November 11, 2014

Sweden is joining the ranks of mortgage-rule tinkerers:

Sweden plans to tighten rules on mortgages to try to chip away at mountains of household debt that threatens the stability of one of Europe’s best-performing economies.

Falling interest rates, a housing shortage and tax cuts have fuelled a credit boom and sent property prices soaring, exposing Sweden to the risk of the kind of real estate crash that Ireland and Spain suffered in 2008.

Under the rules, new mortgage-holders who borrow more than 50 per cent of the value of their property will have to pay back a proportion of the capital in addition to interest every year.

Four in 10 Swedes have interest-only loans, the central bank says, and on average will take a century to wipe out their debt.

At more than 170 per cent of disposable income, household debt levels in Sweden are among Europe’s highest and have prompted the IMF among others to warn of a risk to economic stability.

While I sympathize with the concern that all this investment is going into non-productive assets like houses, and that a fall in real-estate prices will harm the economy, I still think that rules of this nature are far to intrusive and bear all the risks of any central planning doctrine.

I greatly prefer policies that stick to the government’s knitting. What’s the primary purpose of all these rules? To safeguard the banks. So let the banks do what they like, subject to risk-weights that reflect, you know, risk. A mortgage with a loan-to-value ratio of less than 50% should attract a lower capital charge than one with a higher LTV. A mortgage with an amortization period of 100 years should attract a higher capital charge than on with a shorter amortization. Base these rates on historical evidence and, as a final capper, impose a counter-cyclical charge: Canada’s banks, for instance, now have 40%+ of their assets in mortgages, compared with a historical average of 30%. This is risky simply because we haven’t been here before. Impose a countercyclical charge to capital based on the deviations of broad business lines (e.g., mortgages, consumer loans, small business loans, big business loans, sovereign loans…) from their historical averages – say maybe a thirty-year rolling average? Then change is allowed, with brakes. That’s much better than some bureaucrat pulling numbers out of the sky and imposing arbitrary rules on individuals.

In related news from that province known for conservatism and fiscal probity:

The issue of using public funds to pay for an NHL arena has roiled for years in Edmonton.

The city is on the hook to build a $600 million downtown arena for the NHL Oilers.

A deal struck last year between the city and the Oilers will see the team pay $6 million a year in lease payments, run the building, and keep the profits.

Woo-Hoo! A highly illiquid investment with a Current Yield of 1%! Those Albertans sure know how to swing a deal and Get Things Done, all right.

The World Energy Outlook 2014 is forthcoming and Bloomberg has a preview:

Fossil fuels are reaping $550 billion a year in subsidies and holding back investment in cleaner forms of energy, the International Energy Agency said.

Oil, coal and gas received more than four times the $120 billion paid out in subsidy for renewables including wind, solar and biofuels, the Paris-based institution said today in its annual World Energy Outlook.

“In Saudi Arabia, the additional upfront cost of a car twice as fuel efficient as the current average would at present take 16 years to recover through lower spending on fuel,” the IEA said. “This payback period would shrink to three years if gasoline were not subsidized.”

Canada will become a Yuan trading hub:

Bank of Montreal and HSBC Holdings Plc are among banks that stand to benefit from Canada’s designation as the latest nation to host a trading hub for China’s currency.

China on Nov. 8 gave Canada a 50 billion yuan (US$8.2 billion) quota under the Renminbi Qualified Foreign Institutional Investor program as Prime Minister Stephen Harper visited Beijing. China’s State Council also approved a three-year, $30-billion currency swap agreement with the country, while the Chinese central bank appointed Industrial and Commercial Bank of China to clear renminbi transactions in Canada.

China’s decision follows the awarding of a 30 billion yuan quota to Qatar as the world’s second-largest economy expands the RQFII program beyond Hong Kong in efforts to promote global use of the yuan. China started the program in 2011, allowing investors holding the currency overseas to buy domestic bonds, stocks and money-market instruments.

Canada’s hub will let Canadian banks offer exporters the chance to trade renminbi more cheaply, and to have the transactions settled in their own time zone.

Of the $4 trillion in annual trade that makes China the world’s biggest goods-trading nation, one sixth is with Brazil, the U.S. and Canada, according to London-based Standard Chartered.

The Chinese are doing a fair bit to ease trading restrictions:

A 20,000 yuan ($3,260) daily currency-conversion cap for Hong Kong’s permanent residents will be scrapped from Nov. 17, when a program allowing cross-border share trading begins.

The move will help support the stock link, Hong Kong Monetary Authority head Norman Chan said today at a press conference. It will allow locals to buy an unlimited amount of yuan, officially known as the renminbi, at offshore rates, instead of having to get it via the Shanghai market. Hong Kong has allowed non-residents to purchase an unlimited amount of offshore yuan since August 2012.

“Banks will square positions arising from renminbi conversion conducted with Hong Kong residents in the offshore market instead of the onshore market,” Chan said. “As a result, the prevailing conversion and other relevant restrictions for onshore conversion will hence no longer be applicable.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 27bp, FixedResets gaining 1bp and DeemedRetractibles off 7bp. Volatility was relatively high. Volume was very low.

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 -0.1406 % 2,549.7
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1406 % 4,036.7
Floater 2.96 % 3.06 % 64,761 19.55 4 -0.1406 % 2,710.5
OpRet 4.03 % 1.58 % 104,917 0.08 1 0.0000 % 2,743.3
SplitShare 4.24 % 3.92 % 55,788 3.76 5 -0.3946 % 3,191.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,508.4
Perpetual-Premium 5.44 % -7.74 % 64,872 0.08 19 0.0226 % 2,484.0
Perpetual-Discount 5.14 % 5.04 % 107,961 15.36 16 -0.2695 % 2,659.7
FixedReset 4.17 % 3.56 % 175,572 4.53 74 0.0125 % 2,583.4
Deemed-Retractible 4.97 % 0.56 % 101,159 0.14 41 -0.0666 % 2,598.8
FloatingReset 2.55 % -0.95 % 65,468 0.08 6 -0.0586 % 2,554.6
Performance Highlights
Issue Index Change Notes
SLF.PR.G FixedReset -1.52 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.39
Bid-YTW : 4.93 %
BAM.PR.T FixedReset -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-11
Maturity Price : 23.38
Evaluated at bid price : 24.70
Bid-YTW : 3.95 %
CGI.PR.D SplitShare -1.14 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.31 %
MFC.PR.I FixedReset -1.14 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 3.03 %
TRP.PR.C FixedReset 1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-11
Maturity Price : 21.75
Evaluated at bid price : 22.21
Bid-YTW : 3.54 %
Volume Highlights
Issue Index Shares
Traded
Notes
NA.PR.W FixedReset 92,767 TD crossed blocks of 25,000 and 10,000, and bought 10,000 from Nesbitt, all at 25.15. Nesbitt crossed 10,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-11
Maturity Price : 23.18
Evaluated at bid price : 25.12
Bid-YTW : 3.70 %
IFC.PR.C FixedReset 86,400 Nesbitt crossed 20,000 at 25.60; Desjardins crossed 43,800 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.16 %
GWO.PR.R Deemed-Retractible 75,415 RBC crossed 66,000 at 24.57.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.55
Bid-YTW : 5.13 %
TD.PF.B FixedReset 41,497 Nesbitt crossed 35,000 at 25.37.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 3.52 %
ENB.PR.F FixedReset 40,517 RBC crossed 29,600 at 24.85.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-11
Maturity Price : 23.24
Evaluated at bid price : 24.84
Bid-YTW : 4.03 %
PWF.PR.R Perpetual-Premium 32,665 RBC crossed 30,000 at 26.33.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.33
Bid-YTW : 4.60 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.T FixedReset Quote: 24.70 – 25.14
Spot Rate : 0.4400
Average : 0.2932

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-11
Maturity Price : 23.38
Evaluated at bid price : 24.70
Bid-YTW : 3.95 %

CGI.PR.D SplitShare Quote: 26.00 – 26.34
Spot Rate : 0.3400
Average : 0.2107

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.31 %

MFC.PR.I FixedReset Quote: 26.10 – 26.46
Spot Rate : 0.3600
Average : 0.2438

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 3.03 %

NEW.PR.D SplitShare Quote: 32.64 – 33.29
Spot Rate : 0.6500
Average : 0.5382

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-06-26
Maturity Price : 32.07
Evaluated at bid price : 32.64
Bid-YTW : 2.15 %

BAM.PR.N Perpetual-Discount Quote: 21.85 – 22.13
Spot Rate : 0.2800
Average : 0.1686

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-11
Maturity Price : 21.85
Evaluated at bid price : 21.85
Bid-YTW : 5.51 %

ELF.PR.G Perpetual-Discount Quote: 22.44 – 22.75
Spot Rate : 0.3100
Average : 0.2238

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-11-11
Maturity Price : 22.10
Evaluated at bid price : 22.44
Bid-YTW : 5.33 %

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