August 3, 2010

European banks have a lot of refinancing to do:

Banks in Europe’s most indebted nations need to refinance $122 billion of bonds this year, likely paying high interest costs even after receiving a clean bill of health from regulators.

Italy’s Intesa Sanpaolo SpA has the most debt coming due at $28 billion, followed by UniCredit SpA with $21 billion, according to data compiled by Bloomberg. Italian banks must refinance a total $69 billion of bonds this year and $157 billion in 2011, while Spanish lenders have $28 billion and $73 billion of debt that needs to be paid.

Banks in so-called peripheral European countries from Greece to Ireland have been largely shut out of debt markets since April amid concern their governments will struggle to cut budget deficits.

The extra yield investors demand to own European financial- company bonds has climbed 0.5 percentage point to 2.17 percentage points from a 29-month low on April 16, according to Bank of America Merrill Lynch’s EMU Financial Corporate Index.

Spanish bank spreads average 333 basis points, 62 percent wider than at the beginning of April. Portuguese lenders’ margins average 495 basis points, 85 percent wider, while Irish financial debt pays a 585 basis-point margin, 35 percent more. Italian bank spreads are 218 basis points, an increase of 34 percent compared with four months ago.

With many frozen out of the bond market, banks in the peripheral countries are relying on the European Central Bank for the bulk of their funding. Spanish lenders, which account for 10.5 percent of assets in the EU financial system, borrowed a record 126.3 billion euros from the Frankfurt-based ECB in June, the most recent Bank of Spain data show.

The Americans found out during the S&L Crisis that there is a vital difference between “illiquid” and “insolvent” banks, and that the Fed should not prop up the latter. Have the Europeans learnt the same lesson?

There are encouraging reports from Greece:

Prime Minister George Papandreou has raised taxes, cut wages and overhauled the state-run pension system, while braving months of strikes against the measures that helped shrink the budget gap by 45 percent in the first half. Sustaining the effort and qualifying for another 9 billion euros of EU-IMF funds will be complicated by a recession that has been deepened by his steps.

For Papandreou, abiding by the EU-IMF recommendations may trigger further protests. Both institutions have said part of the inflation jump is from a lack of competitiveness that can be addressed in part by opening up professions deemed “closed,” such as trucking.

Truckers last week starved Greek gas stations of fuel as they opposed the government’s plan to issue the first new licenses since 1971. The strike was called off on Aug. 1 after the government commandeered trucks and said the drivers would be prosecuted. Papaconstantinou has pledged to push ahead with changes to open up professions ranging from pharmacists to architects.

“Closed professions will open,” he said in Parliament on July 28. “They will open because prices must fall. They will open because this will help the budget of each household and they will open because that is how the country’s growth will be helped.”

I’m not sure how far their deficit numbers can be trusted, but increased competition amongst previously closed shops has to be a good thing.

There is the possibility that US Banks are finally putting their excess reserves to work, buying Mortgage-Backeds:

Large U.S. commercial banks added $51.4 billion of so- called agency mortgage-backed securities in the two weeks ended July 21, according to the latest data released by the Federal Reserve. The holdings fell from $696.6 billion in the middle of 2009 to $687.2 billion on July 7 even as the lenders’ portfolios of Treasuries and agency corporate debt grew $104 billion.

Large banks, which now hold $736.8 billion of the securities, avoided the debt as the Fed’s $1.25 trillion of buying drove down yield premiums to record lows relative to 10- year Treasuries, and acquisitions by private investors then restrained spreads.
Fannie Mae’s current-coupon notes, or those trading closest to face value, yield 3.54 percent as of 12:37 p.m. in New York, according to data compiled by Bloomberg. That’s 0.64 percentage point more than 10-year Treasuries, up from a record low of 0.54 percentage point reached July 30, Bloomberg data show.

Checking accounts, among the means through which banks raise money that they can invest in securities, pay depositors 0.53 percent on average, according to data. Rates on the accounts typically vary based in part on the Fed’s target rates. A rise in banks’ deposits, which Fed data show growing for large banks by $37 billion from April 21, has contributed to their desire to invest more in mortgage securities, [Barclays analyst Derek] Chen wrote.

Additionally, excess reserves are down by a preliminary $35-billion in the period June 2 – July 28. Who knows? Maybe this new-found interest in RMBS is a tiny step towards James Hamilton’s archetypal car loans.

The SEC’s Department of Making Prospectuses Longer has been working overtime:

U.S. regulators said mutual funds aren’t telling investors enough about why they use derivatives, with some funds providing “generic” disclosures and others failing to explain how the products affect performance.

Regulators said they are concerned that the use of derivatives has increased in the mutual-fund industry without shareholders comprehending the risks or investment strategies. Some funds offer information that “may not be consistent with the intent” of required registration forms, the Securities and Exchange Commission wrote in a July 30 letter to the Investment Company Institute, the industry’s biggest trade group.

The SEC also raised concerns about “abbreviated” disclosures that give investors a false sense of security about how much funds rely on derivatives.

Speaking of the SEC, former Countrywide CEO Mozila is fighting his battles in (gasp!) court:

“The undisputed evidence establishes, and the SEC now admits, that stockholders understood Countrywide’s underwriting guidelines expanded over time,” lawyers for Mozilo and the two other defendants said in the filing.

The SEC admitted in response to inquiries from the defendants’ lawyers that information about its riskier loans was reflected in the company’s stock price, according to Mozilo’s filing. Countrywide provided information about those loans in prospectus supplements for mortgage-backed securities sold in the secondary market, Mozilo said in the filing.

John McCoy, a lawyer for the SEC, didn’t immediately return a call seeking comment.

The SEC sued Mozilo in June 2009, saying he publicly reassured investors about the quality of Countrywide’s loans while he issued “dire” internal warnings and sold about $140 million of his own Countrywide shares. Mozilo wrote in an e-mail that Countrywide was “flying blind” and had “no way” to determine the risks of some adjustable-rate mortgages, according to the SEC complaint.

I don’t have a view on Mozilo’s guilt or innocence … but I have a view on the desirability of the SEC getting a black eye!

Interesting article about Somali piracy, but the world has become awfully wussy. Julius Caesar knew what to do about pirates; so did Thomas Jefferson.

Premier Dad has clearly identified “morons” as a crucial demographic for the next election with his ‘Zero-Brains’ policy on young drivers and alchohol. “Better enforcement tools for the police!” cheer the dimwits. “So much more efficient than the silly old court system!”. After all, police would never abuse their authority, would they? And they always tell the truth, right? So what do we need the courts for, anyway?

The Canadian preferred share market moved up today on light trade, as PerpetualDiscounts gained 2bp and FixedResets gained 16bp, taking the median weighted average yield to worst of the latter class all the way down to 3.44%. That’s the eighth lowest yielding close on record … can we push past the 3.31% mark, set March 26? Stay tuned! The Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) remains in its range at 51bp … which makes me laugh.

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

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.1438 % 2,081.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1438 % 3,153.8
Floater 2.51 % 2.13 % 37,296 22.01 4 0.1438 % 2,247.9
OpRet 4.87 % 3.41 % 101,589 0.32 10 0.1865 % 2,346.7
SplitShare 6.19 % 3.81 % 73,746 0.08 2 0.5148 % 2,240.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1865 % 2,145.8
Perpetual-Premium 5.81 % 5.67 % 104,287 5.62 7 0.0623 % 1,938.4
Perpetual-Discount 5.82 % 5.88 % 177,094 14.09 71 0.0211 % 1,862.9
FixedReset 5.31 % 3.44 % 299,261 3.42 47 0.1588 % 2,231.8
Performance Highlights
Issue Index Change Notes
BMO.PR.H Perpetual-Discount -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 22.90
Evaluated at bid price : 23.73
Bid-YTW : 5.55 %
GWO.PR.H Perpetual-Discount -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 20.62
Evaluated at bid price : 20.62
Bid-YTW : 5.96 %
MFC.PR.C Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 19.35
Evaluated at bid price : 19.35
Bid-YTW : 5.91 %
BNA.PR.C SplitShare 1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 20.51
Bid-YTW : 7.40 %
SLF.PR.G FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 25.58
Evaluated at bid price : 25.63
Bid-YTW : 3.82 %
NA.PR.P FixedReset 1.31 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 27.87
Bid-YTW : 3.20 %
HSB.PR.D Perpetual-Discount 1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 21.70
Evaluated at bid price : 21.70
Bid-YTW : 5.84 %
Volume Highlights
Issue Index Shares
PWF.PR.P FixedReset 161,227 Scotia crossed blocks of 25,300 shares, 30,000 and 10,000, all at 25.75. RBC crossed 19,500 at 25.75, and Scotia closed by crossing 49,600 at the same price.
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 23.31
Evaluated at bid price : 25.58
Bid-YTW : 3.81 %
TRP.PR.C FixedReset 30,000 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 23.25
Evaluated at bid price : 25.40
Bid-YTW : 3.81 %
BNS.PR.T FixedReset 27,505 RBC crossed 22,600 at 27.60.
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.60
Bid-YTW : 3.38 %
RY.PR.Y FixedReset 27,040 RBC crossed 20,000 at 27.56.
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.56
Bid-YTW : 3.52 %
RY.PR.A Perpetual-Discount 26,258 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 20.11
Evaluated at bid price : 20.11
Bid-YTW : 5.55 %
TD.PR.O Perpetual-Discount 21,101 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-03
Maturity Price : 21.68
Evaluated at bid price : 21.68
Bid-YTW : 5.63 %
There were 14 other index-included issues trading in excess of 10,000 shares.

One Response to “August 3, 2010”

  1. […] world deserves this, because we’re all wimps now. As I said on August 3: Julius Caesar knew what to do about pirates; so did Thomas […]

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