There’s an interesting, albeit badly in need of editing, paper by Alessandro Fontana titled The persistent negative CDS-bond basis during the 2007/08 financial crisis:
I study the behavior of the CDS-bond basis – the difference between the CDS and the bond spread – for a sample of investment-graded US firms. I document that, since the onset of the 2007/08 financial crisis it has become persistently negative, and I investigate the role played by the cost of trading the basis and its underlying risks. To exploit the negative basis an arbitrageur must finance the purchase of the underlying bond and buy protection. The idea is that, during the crisis, because of the funding liquidity shortage and the increased risk in the financial sector, which exposes protection buyers to counter-party risk, the negative basis trade is risky. In fact, I find that basis dynamics is driven by economic variables that are proxies for funding liquidity (cost of capital and hair cuts), credit markets liquidity and risk in the inter-bank lending market such as the Libor-OIS spread, the VIX , bid-asks spreads and the OIS-T-Bill spread. Results support the evidence that during stress times asset prices depart form frictionless ideals due to funding liquidity risk faced by financial intermediaries and investors; hence, deviations from parity do not imply presence of arbitrage opportunities.
The Basel Committee continued its attempts to deflect public attention from its incompetence with the release of Pillar 3 disclosure requirements for remuneration. The financial crisis had a lot more to do with tranche retention and the lack of minimum turnover standards for securities designated Available For Sale than any compensation packages.
Econbrowser‘s James Hamilton discusses the 2010 changes in the yield curve in his post Changes in the Yield Curve:
One goal of the Fed’s second round of quantitative easing begun at the start of November was to flatten the yield curve. That obviously didn’t happen, and I discussed some of the reasons why a few weeks ago. A second goal was to increase inflationary expectations, which was achieved.
Even so, all we’ve done is moved back to about where we were a year ago. And a year ago, if you recall, things really weren’t that great.
But at least now we’re moving in the right direction.
The Globe & Mail ran a story on insurance fraud on Monday that I confess I don’t fully understand:
Again, the real money was made through a clinic, by submitting stacks of claims for false treatments under Ontario’s no-fault insurance system that averaged more than $250,000 per accident.
…
For an initial fee of $500, any person – not necessarily a doctor – can register as the owner of a clinic, hire practitioners and bill insurers for claims. In order to file those claims, a doctor or registered practitioner’s name, signature, and other billing information is needed, but this is sometimes forged.Using confidential documents obtained from U.S. investigators, which were then cross-referenced with information gathered from court and corporate searches in Canada, The Globe and Mail has learned that at least one person indicted in the biggest auto insurance crackdown ever seen in the United States has since opened a rehabilitation business in Ontario, operating under the noses of regulators and lawmakers.
I don’t get it. OK, I understand the bit about since the regulators basically allow cost-plus charging of premiums, there’s very little incentive to show any initiative in checking out possible fraud. But honestly, when a clinic you’ve never heard of sends you a bill for $250,000 … don’t you send some clerk to go check them out? Call the practitioners involved? Ask for some back-up? and flag the clinic for a higher rate of spot checks until they’ve been in business for a year? This seems to me to be such a basic part of good business practice that I am astounded it’s not standard, especially considering that cashing a $500 cheque requires a rectal probe.
The Globe published my letter regarding the Mordecai Richler tempest.
The Canadian preferred share market rally continued today on unsurprisingly very low volume, with PerpetualDiscounts gaining 15bp and FixedResets up 3bp.
PerpetualDiscounts now yield 5.43%, equivalent to 7.60% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.4%, so the pre-tax interest-equivalent spread is now about 220bp, with all figures basically unchanged from December 22.
| 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 | -0.1603 % | 2,305.8 |
| FixedFloater | 4.83 % | 3.55 % | 31,393 | 18.93 | 1 | -0.4423 % | 3,481.7 |
| Floater | 2.59 % | 2.39 % | 54,023 | 21.23 | 4 | -0.1603 % | 2,489.7 |
| OpRet | 4.79 % | 3.30 % | 65,994 | 2.36 | 8 | 0.1488 % | 2,395.0 |
| SplitShare | 5.34 % | 1.38 % | 812,288 | 0.94 | 4 | 0.0101 % | 2,444.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1488 % | 2,190.0 |
| Perpetual-Premium | 5.70 % | 5.54 % | 154,023 | 5.37 | 27 | 0.1470 % | 2,016.6 |
| Perpetual-Discount | 5.40 % | 5.43 % | 278,145 | 14.72 | 51 | 0.1459 % | 2,025.6 |
| FixedReset | 5.22 % | 3.42 % | 337,843 | 3.10 | 52 | 0.0348 % | 2,270.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRP.PR.B | FixedReset | -1.89 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 24.90 Evaluated at bid price : 24.95 Bid-YTW : 3.72 % |
| MFC.PR.C | Perpetual-Discount | -1.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 20.37 Evaluated at bid price : 20.37 Bid-YTW : 5.57 % |
| PWF.PR.A | Floater | -1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 21.59 Evaluated at bid price : 21.85 Bid-YTW : 2.39 % |
| PWF.PR.E | Perpetual-Discount | -1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 23.25 Evaluated at bid price : 24.27 Bid-YTW : 5.71 % |
| TCA.PR.Y | Perpetual-Premium | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 46.64 Evaluated at bid price : 49.90 Bid-YTW : 5.53 % |
| POW.PR.B | Perpetual-Discount | 1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 23.56 Evaluated at bid price : 23.83 Bid-YTW : 5.62 % |
| ELF.PR.F | Perpetual-Discount | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 21.91 Evaluated at bid price : 22.20 Bid-YTW : 5.98 % |
| PWF.PR.F | Perpetual-Discount | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 23.74 Evaluated at bid price : 24.05 Bid-YTW : 5.54 % |
| W.PR.J | Perpetual-Discount | 1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 24.06 Evaluated at bid price : 24.32 Bid-YTW : 5.77 % |
| BAM.PR.I | OpRet | 1.41 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2011-01-28 Maturity Price : 25.50 Evaluated at bid price : 25.86 Bid-YTW : -11.69 % |
| GWO.PR.J | FixedReset | 1.42 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.17 Bid-YTW : 3.00 % |
| BAM.PR.R | FixedReset | 1.44 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-07-30 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 4.58 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.Q | FixedReset | 36,706 | TD crossed 25,000 at 26.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-24 Maturity Price : 25.00 Evaluated at bid price : 26.35 Bid-YTW : 3.28 % |
| BNS.PR.Y | FixedReset | 28,555 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 25.06 Evaluated at bid price : 25.11 Bid-YTW : 3.47 % |
| CM.PR.J | Perpetual-Discount | 19,622 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 21.36 Evaluated at bid price : 21.36 Bid-YTW : 5.27 % |
| BNS.PR.L | Perpetual-Discount | 19,002 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 22.04 Evaluated at bid price : 22.16 Bid-YTW : 5.16 % |
| SLF.PR.A | Perpetual-Discount | 18,787 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 21.55 Evaluated at bid price : 21.55 Bid-YTW : 5.55 % |
| BNS.PR.M | Perpetual-Discount | 17,176 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-12-29 Maturity Price : 22.02 Evaluated at bid price : 22.14 Bid-YTW : 5.16 % |
| There were 8 other index-included issues trading in excess of 10,000 shares. | |||
[…] PerpetualDiscounts now yield 5.48%, equivalent to 7.67% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.4%, so the pre-tax interest-equivalent spread is now about 225bp, a slight (and perhaps spurious) widening from the 220bp reported December 29 […]