The FOMC statement was released and had no surprises:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
…
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
…
Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
Market reaction was favourable:
U.S. stocks extended gains after the Federal Reserve said it will maintain its $85 billion in monthly bond purchases and persistently low inflation could hamper the expansion.
The Standard & Poor’s 500 Index climbed 0.4 percent to 1,692.89 at 2:06 p.m. in New York.
The jury is deliberating on the Fabulous Fab case:
The jurors listened to more than two weeks’ worth of sometimes combative testimony, including from Mr. Tourre himself. Much of the trial was laden with complex jargon that both the S.E.C. and the defense team acknowledged was likely to make the jury’s eyes glaze over. Several jurors appeared to doze off during the financially denser portions of the trial.
The WSJ has a good round-up of the issues:
—Did Mr. Tourre intentionally or recklessly engage in a scheme to defraud investors? This is similar to a conspiracy charge in a criminal case.
— Did Mr. Tourre obtain money or property as a result of material misstatements or omissions? This includes statements in marketing materials for the deal. The jury can decide he was negligent, rather than intentionally committing fraud, in relation to these statements.
—Did Mr. Tourre engage in a deceptive course of conduct related to the offer or sale of securities? Again, the jury can decide he acted in negligence, rather than with intent, in this claim.
Brazil, recently reviled for financial mismanagement is kicking against the pricks:
Brazil’s executive director at the IMF refused to back the fund’s move this week to keep bankrolling Greece, citing risks of non-repayment, and the fund itself said Athens might need faster debt relief from Europe.
“Recent developments in Greece confirm some of our worst fears,” said Paulo Nogueira Batista, Brazil’s executive director at the IMF, who also represents 10 small nations in Central and South America, the Caribbean, Asia and Africa. Batista clarified on Wednesday that he was speaking only for himself.
“Implementation [of Greece’s reform program] has been unsatisfactory in almost all areas; growth and debt sustainability assumptions continue to be over-optimistic,” said Batista, criticizing the IMF executive board’s decision on Monday to release €1.7-billion ($2.32-billion) of rescue loans to Greece.
It was a poor day overall for the Canadian preferred share market, with both PerpetualDiscounts and DeemedRetractibles losing 23bp, while FixedResets gained 6bp. The Performance Highlights table was again very lengthy considering the overall price movement. Volume was average.
PerpetualDiscounts now yield 5.47%, equivalent to 7.11% interest at the standard 1.3x equivalency factor. Long corporates now yield a little under 4.7%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 240bp, a slight (and perhaps spurious) widening from the 235bp reported July 24.
Pricing for month-end was enlivened by the TSX’s moronic insistence on selling the “Last” quotations rather than the “Closing” quotations. I’m getting really sick of this idiocy, particularly since MAPF owns a hatfull of MFC.PR.C.
| 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 | 0.9251 % | 2,625.1 |
| FixedFloater | 4.10 % | 3.40 % | 33,462 | 18.58 | 1 | 0.0000 % | 4,046.5 |
| Floater | 2.67 % | 2.87 % | 83,803 | 20.05 | 4 | 0.9251 % | 2,834.4 |
| OpRet | 4.58 % | 0.83 % | 82,615 | 0.65 | 3 | 0.1403 % | 2,632.1 |
| SplitShare | 4.69 % | 4.74 % | 60,816 | 4.16 | 6 | 0.2546 % | 2,957.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1403 % | 2,406.8 |
| Perpetual-Premium | 5.62 % | 4.93 % | 106,702 | 0.09 | 12 | -0.0298 % | 2,284.5 |
| Perpetual-Discount | 5.40 % | 5.47 % | 137,156 | 14.64 | 26 | -0.2334 % | 2,387.2 |
| FixedReset | 4.94 % | 3.60 % | 234,523 | 3.52 | 85 | 0.0646 % | 2,468.4 |
| Deemed-Retractible | 5.11 % | 4.67 % | 195,538 | 6.86 | 43 | -0.2348 % | 2,369.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| MFC.PR.C | Deemed-Retractible | -2.54 % | Not a real loss, since the day’s low was 21.73 and the closing price was 21.77. Note that this bid is based on the “Last” quote which is not the same thing as the “Closing” quote. The actual “Closing” quote, recovered at great expense from a separate service of the TMX, was a much more reasonable 21.60-78. Just more idiocy, courtesy of the Toronto Stock Exchange YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.11 Bid-YTW : 6.55 % |
| BAM.PR.N | Perpetual-Discount | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-31 Maturity Price : 21.57 Evaluated at bid price : 21.57 Bid-YTW : 5.58 % |
| GWO.PR.H | Deemed-Retractible | -1.27 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.25 Bid-YTW : 5.77 % |
| BAM.PF.C | Perpetual-Discount | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-31 Maturity Price : 21.30 Evaluated at bid price : 21.59 Bid-YTW : 5.67 % |
| GWO.PR.G | Deemed-Retractible | -1.22 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.20 Bid-YTW : 5.67 % |
| BNS.PR.M | Deemed-Retractible | -1.08 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.83 Bid-YTW : 4.62 % |
| GWO.PR.F | Deemed-Retractible | 1.11 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-08-30 Maturity Price : 25.00 Evaluated at bid price : 25.58 Bid-YTW : -15.36 % |
| TD.PR.Y | FixedReset | 1.13 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 3.46 % |
| GWO.PR.M | Deemed-Retractible | 1.16 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-03-31 Maturity Price : 25.00 Evaluated at bid price : 26.15 Bid-YTW : 5.00 % |
| BAM.PR.K | Floater | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-31 Maturity Price : 18.30 Evaluated at bid price : 18.30 Bid-YTW : 2.89 % |
| BAM.PR.X | FixedReset | 1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-31 Maturity Price : 22.80 Evaluated at bid price : 23.87 Bid-YTW : 3.88 % |
| BMO.PR.M | FixedReset | 1.42 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-24 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 1.40 % |
| MFC.PR.F | FixedReset | 1.74 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.97 Bid-YTW : 3.96 % |
| TRI.PR.B | Floater | 1.94 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-31 Maturity Price : 23.37 Evaluated at bid price : 23.66 Bid-YTW : 2.20 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.T | FixedReset | 99,696 | RBC bought blocks of 15,000 and 20,900 from CIBC at 25.56; then crossed 45,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-25 Maturity Price : 25.00 Evaluated at bid price : 25.55 Bid-YTW : 3.16 % |
| BMO.PR.M | FixedReset | 79,345 | Will reset at 3.390% coupon. The volume may be due to sharpies setting up to reap a potential big premium on conversion. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-24 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 1.40 % |
| TRP.PR.D | FixedReset | 67,586 | National sold 10,000 to RBC at 25.10, then crossed 10,400 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-31 Maturity Price : 23.13 Evaluated at bid price : 25.04 Bid-YTW : 3.97 % |
| RY.PR.N | FixedReset | 29,330 | RBC crossed 23,600 at 25.40. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 25.37 Bid-YTW : 2.88 % |
| TD.PR.C | FixedReset | 26,447 | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.34 Bid-YTW : 2.86 % |
| PWF.PR.S | Perpetual-Discount | 22,284 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-31 Maturity Price : 23.21 Evaluated at bid price : 23.51 Bid-YTW : 5.12 % |
| There were 30 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.C | Deemed-Retractible | Quote: 21.11 – 21.78 Spot Rate : 0.6700 Average : 0.4315 YTW SCENARIO |
| SLF.PR.I | FixedReset | Quote: 25.36 – 25.76 Spot Rate : 0.4000 Average : 0.2682 YTW SCENARIO |
| TRP.PR.C | FixedReset | Quote: 23.30 – 23.69 Spot Rate : 0.3900 Average : 0.2649 YTW SCENARIO |
| BMO.PR.L | Deemed-Retractible | Quote: 25.91 – 26.19 Spot Rate : 0.2800 Average : 0.1765 YTW SCENARIO |
| BNA.PR.E | SplitShare | Quote: 25.31 – 25.75 Spot Rate : 0.4400 Average : 0.3396 YTW SCENARIO |
| MFC.PR.I | FixedReset | Quote: 25.70 – 25.97 Spot Rate : 0.2700 Average : 0.1784 YTW SCENARIO |
re: TSX Idiocy/MFC.PR.C
Please remember the original reasons for the investment: stability over the long term, combined with reliable dividends. You should ignore the day in, day out stupidity of the market.
Who gave me this advice, anyway?!
(sorry James; I couldn’t resist!)
Yeah, yeah, yeah. 🙂
The vagaries of the market I can deal with. Stupid dumb reporting by people who should know better is a little tougher. Especially when it happens on a day I have to report to my clients.
James,
thanks for answering the previous post. i understand completely how busy you are, so not worries about time taken to answer. i greatly appreciate your efforts.
i’m trying to wrap my head around “modified duration”..
specific example here, you can just say yes/no if i’ve got the concept correct….
regarding GWO.PR.I, closed today at $22 even. your letter says it has a modified duration of 8.79
so, for a 0.1% change in rates, i will expect 0.879% change in the instrument price.
if i expect a 0.5% change in rates, i can expect a (5 x 0.879) 4.395% change in price.
so, in this specific case, at $22, i should expect (22 x 0.04395) $0.9669 change….
if the underlying interest rate changes by 0.5%, either way, price should go $0.97 either side of $22 ($22.97 for a fall in rates, $21.03 if rates increase)
Nestor
Yes, that’s right. However, there are some things you have to keep in mind:
i) Long rates are different from short rates; government rates are different from corporate rates. So it is incorrect to assume that (say) a 25bp hike in the Bank of Canada Overnight Rate will lead to a 2.2% decline in the price of GWO.PR.I unless you also assume that: the 25bp hike will be transmitted across the curve (a parallel shift) AND be transmitted one-hundred percent to all sectors.
ii) the Yield-to-Worst scenario can change significantly when the instrument is trading near par; i.e., at a price of 25.05 a given instrument could be presumed to be called immediately, with a Modified Duration of 0.08; while if the price is 24.95, it might be presumed to be perpetual, with a Modified Duration of 20.00
iii) As implied in (ii), the Modified Duration of any instrument is dependent upon its term; long-dated instruments will approach the limit of 1/i which applies to perpetuals, where “i” is the yield. For instance, a perpetual with a yield of 5% has a Modified Duration of 20. A perpetual with a yield of 4% has a Modified Duration of 25.
iv) As implied in (iii) the assumption of DeemedRetractibility for GWO.PR.I has a major effect on expectations given changes in market yields. I expect GWO.PR.I to behave like a twelve-year bond, given my ASSUMPTION that redemption on or prior to 2025-1-31 will occur due to changes in the NVCC rules applicable to insurance holding companies. However, the market does not (yet!) agree with me and it reacts to overall market yield changes as if it is a perpetual. So the Modified Duration I use (call it 8.00) is far different from the Modified Duration the market uses (call it 20.00).
v) Thus, as implied by (iv) and reversing the process, if the price of GWO increases (decreases) by 1%, then the yield I calculate will decrease (increase) by 12.5bp. The yield the market calculates will decrease (increase) by 5bp. Whose calculation is correct? Time will tell!
If you haven’t already seen them, have a look at my articles Modified Duration, Perpetual Hockey Sticks and Convexity.
“Stupid dumb reporting” . . . always moves to a new level on the first Friday of the month when the “jobs” report comes out. Remember last month, when everyone got hot and bothered about the +195,000 number out of the US? The Dow surged, gold tanked . . . wow, eh?
So I suggested in this forum that I couldn’t understand how the market continuously trades on this headline number, especially since it is totally inaccurate, and always gets revised, usually downward.
James, if you’re going to mention the July number in an upcoming comment, show them you’re ahead of the game and make me proud . . . please include this [final paragraph] from todays release,
“The change in total nonfarm payroll employment for May was revised from +195,000 to +176,000, and
the change for June was revised from +195,000 to +188,000.”
No one else will mention it . . . or trade on it (well almost no one else).
. . . and have a lovely weekend!
[…] PerpetualDiscounts now yield 5.64%, equivalent to 7.33% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.7%, so the pre-tax interest-equivalent spread is now about 265bp, an extremely sharp widening from the 240bp reported July 31. […]