Oh, what joy there is amongst the anti-market crusaders:
Credit trading just isn’t paying like in the old days. That’s why Wall Street dealers are putting less money at risk to broker the debt, and instead are matching buyers and sellers as much as they can before making trades.
Dealers are only acting as middlemen for about 60 percent of high-yield bond transactions bigger than $2 million, moving securities between two sides they already have lined up, according to data compiled by financial-research company Tabb Group LLC. Before the 2008 financial crisis, such trades accounted for an estimated 25 percent of their business.
The downside of this movement is that it takes longer for investment firms to complete bigger trades, because banks used to just buy blocks of bonds with their own money and then opportunistically sell them into the market.
The upside? The trend sets the stage for a dramatic transformation of credit trading, where investors pay less to transact because dealers aren’t taking the same kind of risk.
What a great upside! Now it will be harder, for instance, to sell a new issue, because to make room in their portfolios investors will – as always – have to sell something, and that will take longer (and because it will take longer, yields will go up) and since it will take longer, there will have to be a longer selling period because of deal uncertainty, so yields will go up again! Hurray! And then it will become uneconomic at the margins for companies to issue debt, so they’ll issue less, with the twin results of giving the regulators less work to do and decreasing economic activity, thereby making the benefits of a government job even more beneficial. In addition, an even smaller proportion of the issue universe will be available to retail, because of inventory concerns if retail ever wants to sell, which will result in fewer complaints! It’s a brave new world, all right.
Meanwhile, the war on stockbrokers is yielding benefits to new players:
A growing crop of financial technology services companies have entered the Canadian market in recent months, providing alternatives to consumers looking for lower investment management and borrowing fees.
The country is becoming a hotbed for these “fintech” firms, threatening a dramatic shift in the financial services sector, driven by technology and a set of savvy entrepreneurs.
Last fall, former BMO Nesbitt Burns investment banker Nauvzer Babul launched Smart Money Capital Management, a computer-assisted financial management company. Smart Money invests in exchange-traded funds (ETFs) and charges clients an annual asset-based fee of 0.45 per cent on top of ETF fees, which together totals less than 1 per cent, Mr. Babul says.
Nova Scotia Power, proud issuer of NSI.PR.D, has been confirmed at Pfd-2(low) by DBRS:
DBRS Limited (DBRS) has confirmed the Issuer Rating and Unsecured Debentures & Medium-Term Notes rating of Nova Scotia Power Inc. (NSPI or the Company) at A (low) as well as its Cumulative Preferred Shares rating at Pfd-2 (low) and its Commercial Paper rating at R-1 (low). All trends are Stable. The rating confirmations reflect the Company’s relatively low business risk profile operating under a reasonable regulatory environment in Nova Scotia (the Province), albeit somewhat below average compared to other provinces that have privatized or deregulated their power sectors. The confirmations also reflect NSPI’s reasonable financial risk profile, with all key credit metrics expected to remain in line with the current rating category and within regulatory parameters.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets down 11bp and DeemedRetractibles gaining 7bp. Volatility continued to be high, with Enbridge FixedResets prominent among the losers. Volume was average.
PerpetualDiscounts now yield 4.92%, equivalent to 6.40% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 3.8%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 260bp, a narrowing from the 270bp reported February 11.
For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.
Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread
Here’s TRP:
Click for Big
TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.52 to be $1.03 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is bid at 14.80 to be $0.66 cheap.
Click for Big
Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).
Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.45 to be $0.32 rich, while MFC.PR.G, resetting at +290 on 2016-12-19 and MFC.PR.H, resetting at +313bp on 2017-3-19, are bid at 25.86 and 26.27, respectively, to be $0.35 cheap.
Click for Big
The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.
The cheapest issue relative to its peers is BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 17.83 to be $0.61 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.75 and appears to be $1.05 rich.
Click for Big
This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.80, looks $1.08 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.65 and is $1.03 rich.
Click for Big
All the break-even rates are scattered around negative 10bp – the market has started believing the deflation story again!
On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:
Click for Big
Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?
| 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 | 1.4357 % | 2,272.3 |
| FixedFloater | 4.37 % | 3.52 % | 19,590 | 18.38 | 1 | 0.6475 % | 4,048.4 |
| Floater | 3.17 % | 3.39 % | 67,225 | 18.74 | 4 | 1.4357 % | 2,415.6 |
| OpRet | 4.05 % | 2.22 % | 97,628 | 0.33 | 1 | -0.1970 % | 2,752.0 |
| SplitShare | 4.28 % | 3.50 % | 28,108 | 3.57 | 5 | 0.5046 % | 3,218.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1970 % | 2,516.4 |
| Perpetual-Premium | 5.33 % | -2.66 % | 57,016 | 0.08 | 24 | -0.1370 % | 2,513.6 |
| Perpetual-Discount | 4.96 % | 4.92 % | 120,992 | 15.66 | 10 | -0.0209 % | 2,791.7 |
| FixedReset | 4.39 % | 3.40 % | 202,865 | 17.08 | 79 | -0.1118 % | 2,438.9 |
| Deemed-Retractible | 4.90 % | 0.10 % | 105,520 | 0.10 | 39 | 0.0675 % | 2,650.9 |
| FloatingReset | 2.44 % | 2.94 % | 83,763 | 6.40 | 7 | 0.2038 % | 2,321.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IFC.PR.A | FixedReset | -4.22 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.73 Bid-YTW : 5.96 % |
| ENB.PR.B | FixedReset | -2.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 19.20 Evaluated at bid price : 19.20 Bid-YTW : 4.22 % |
| ENB.PR.H | FixedReset | -2.73 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 18.55 Evaluated at bid price : 18.55 Bid-YTW : 4.13 % |
| ENB.PR.F | FixedReset | -2.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 20.01 Evaluated at bid price : 20.01 Bid-YTW : 4.22 % |
| ENB.PR.D | FixedReset | -2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 19.32 Evaluated at bid price : 19.32 Bid-YTW : 4.21 % |
| ENB.PR.Y | FixedReset | -1.92 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 20.40 Evaluated at bid price : 20.40 Bid-YTW : 4.07 % |
| GWO.PR.N | FixedReset | -1.68 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.09 Bid-YTW : 5.98 % |
| TRP.PR.D | FixedReset | -1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 22.62 Evaluated at bid price : 23.55 Bid-YTW : 3.44 % |
| PWF.PR.A | Floater | -1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 2.67 % |
| ENB.PR.N | FixedReset | -1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 21.31 Evaluated at bid price : 21.60 Bid-YTW : 4.04 % |
| BAM.PF.E | FixedReset | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 23.07 Evaluated at bid price : 24.75 Bid-YTW : 3.51 % |
| PVS.PR.D | SplitShare | 1.02 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2021-10-08 Maturity Price : 25.00 Evaluated at bid price : 24.58 Bid-YTW : 4.79 % |
| BAM.PR.C | Floater | 1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 14.70 Evaluated at bid price : 14.70 Bid-YTW : 3.42 % |
| BAM.PR.R | FixedReset | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 21.56 Evaluated at bid price : 21.94 Bid-YTW : 3.65 % |
| PVS.PR.C | SplitShare | 1.14 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-12-10 Maturity Price : 25.50 Evaluated at bid price : 25.77 Bid-YTW : 3.14 % |
| MFC.PR.K | FixedReset | 1.34 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.22 Bid-YTW : 3.75 % |
| VNR.PR.A | FixedReset | 1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 23.51 Evaluated at bid price : 25.20 Bid-YTW : 3.52 % |
| BAM.PR.B | Floater | 1.78 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 14.86 Evaluated at bid price : 14.86 Bid-YTW : 3.39 % |
| MFC.PR.L | FixedReset | 1.88 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.45 Bid-YTW : 3.72 % |
| HSE.PR.A | FixedReset | 2.94 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 17.51 Evaluated at bid price : 17.51 Bid-YTW : 3.72 % |
| BAM.PR.K | Floater | 5.27 % | Just a reversal of yesterday‘s collapse. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 14.57 Evaluated at bid price : 14.57 Bid-YTW : 3.45 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.B | Deemed-Retractible | 127,371 | RBC crossed 125,000 at 25.43. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-20 Maturity Price : 25.25 Evaluated at bid price : 25.42 Bid-YTW : -4.40 % |
| BMO.PR.S | FixedReset | 63,489 | RBC crossed 30,000 at 25.12. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 23.25 Evaluated at bid price : 25.10 Bid-YTW : 3.09 % |
| RY.PR.J | FixedReset | 61,753 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-02-18 Maturity Price : 23.19 Evaluated at bid price : 25.15 Bid-YTW : 3.35 % |
| MFC.PR.M | FixedReset | 45,940 | Scotia crossed 40,000 at 24.92. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.83 Bid-YTW : 3.68 % |
| SLF.PR.G | FixedReset | 44,158 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.73 Bid-YTW : 6.25 % |
| TD.PR.S | FixedReset | 41,560 | TD crossed 39,400 at 25.28. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.28 Bid-YTW : 2.73 % |
| There were 32 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| IFC.PR.A | FixedReset | Quote: 19.73 – 20.30 Spot Rate : 0.5700 Average : 0.3964 YTW SCENARIO |
| TRP.PR.D | FixedReset | Quote: 23.55 – 24.10 Spot Rate : 0.5500 Average : 0.4059 YTW SCENARIO |
| BMO.PR.Q | FixedReset | Quote: 22.61 – 22.90 Spot Rate : 0.2900 Average : 0.1935 YTW SCENARIO |
| ENB.PR.B | FixedReset | Quote: 19.20 – 19.59 Spot Rate : 0.3900 Average : 0.2942 YTW SCENARIO |
| PWF.PR.O | Perpetual-Premium | Quote: 26.35 – 26.62 Spot Rate : 0.2700 Average : 0.1808 YTW SCENARIO |
| BAM.PF.B | FixedReset | Quote: 24.06 – 24.39 Spot Rate : 0.3300 Average : 0.2426 YTW SCENARIO |