October 25, 2011

The Europeans are still trying to square the circle, but at least they now seem to be downplaying the monetization idea:

Boosting the effectiveness of Europe’s bailout fund will require further talks with investors as German lawmakers prepare to vote on its new powers tomorrow, a European Union document showed.

While the European Financial Stability Facility can be bolstered under two models that may be combined and implemented “quickly,” the extent to which the fund is leveraged can only be ascertained after discussions with investors and rating companies, the document provided to German lawmakers said.

The draft underscores the gaps remaining in European Union efforts to address the debt crisis as Chancellor Angela Merkel and fellow leaders prepare to return to Brussels tomorrow for a second summit in four days. Leaders are still jousting with banks over the size of losses they take on Greek bonds while deliberating over leveraging the fund after ruling out tapping the European Central Bank’s balance sheet.

Rumours continue to swirl about the possible output from the summit:

European leaders increased pressure on Italian Prime Minister Silvio Berlusconi to specify how he will reach budget-reduction targets as German lawmakers prepared to vote on a revamped euro-area bailout package that officials raced to complete before a summit tomorrow.

Italy needs to back up commitments with “specific actions” and come up with “clear timing,” European Commission spokesman Amadeu Altafaj said in Brussels today after a crisis cabinet meeting in Italy late yesterday failed to announce steps to spur growth.

While 27 EU leaders convene before the 17 chiefs of the 17 euro nations tomorrow, a meeting of the 27 EU finance ministers scheduled to precede them was cancelled with no explanation.

The elements of the revamped blueprint may include expanding the reach of the 440 billion-euro ($611 billion) European Financial Stability Facility by turning it into a bond insurer and setting up vehicles to raise outside funds, possibly alongside the International Monetary Fund, and a bank- recapitalization strategy.

At an Oct. 23 summit, the leaders excluded a forced restructuring of Greek debt, sticking with the tactic of enticing bondholders to accept losses to help restore the country’s finances, and ruled out tapping the balance sheet of the European Central Bank.

Euro-area leaders are counting on the ECB to continue buying troubled countries’ bonds, three people familiar with the deliberations said. They are debating how to obtain an ECB signal without appearing to give orders to the politically independent central bank, said the people. The central bank has bought 169.5 billion euros in bonds so far.

Super! Bond insurance! Loan guarantees! It worked out so well for Fannie Mae, Freddie Mac and all the monolines that it must be good! And doesn’t cost a cent!

I mentioned my fascination with longevity risk for pension plans on June 21. Swiss Re also considers it a fascinating topic:

A number of Canadian pension plans are not putting aside enough money to account for the risk that people will live longer than expected, says a new report to be released on Monday.

Swiss Re, which is hoping to convince pension plans and insurers to buy protection against this risk, clearly has an agenda in publishing the report, which it characterizes as the first comprehensive look at longevity risk in Canada. But the numbers are startling nonetheless. And if the company succeeds in creating an active market for longevity risks in this country, it might ultimately package those risks up into bonds or securities that are sold to investors. The report estimates that between $10-billion and $20-billion of longevity risk will be transferred from Canadian pensions and annuities to reinsurers and investors in the next decade.

Canada’s longevity risk, at roughly five per cent of the total global amount, is relatively high because of the quantity of defined benefit pensions in this country, says George Graziani, a senior vice-president at Swiss Re in Canada.

Elizabeth A Duke, Member of the Board of Governors of the Federal Reserve System, gave a speech titled The Federal Reserve System and individual financial planning:

The Federal Reserve Bank of Dallas offers a popular financial planning publication, Building Wealth. In it, individuals and families seeking help to develop a plan for building personal wealth will find an overview of personal asset-building strategies that includes setting financial goals, budgeting, saving and investing, managing debt, and understanding credit reports and credit scores. The Dallas Fed makes Building Wealth available online in both English and Spanish, and has created an interactive version of the publication, making it usable as a personal finance education resource for schools, nonprofit community organizations, and financial services providers.

Another valuable online resource is the Federal Reserve Bank of San Francisco’s Guide to Financial Literacy. This free publication explains what level of financial education is appropriate for a variety of age groups, offers guidance for consumers making key financial decisions at different stages of life, and includes a compendium of financial education resources that address these needs.

Footnotes: Building Wealth can be found at www.dallasfed.org/ca/wealth/index.cfm.

The Guide to Financial Literacy Resource can be found at www.frbsf.org/community/webresources/bankersguide.pdf

The books mentioned in the Resource Guide at the end of the Dallas Fed publication are fascinating:

  • Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life
    Dwight R. Lee and Richard B. McKenzie 1999, Harper Business
  • It’s About the Money! The Fourth Movement of the Freedom Symphony: How to Build Wealth, Get Access to Capital, and Achieve Your Financial Dreams
    Reverend Jesse L. Jackson, Sr. and Jesse L. Jackson, Jr. with Mary Gotschall 1999, Times Business/Random
    House
  • The Millionaire Next Door: The Surprising Secrets of America’s Wealthy Thomas J. Stanley and William D. Danko 1996, Longstreet

I’ve heard of “The Millionaire Next Door”, although I’ve never read it. Many things come to mind when I hear the name “Reverend Jesse L. Jackson, Sr.”, but I’ll admit that Financial Planning advice isn’t one of them! But it’s listed because of a single quote:

Accumulating wealth—as distinct from just making a big income—is the key to your financial independence. It gives you control over assets, power to help shape the corporate and political landscape, and the ability to ensure a prosperous future for your children and their heirs….

… which is reasonable enough!

OSFI has released the Autumn 2011 edition of the OSFI Pillar. The new Assistant Superintendent is Mark Zelmer, a career civil servant.

S&P affirmed Canada:

  • We are affirming our ‘AAA/A-1+’ long- and short-term sovereign credit ratings on Canada.
  • In our view, Canada has a superior political and economic profile and strong flexibility and performance profile.
  • The outlook is stable. Given Canada’s strong starting position, a combination of increased political uncertainty and weaker fiscal or external outcomes would be necessary for downward pressure to build on the rating.

The BoC was full of cheery news:

The global economy has slowed markedly as several downside risks to the projection outlined in the Bank’s July Monetary Policy Report (MPR) have been realized. Financial market volatility has increased and there has been a generalized retrenchment from risk-taking across global markets

The outlook for the Canadian economy has weakened since July, with the significantly less favourable external environment affecting Canada through financial, confidence and trade channels.

Overall, the Bank expects that growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates and confidence increases. The Bank projects that the economy will expand by 2.1 per cent in 2011, 1.9 per cent in 2012, and 2.9 per cent in 2013.

The weaker economic outlook implies greater and more persistent economic slack than previously anticipated, with the Canadian economy now expected to return to full capacity by the end of 2013. As a result, core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2 percent by the end of 2013. The projection for total CPI inflation has also been revised down, reflecting the recent reversal of earlier sharp increases in world energy prices as well as modestly weaker core inflation. Total CPI inflation is expected to trough around 1 per cent by the middle of 2012 before rising with core inflation to the two per cent target by the end of 2013, as excess supply in the economy is slowly absorbed.

Several significant upside and downside risks are present in the inflation outlook for Canada. Overall, the Bank judges that these risks are roughly balanced over the projection horizon.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

CZP issues have been hammered in the past two days, after DBRS warned of a possible 3-notch downgrade and S&P was less explicit, but just as gloomy.

CZP Issues
2011-10-21 to 2011-10-25
Ticker Quote
10/21
Quote
10/25
Bid YTW
10/25
YTW
Scenario
10/25
Performance
10/21 – 10/25
(bid/bid)
CZP.PR.A 16.92-07 15.31-80 8.05% Limit Maturity -9.52%
CZP.PR.B 26.87-99 20.10-74 7.69% Limit Maturity -25.20%

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets down 1bp and DeemedRetractibles winning 26bp. Volatility was quite good, with BAM issues prominent at both ends of the spectrum – FixedResets on the downside, probably reflecting the new issue. Volume was heavy; RBC scored a lock-out on the reported block trading.

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 2.2260 % 2,045.4
FixedFloater 0.00 % 0.00 % 0 0.00 0 2.2260 % 3,076.3
Floater 3.52 % 3.53 % 159,494 18.46 2 2.2260 % 2,208.5
OpRet 4.84 % 2.61 % 64,363 1.53 8 -0.0678 % 2,456.3
SplitShare 5.38 % 0.62 % 54,167 0.34 4 0.5001 % 2,492.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0678 % 2,246.1
Perpetual-Premium 5.69 % 4.20 % 107,946 1.87 13 0.0303 % 2,126.4
Perpetual-Discount 5.35 % 5.43 % 109,050 14.74 17 0.1105 % 2,257.3
FixedReset 5.15 % 3.20 % 209,915 2.46 61 -0.0138 % 2,330.7
Deemed-Retractible 5.07 % 4.39 % 214,781 4.07 46 0.2555 % 2,203.3
Performance Highlights
Issue Index Change Notes
BAM.PR.T FixedReset -2.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 22.78
Evaluated at bid price : 24.06
Bid-YTW : 4.20 %
BAM.PR.R FixedReset -1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 23.30
Evaluated at bid price : 25.35
Bid-YTW : 4.11 %
BAM.PR.P FixedReset -1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.83
Bid-YTW : 4.52 %
GWO.PR.L Deemed-Retractible -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 5.74 %
BAM.PR.M Perpetual-Discount -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 21.72
Evaluated at bid price : 22.07
Bid-YTW : 5.42 %
POW.PR.D Perpetual-Discount -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 23.94
Evaluated at bid price : 24.24
Bid-YTW : 5.18 %
GWO.PR.H Deemed-Retractible 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 5.71 %
PWF.PR.K Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 24.00
Evaluated at bid price : 24.30
Bid-YTW : 5.10 %
ELF.PR.F Perpetual-Discount 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 22.21
Evaluated at bid price : 22.21
Bid-YTW : 6.02 %
BNA.PR.E SplitShare 1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 23.05
Bid-YTW : 6.58 %
PWF.PR.L Perpetual-Discount 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 24.00
Evaluated at bid price : 24.30
Bid-YTW : 5.26 %
RY.PR.G Deemed-Retractible 1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.06
Bid-YTW : 4.37 %
SLF.PR.D Deemed-Retractible 1.37 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.41
Bid-YTW : 6.46 %
SLF.PR.H FixedReset 1.67 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.30
Bid-YTW : 4.30 %
SLF.PR.G FixedReset 1.76 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.80
Bid-YTW : 3.68 %
BAM.PR.B Floater 2.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 14.99
Evaluated at bid price : 14.99
Bid-YTW : 3.53 %
BAM.PR.K Floater 2.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 14.86
Evaluated at bid price : 14.86
Bid-YTW : 3.56 %
Volume Highlights
Issue Index Shares
Traded
Notes
IFC.PR.A FixedReset 184,263 RBC crossed blocks of 79,900 and 72,400, both at 25.40.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 3.81 %
BNS.PR.Z FixedReset 174,181 Recent secondary offering.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.74
Bid-YTW : 3.42 %
ENB.PR.B FixedReset 140,086 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 3.63 %
BNS.PR.R FixedReset 128,495 RBC crossed blocks of 47,000 and 57,000, both at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.87
Bid-YTW : 3.36 %
TRP.PR.C FixedReset 116,541 RBC crossed 100,000 at 25.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 23.32
Evaluated at bid price : 25.30
Bid-YTW : 3.22 %
TD.PR.M OpRet 87,500 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-04-30
Maturity Price : 25.25
Evaluated at bid price : 25.49
Bid-YTW : 2.61 %
There were 43 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.R FixedReset Quote: 25.35 – 25.80
Spot Rate : 0.4500
Average : 0.3126

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 23.30
Evaluated at bid price : 25.35
Bid-YTW : 4.11 %

IAG.PR.F Deemed-Retractible Quote: 25.85 – 26.59
Spot Rate : 0.7400
Average : 0.6103

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : 5.55 %

GWO.PR.N FixedReset Quote: 24.20 – 24.55
Spot Rate : 0.3500
Average : 0.2334

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.20
Bid-YTW : 3.68 %

BAM.PR.T FixedReset Quote: 24.06 – 24.45
Spot Rate : 0.3900
Average : 0.2782

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 22.78
Evaluated at bid price : 24.06
Bid-YTW : 4.20 %

IGM.PR.B Perpetual-Premium Quote: 25.42 – 25.70
Spot Rate : 0.2800
Average : 0.1682

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.42
Bid-YTW : 5.63 %

BAM.PR.X FixedReset Quote: 23.75 – 24.17
Spot Rate : 0.4200
Average : 0.3102

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-25
Maturity Price : 22.63
Evaluated at bid price : 23.75
Bid-YTW : 3.90 %

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