PrefBlog

There’s an interesting straw in the wind for junk bonds:

Investors yanked a record volume of cash from BlackRock Inc.’s exchange-traded fund that buys junk bonds as the notes lose value for the first month since May.

The $16.3 billion fund reported an outflow of 2.4 million shares yesterday, equal to about $218.9 million, according to data compiled by Bloomberg. That’s the biggest daily withdrawal in the five-year history of the iShares iBoxx High Yield Corporate Bond Fund, the largest of its kind.

The five largest junk-bond ETFs, which allow investors to speculate on the securities without actually owning them, have lost $1.97 billion of assets since Sept. 20 as investors wager that a four-year rally in the debt is running out of steam. High-yield bonds in the U.S. are losing 0.14 percent this month after posting 12.9 percent returns this year through October, according to Bank of America Merrill Lynch index data.

Regulation is wonderful:

Since 1998, ABS [the non-profit American Bureau of Shipping] has hired four former Coast Guard admirals as executives. They include retired Admiral Robert Kramek, who led the Coast Guard as commandant from 1994 to 1998. It was Kramek who signed an agreement with ABS in 1995 that expanded the nonprofit’s powers to inspect independently owned ships on the Coast Guard’s behalf.

In June 1998, three years after Kramek signed that inspection agreement, ABS hired him as president of its Americas division.

Jack Devanney, a retired executive of companies that own ships that used ABS services, says this revolving door is bad for ship safety.

“When you give Kramek a nice job, you’re sending a message to all the Coast Guard guys that they’ve got a second career at ABS,” says Devanney, who has a Ph.D. in management science from the Massachusetts Institute of Technology. “If you rock the boat, that opportunity’s not going to be available to you.”

S&P has released a fascinating report titled A Tale Of Two Countries: U.S. And Canadian Banks’ Contrasting Profitability Dynamics:

Profit dynamics for a company or an industry are highly sensitive to shifting operating and regulatory conditions and, as a result, are likely to change over time. Profits are important because they can be a significant generator of capital–for the companies that retain them in a meaningful amount. A careful review of bank profitability in both the U.S. and Canada indicates that Canadian banks have been more profitable than their U.S. counterparts in recent years. This gap has widened in the postcrisis years. This is partly because of Canadian banks’ higher leverage that largely arises from structural differences. We also note that the leverage ratio gap between the U.S. and Canada is sensitive to definition. Alternative definitions of leverage ratio for U.S. banks, for example using Standard & Poor’s adjusted common equity to adjusted assets, also show that U.S. banks have lower leverage than Canadian banks, but the gap is much smaller.
…
As for Canada, the Office of the Superintendent of Financial Institutions (OSFI) will issue a new Basel III capital guideline before the end of 2012–for implementation in the first fiscal quarter of 2013. Of the 29 G-SIBs that the Financial Stability Board (FSB) identified in November 2011, none were Canadian banks. However, there are plans to identify domestic systemically important banks (D-SIBs) and recommend that a capital surcharge be applied to them. But Canadian banking regulators have not offered any detailed views on this yet. Therefore, we anticipate Canadian banks, on average, will continue to have higher leverage than U.S. banks, particularly the largest and most complex. We believe that at least part of the tolerance for higher leverage may be due to the accumulation of relatively low-risk weighted assets, like government-insured mortgages

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 3bp, FixedResets gaining 2bp and DeemedRetractibles off 1bp. Volatility was non-existent. Volume was low.

PerpetualDiscounts now yield 4.91%, equivalent to 6.38% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, 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 November 7.

This entry was posted on Thursday, November 15th, 2012 at 1:09 am and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.