broking firms. And guess what? That ain’t gonna happen.

Perhaps you will say that Chinese Walls will work just as well. Perhaps you will insist that proper oversight and regulation will regulate a distinction between the buy side and the sell side. Perhaps you are a fool. Follow the money. Regulation will produce nothing more than a few cushy jobs for regulators, reams of ultimately unread paperwork generated by guys who have better things to do and a total lack of service to Granny with her $50,000 account but – on the bright side – lots of new business for banks, who will stick their clients into GOOD SAFE GICS and ZERO-RISK Principal Protected Notes!

“>
Click for Big

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.41 to be $1.12 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.23 cheap at its bid price of 24.78.

Click for Big

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

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.35 to be $0.63 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.86 to be $0.69 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.44 to be $0.44 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.44 and appears to be $0.98 rich.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.50, looks $1.46 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.72 and is $1.07 rich.

Click for Big

The cancellation of the previously announced deflationary environment had an immediate effect on the implied three month bill rate, with investment-grade pairs predicting an average over the next five years of about 0.00% – except for one outlier, TRP.PR.A / TRP.PR.F, which has a break-even of -0.83%. The DC.PR.B / DC.PR.D pair has gone from the extreme to the ludicrous and now predicts an average bill rate over the next 4 3/4 years of -2.09%

Click for Big

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

It was a rough day for the Canadian preferred share market, with PerpetualDiscounts losing 31bp, FixedResets down 29bp and DeemedRetractibles off 7bp. Floater and FixedReset losers dominated the Performance Highlights table. Volume was average.

Nothing happened today.

The Canadian preferred share market was on fire today, with PerpetualDiscounts winning 88bp, FixedResets up 28bp and DeemedRetractibles gaining 15bp. There’s a good list of winners in the Performance Highlights table. Volume was below average.

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

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

Here’s TRP:

click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.32 to be $1.03 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.21 cheap at its bid price of 24.80.

click for Big

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

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.35 to be $0.43 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 26.00 to be $0.58 cheap.

click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.59 to be $0.59 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.67 and appears to be $0.99 rich.

click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.71, looks $1.36 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.79 and is $1.00 rich.

click for Big

The cancellation of the previously announced deflationary environment had an immediate effect on the implied three month bill rate, with investment-grade pairs predicting an average over the next five years of about 0.00% – except for one outlier, TRP.PR.A / TRP.PR.F, which has a break-even of -0.87%.

click for Big

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