I can’t say I’m against this move – but it does open up a can of worms:
Denmark’s government agreed to ease rules for the country’s pension firms to help reduce their liabilities as record-low bond yields inflate the value of their obligations.
Pension companies and life insurers will be allowed to raise the discount rate they use to calculate their liabilities to better reflect long-term growth and inflation prospects, the Business and Growth Ministry in Copenhagen said in a statement late yesterday. The decision sent yields on longer-maturity bonds soaring as the industry’s need to buy up debt assets to match their pension obligations was reduced.
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The Danish move follows similar changes in Sweden, where 10-year yields surged 30 basis points on June 7 after the country’s regulator put a floor on the discount rate pension funds use to calculate liabilities. Nordic pension funds had come under pressure to increase their asset purchases as the region’s haven status from the debt crisis sent bond values higher and swelled the value of their liabilities.
The US housing market has a new kind of problem:
Funds planning to invest more than $6 billion to buy and rent foreclosed homes are finding it easy to raise money. The difficulty is spending it.
The number of low-cost foreclosed homes coming to market has dropped, bulk sales have been slow to materialize and prices are recovering in markets such as Phoenix, making it hard for private-equity firms, hedge funds and pension systems to buy as many homes as they need.
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Investors are trying to spend at least $6.4 billion on single-family rentals, including from funds such as Colony Capital LLC, GTIS Partners, KKR & Co., Oaktree Capital Group LLC (OAK), Och-Ziff Capital Management Group LLC (OZM) and the Alaska Permanent Fund Corp. They want to take advantage of U.S. home prices that are 35 percent below the 2006 peak and growing demand for rentals as the homeownership rate sits at the lowest level since 1997.
There is brinksmanship in Greece:
Alexis Tsipras said he expects the European Union will do all it can to keep Greece in the euro even if he wins elections and carries out his promise to repeal the austerity measures required to receive emergency loans.
“We have no sense that European partners will follow this tactic of blackmail heard from some quarters and stop funding,” Tsipras, whose Syriza party is vying for first place in pre- election polls, said in an interview in Athens today with Bloomberg Television. “Something like that would be catastrophic not only for Greece but for the entire euro area.”
BIS has released a working paper by Mathias Drehmann, Claudio Borio and Kostas Tsatsaronis titled Characterising the financial cycle: don’t lose sight of the
medium term!:
We characterise empirically the financial cycle using two approaches: analysis of turning points and frequency-based filters. We identify the financial cycle with the medium-term component in the joint fluctuations of credit and property prices; equity prices do not fit this picture well. We show that financial cycle peaks are very closely associated with financial crises and that the length and amplitude of the financial cycle have increased markedly since the mid-1980s. We argue that this reflects, in particular, financial liberalisation and changes in monetary policy frameworks. So defined, the financial cycle is much longer than the
traditional business cycle. Business cycle recessions are much deeper when they coincide with the contraction phase of the financial cycle. We also draw attention to the “unfinished recession” phenomenon: policy responses that fail to take into account the length of the financial cycle may help contain recessions in the short run but at the expense of larger recessions down the road.
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Against this backdrop, if the policymakers “overreact” to short-term developments and lose sight of the (medium-term) financial cycle that may lie behind them, they can store up bigger trouble down the road. Arguably, this is what happened both in the mid-1980s/early 1990s and in the period 2001-2007. In both cases, policymakers reacted strongly to collapses in
equity prices – the global stock market crashes of 1987 and 2001, which ushered in slowdowns in economic growth and/or actual recessions. As we have seen, however, equity prices are not a reliable indicator of the medium-term financial cycle. In fact, in both episodes credit and property prices continued to increase, benefiting from a second breath of life. A few years later, the credit and property price booms in turn collapsed, causing serious financial disruptions and dragging down the economy with them. From the perspective of the medium-term financial and business cycles, the slowdowns or contractions in 1987 and 2001 can thus be regarded as “unfinished recessions”.
We might be headed into one of the periodic outbreaks of handwringing about productivity:
Canada can’t live off its resource wealth forever and must get serious about chronically lagging productivity and innovation, says the Organization for Economic Co-operation and Development.
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“Canada is blessed with abundant natural resources, but it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and equitable distribution of the fruits of growth,” said Peter Jarrett, head of the OECD’s Canada division and one of the authors of the study.
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But the 128-page report’s main focus is productivity and innovation policy. The OECD pointed out that while per capita incomes are growing, productivity has stagnated for decades, and has actually declined since 2002.Canada’s productivity and innovation conundrum isn’t a new theme for Canada. Those challenges were at the heart of last year’s federal task force report on research and development policies, chaired by Open text Corp. chairman Tom Jenkins. Ottawa moved to address several of the report’s recommendations in its March 29 budget.
R&D policies are a joke – they do nothing for productivity, they reward businesses who are willing to jump through the bureaucratic hoops – and reward the specialist lawyers and accountants who help with the application. That’s not productivity, that’s welfare. The three major impediments to Canadian productivity are a coddled financial sector, a coddled transportation sector and a coddled telecommunication sector, but these aren’t the best examples of anti-productive government policy.
I’ll believe that a Canadian government has started to care about about productivity when dairy farmers are told that 50-cow herds, and their massive indirect subsidy granted by import restrictions and dairy quotas, are nothing more than a national cash drain. Dairy farming is the most egregious Canadian example of low productivity.
There’s an interesting funding gap at Deutsche Bank:
Deutsche Bank AG (DBK) has a funding gap of as much as 14 billion euros ($17.5 billion) at its Italian and Spanish units which could reduce capital levels at the firm if those countries leave the euro, according to analysts at Espirito Santo Investment Bank.
Deutsche Bank’s loans amount to 205 percent of deposits at the Italian unit and 314 percent in Spain, according to London- based analyst Andrew Lim, who cited company filings. If those countries exit the euro and the new currencies fall 30 percent, the Frankfurt-based lender could lose as much as 4.2 billion euros of equity as the value of assets at those divisions declines while some funding remains in euros, he said.
Such cross-border funding gaps can be dangerous:
The government forced commercial banks to swallow exchange- rate losses on foreign-currency denominated mortgages by giving borrowers the option to repay their loans in a lump sum at below-market rates. Two-thirds of housing loans were denominated in foreign currencies, mostly in Swiss francs, and installments on them soared as the forint weakened.
Hungarians repaid 170,000 mortgages under the plan in a value of 1.4 trillion forint ($6.3 billion), cutting the total amount of outstanding foreign-currency mortgages by 23.3 percent, the financial market authority said in a report today.
It was a surprisingly uneventful day on the Canadian preferred share market, despite an enormous number of dividends going ex. PerpetualPremiums were off 3bp, FixedResets down 1bp and DeemedRetractibles gained 3bp. Volatility was non-existent, but volume was very high.
PerpetualDiscounts now yield 5.04%, equivalent to 6.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215 bp, a significant decline from the 225bp reported June 6.
| 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 | 0.7043 % | 2,318.8 |
| FixedFloater | 4.46 % | 3.84 % | 24,677 | 17.61 | 1 | 0.9000 % | 3,534.7 |
| Floater | 3.14 % | 3.13 % | 68,287 | 19.42 | 3 | 0.7043 % | 2,503.7 |
| OpRet | 4.82 % | 2.39 % | 40,842 | 1.02 | 5 | -0.1387 % | 2,505.6 |
| SplitShare | 5.26 % | -8.67 % | 47,456 | 0.52 | 4 | -0.0893 % | 2,719.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1387 % | 2,291.1 |
| Perpetual-Premium | 5.45 % | 2.56 % | 77,560 | 0.58 | 26 | -0.0316 % | 2,228.7 |
| Perpetual-Discount | 5.04 % | 5.04 % | 121,683 | 15.39 | 7 | -0.0567 % | 2,450.7 |
| FixedReset | 5.05 % | 3.19 % | 201,254 | 4.52 | 71 | -0.0127 % | 2,390.7 |
| Deemed-Retractible | 5.03 % | 3.95 % | 157,068 | 2.89 | 45 | 0.0266 % | 2,300.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| No individual gains or losses exceeding 1%! | |||
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| MFC.PR.D | FixedReset | 110,515 | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 26.19 Bid-YTW : 4.10 % |
| TD.PR.G | FixedReset | 78,400 | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.69 Bid-YTW : 2.95 % |
| TD.PR.Y | FixedReset | 76,790 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.59 Bid-YTW : 3.08 % |
| BNS.PR.O | Deemed-Retractible | 75,900 | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-04-26 Maturity Price : 26.00 Evaluated at bid price : 26.82 Bid-YTW : 2.48 % |
| RY.PR.R | FixedReset | 62,750 | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.37 Bid-YTW : 3.14 % |
| SLF.PR.D | Deemed-Retractible | 62,472 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.71 Bid-YTW : 6.30 % |
| There were 50 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.B | Deemed-Retractible | Quote: 22.37 – 22.97 Spot Rate : 0.6000 Average : 0.4011 YTW SCENARIO |
| MFC.PR.D | FixedReset | Quote: 26.19 – 26.47 Spot Rate : 0.2800 Average : 0.1593 YTW SCENARIO |
| NA.PR.M | Deemed-Retractible | Quote: 26.52 – 26.90 Spot Rate : 0.3800 Average : 0.2831 YTW SCENARIO |
| ELF.PR.F | Perpetual-Discount | Quote: 24.72 – 25.06 Spot Rate : 0.3400 Average : 0.2478 YTW SCENARIO |
| BAM.PR.N | Perpetual-Discount | Quote: 23.62 – 23.98 Spot Rate : 0.3600 Average : 0.2681 YTW SCENARIO |
| CM.PR.K | FixedReset | Quote: 26.15 – 26.49 Spot Rate : 0.3400 Average : 0.2545 YTW SCENARIO |
[…] PerpetualDiscounts now yield 5.06%, equivalent to 6.58% interest at the standard conversion factor of 1.3x. Long corporates continue to yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, a slight (and perhaps spurious) increase from the 215bp reported June 13. […]