August 23, 2010

I should have mentioned this earlier … but it just seemed so trivial! S&P has announced:

the S&P/TSX North American Preferred Stock Index. The Index seeks to provide investors with the opportunity to achieve broad diversification and exposure to North American preferred stocks.

Preferred stocks are a class of securities that combine the characteristics of debt and common stocks. Their returns have low correlations with common stock returns and with bond returns, making them good diversifiers. While their expected volatility and returns lie between those of common stocks and bonds, their yields are typically higher than that of common stock, the bond market and the money market.
“Preferred stocks are attractive to investors in today’s low interest rate environment, due to their higher yields,” says Steve Rive, Managing Director at S&P Indices. “The S&P/TSX North American Preferred Stock Index will provide investors with a diversified and broadly representative exposure to this important segment of the market.”

The S&P/TSX North American Preferred Stock Index is comprised of a 50% equal weighting in the S&P/TSX Preferred Share Index and S&P U.S. Preferred Stock Index. The S&P/TSX Preferred Share Index is comprised of preferred stocks trading on the Toronto Stock Exchange that meet criteria relating to minimum size, liquidity, issuer rating, and exchange listing. The S&P U.S. Preferred Stock Index measures the yield and price performance of preferred stocks in the U.S. equity universe by using a rules-driven methodology. It is comprised of preferred stocks issued by U.S. entities that meet a set of defined criteria.

I don’t see the point of this. The US and Canadian preferred share markets are very different animals, with very different taxation profiles. My guess is that there will be an ETF announcement in the very near future. Thanks to Assiduous Readers MP and like_to_retire for reminding me that I’m supposed to report EVERYTHING about Canadian preferred shares, not just the news that investors might consider interesting or useful.

The FRBNY has released a staff report about a fascinating idea by Marco Del Negro, Fabrizio Perri, and Fabiano Schivardi titled Tax Buyouts:

The paper studies a fiscal policy instrument that can reduce fiscal distortions, without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each individual citizen, whereby the citizen can choose to pay a fixed price up front in exchange for a given reduction in her tax rate for a prespecified period of time. We consider a dynamic overlapping-generations economy, calibrated to match several features of the U.S. income and wealth distribution, and show that, under simple pricing, the introduction of the buyout is revenue neutral and at the same time can benefit a significant fraction of the population and lead to sizable increases in labor supply, income, consumption, and welfare.

The baseline buyout we consider is a reduction in the marginal tax rate of at most 5% offered at a price of roughly $4500, which ensures revenue neutrality.

The FRBNY also released a staff report by James Vickery and Joshua Wright titled TBA Trading and Liquidity in the Agency MBS Market:

Most mortgages in the United States are securitized through the agency mortgage-backedsecurities (MBS) market. These securities are generally traded on a “to-be-announced,” or TBA, basis. This trading convention significantly improves agency MBS liquidity, leading to lower borrowing costs for households. Evaluation of potential reforms to the U.S. housing finance system should take into account the effects of those reforms on the operation of the TBA market.

Consistent with the view that liquidity effects were important during this period, the timing of the increase in the jumbo-conforming spread corresponds closely to the collapse in non-agency MBS liquidity and mortgage securitization during the second half of 2007. Furthermore, this spread remains significantly elevated even today, despite normalization in many measures of credit risk premia.

I know a man who considers one thing to be an infallible contrarian indicator: when the little guy gets in … :

The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the internet bubble, stoking concern that fixed- income markets are headed for a fall.

Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.

Concern that the global economic recovery is faltering, with the U.S. growing at a slower-than-forecast 2.4 percent pace in the second quarter, is prompting investors to pile into fixed-income securities of all types even with some yields at record lows. The new cash has helped fuel a rally and drove yields on investment-grade U.S. corporate debt down to a record 3.79 percent last week, while two-year U.S. Treasury yields fell to an all-time low of less than 0.5 percent.

There’s increased chatter about century bonds:

“With credit spreads rallying, it’s the perfect environment for issuers to get away with 100-year bonds,” said one banker who has been selectively pitching the idea to institutional investors. “There is a natural trend to go long, so the obvious extension of that is to move past the 30-year bucket.”

As investors move “out on the curve” to longer-dated issues, the amount of three-year corporate debt offerings has fallen by 50% compared to 2009. The pace of 30-year issuance has risen by 30%, according to Dealogic.

New York State may be reducing return assumptions for its pension funds:

New York state’s $132.6 billion pension fund, the nation’s third-largest, will cut the assumed rate of return on its investments to less than the 8 percent it has used for a decade.

A reduction to 7.5 percent or 7.75 percent is likely, said Robert Whalen, a spokesman for Comptroller Thomas DiNapoli. The move “will increase the required contributions from the state and local governments but will keep the fund as strong as it is now,” Whalen said.

The plan, which covers 1 million current and retired workers, had assets equal to about 107 percent of its future liabilities, according to the fund. New York was one of only four states with pension systems in 2008 that fully funded their future obligations, according to a study by the Washington-based Pew Center on the States.

By way of comparison, the Ontario Teachers’ Pension Plan states:

A typical teacher retiring in 2009 has 26 years of pension credit and is expected to receive a pension for 30 years, plus a survivor may be paid after that. Working teachers can expect to collect their pensions for longer than they contributed to the plan.

FUNDING VALUATION ASSUMPTIONS (percent)
  2009 Filed 2009 Preliminary
Rate of return 5.00 4.90
Inflation rate 1.35 1.35
Real rate of return 3.65 3.55

The assumptions for 2010 are nominal 5.5% less inflation 2.55% equals real 2.95%. Since:

The OTF and the Ontario government adopted a Funding Management Policy in 2003. Under the policy:
  • If assets are equal to or up to 10% greater than liabilities, the plan is in balance and no change is required.
  • If assets are more than 10% greater than liabilities, the plan has a surplus that can be used to reduce contribution rates or improve benefits.
  • If liabilities are greater than assets, the plan has a shortfall. The OTF and the government can address a shortfall by increasing contributions, invoking conditional inflation protection for pension credit earned after 2009, changing other benefits members will earn in the future, or adopting a combination of these measures.

… one cannot help but wonder if the relatively low return assumptions are simply yet another way of back-dooring some extra benefits to the plan members.

BIS has commenced publishing property price statistics. Oddly, there are no data available for Canada.

The Bank of Canada has released a working paper by Hajime Tomura titled Liquidity Transformation and Bank Capital Requirements:

This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks’ balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected.

The model, however, also shows that if a deterioration in asymmetric information in the asset market increases the illiquidity of bank assets significantly, then banks need to raise more bank capital during the liquidity crisis to prevent self-fulfilling bank runs. This result implies that the counter-cyclical capital buffer will not help to free up bank capital as designed in a liquidity crisis.

The (alleged) G-20 protesters had their day in court today:

Over 300 people facing G20-related charges appeared at a Toronto courthouse Monday, a legal tidal wave resulting from the largest mass arrests in Canadian history.

The court’s hallways are only designed to hold 176 people. Officers have been tasked with regulating the intake of defendants to ensure the building doesn’t break fire code. The court’s legal aid office brought in extra staff, including French-speakers.

I don’t know the name of the petty, vindictive ratshit who decided to make the scheduling an extra-judicial punishment … but I have a message for him: You have held the courts in contempt, and you have done more damage to the rule of law than any of those charged. Asshole.

It was a mixed day on good volume for the Canadian preferred share market, with PerpetualDiscounts gaining 23bp and FixedResets losing 5bp; the change narrowed the Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) slightly to 44bp.

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 0.1059 % 2,055.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1059 % 3,113.8
Floater 2.54 % 2.17 % 36,708 21.93 4 0.1059 % 2,219.4
OpRet 4.90 % -1.52 % 99,311 0.19 9 0.0301 % 2,351.5
SplitShare 6.05 % -30.77 % 68,049 0.09 2 -0.3121 % 2,325.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0301 % 2,150.2
Perpetual-Premium 5.77 % 5.20 % 100,766 5.57 7 0.1351 % 1,962.1
Perpetual-Discount 5.73 % 5.78 % 185,006 14.13 71 0.2302 % 1,895.6
FixedReset 5.29 % 3.28 % 278,289 3.37 47 -0.0537 % 2,243.7
Performance Highlights
Issue Index Change Notes
BNA.PR.C SplitShare -1.45 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 21.11
Bid-YTW : 6.83 %
CM.PR.K FixedReset -1.07 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.71
Bid-YTW : 3.56 %
POW.PR.D Perpetual-Discount 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-23
Maturity Price : 21.49
Evaluated at bid price : 21.76
Bid-YTW : 5.81 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.B Perpetual-Discount 86,943 Nesbitt crossed blocks of 12,000 and 40,000, both at 19.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-23
Maturity Price : 18.95
Evaluated at bid price : 18.95
Bid-YTW : 6.15 %
TD.PR.M OpRet 80,435 TD crossed 19,800 at 26.18. RBC crossed blocks of 25,000 and 20,000, both at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-09-22
Maturity Price : 25.75
Evaluated at bid price : 26.15
Bid-YTW : -10.45 %
RY.PR.I FixedReset 51,115 RBC crossed 44,700 at 26.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.45
Bid-YTW : 3.22 %
RY.PR.G Perpetual-Discount 49,890 TD crossed 30,000 at 20.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-23
Maturity Price : 20.70
Evaluated at bid price : 20.70
Bid-YTW : 5.47 %
BNS.PR.P FixedReset 46,055 RBC crossed 30,100 at 26.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.26
Bid-YTW : 3.15 %
RY.PR.W Perpetual-Discount 43,575 RBC crossed blocks of 21,900 and 11,600, both at 22.48.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-23
Maturity Price : 22.24
Evaluated at bid price : 22.40
Bid-YTW : 5.49 %
There were 36 other index-included issues trading in excess of 10,000 shares.

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