June 2, 2017

Jobs, jobs, jobs!

Nonfarm payrolls rose by a seasonally adjusted 138,000 in May from the prior month, the Labor Department said Friday, and job gains in the prior two months were revised down. The unemployment rate fell to 4.3%, the lowest reading since May 2001. Economists surveyed by The Wall Street Journal had expected 184,000 new jobs to be added in May and a jobless rate of 4.4%.

The drop in unemployment suggests that the labor market is at or very near full employment, or the point when virtually all workers who are seeking a job have found one. Federal Reserve officials projected in March the jobless rate will average 4.7% to 5% over the long run.

Average hourly earnings for private-sector workers increased by 4 cents to $26.22 an hour in May. From a year earlier, wages rose 2.5%. Annual wage gains have stayed near the 2.5% pace since late 2015, despite a steady decrease in the unemployment rate.

Typically, economists would expect falling unemployment to coincide with better wage gains. When the unemployment rate was 4.4% in May 2007, wages for nonsupervisory workers were growing better than 4% annually. In May 2001, those wages were up 4% from a year earlier. Nonsupervisory wages rose 2.4% last month, from a year earlier.

Maybe people have lost the habit of paying more:

Robert Barbera, co-director for the Center for Financial Economics at Johns Hopkins University, suggests it is important to not just look at the unemployment rate’s level, but how long it took to get there

It took a long seven years for the unemployment rate to get to 4.3% from the peak of 10% in October 2009. Because of the sluggish growth, businesses never had to scramble, and pay more, to add workers. And at no point did workers feel they were awash in opportunity.

This slow growth doesn’t give people confidence to ask for higher wages. And plenty of workers have never experienced that kind of environment: The 2000s were a bit of a dud outside of housing. Only workers in their 40s and older remember the 1990s boom. Maybe the U.S. labor market is turning a bit like Japan’s, where the unemployment has fallen to its lowest level in nearly a quarter-century, but after so many years of disappointment, workers are hesitant to demand higher wages, and employers are hesitant to give them.

Meanwhile Illinois is in big trouble!

Illinois had its bond rating downgraded to one step above junk by Moody’s Investors Service and S&P Global Ratings, the lowest ranking on record for a U.S. state, as the long-running political stalemate over the budget shows no signs of ending.

S&P warned that Illinois will likely lose its investment-grade status, an unprecedented step for a state, around July 1 if leaders haven’t agreed on a budget that chips away at the government’s chronic deficits. Moody’s followed S&P’s downgrade Thursday, citing Illinois’s underfunded pensions and the record backlog of bills that are equivalent to about 40 percent of its operating budget.

“Legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance,” Ted Hampton, Moody’s analyst, said in a statement. “During the past year of fruitless negotiations and partisan wrangling, fundamental credit challenges have intensified enough to warrant a downgrade, regardless of whether a fiscal compromise is reached.”

“The rating actions largely reflect the severe deterioration of Illinois’ fiscal condition, a byproduct of its stalemated budget negotiations,” S&P analyst Gabriel Petek said in a statement. “The unrelenting political brinkmanship now poses a threat to the timely payment of the state’s core priority payments.”

Meanwhile, Picton Mahoney has gotten some ink for investing in ‘Deemed Retractible bonds’

Phil Mesman and his colleagues at Picton Mahoney Asset Management have been scooping up subordinated debt issued by the likes of JPMorgan Chase & Co., Barclays Plc, and Credit Agricole SA in the 1980s and 1990s that is trading at a discount to face value. The goal is to get repaid early at a premium to the current price. This strategy, which began almost two years ago with a spreadsheet plotting the rather tiny universe of the asset class, has handed the firm’s funds returns of more than 20 percent, Mesman said.

These legacy hybrid capital notes were originally issued to convert to equity in the event of a bank failure. They trade at a discount primarily because of the low coupon, which is based on a spread over the London interbank offered rate, and uncertainty around whether or not they will be repaid early, Mesman said.

The bonds, which also have a liquidity discount, have a maturity of 25 years or longer in most cases, and some are perpetual bonds, he said. The bond covenants and structures are good for investors, because they make it difficult for a bank to convert the bonds to equity in the event it needs to shore up capital levels. Regulators have said that banks need to take out the bonds before Jan. 1, 2022, Mesman said, putting a deadline on opportunities in the trade.

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 -0.8136 % 2,090.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.8136 % 3,836.7
Floater 3.75 % 3.79 % 84,386 17.80 3 -0.8136 % 2,211.1
OpRet 0.00 % 0.00 % 0 0.00 0 0.0158 % 3,041.4
SplitShare 4.73 % 4.30 % 69,297 1.55 5 0.0158 % 3,632.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0158 % 2,833.9
Perpetual-Premium 5.28 % -0.69 % 71,623 0.09 25 0.1314 % 2,792.1
Perpetual-Discount 5.07 % 5.06 % 103,880 15.33 12 0.1058 % 3,012.9
FixedReset 4.53 % 4.15 % 194,604 6.55 95 -0.3398 % 2,288.1
Deemed-Retractible 4.97 % 4.94 % 125,317 6.28 30 0.1115 % 2,907.1
FloatingReset 2.52 % 3.15 % 47,391 4.40 10 -0.1214 % 2,527.4
Performance Highlights
Issue Index Change Notes
TRP.PR.C FixedReset -2.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 15.19
Evaluated at bid price : 15.19
Bid-YTW : 4.07 %
TRP.PR.B FixedReset -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 14.06
Evaluated at bid price : 14.06
Bid-YTW : 3.95 %
PWF.PR.P FixedReset -1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 15.50
Evaluated at bid price : 15.50
Bid-YTW : 4.08 %
TRP.PR.A FixedReset -1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 18.30
Evaluated at bid price : 18.30
Bid-YTW : 4.00 %
MFC.PR.J FixedReset -1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.44
Bid-YTW : 5.94 %
TRP.PR.H FloatingReset -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 13.22
Evaluated at bid price : 13.22
Bid-YTW : 3.43 %
BMO.PR.Q FixedReset -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.32
Bid-YTW : 5.47 %
IFC.PR.A FixedReset -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.37
Bid-YTW : 8.41 %
BAM.PF.B FixedReset -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 20.81
Evaluated at bid price : 20.81
Bid-YTW : 4.45 %
BAM.PR.C Floater -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 12.56
Evaluated at bid price : 12.56
Bid-YTW : 3.80 %
CM.PR.Q FixedReset -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 22.07
Evaluated at bid price : 22.46
Bid-YTW : 4.15 %
BAM.PR.X FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 16.08
Evaluated at bid price : 16.08
Bid-YTW : 4.35 %
RY.PR.H FixedReset -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 20.90
Evaluated at bid price : 20.90
Bid-YTW : 3.95 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.R FixedReset 2,454,817 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 23.14
Evaluated at bid price : 24.98
Bid-YTW : 4.25 %
PWF.PR.Z Perpetual-Premium 171,302 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 24.67
Evaluated at bid price : 25.07
Bid-YTW : 5.15 %
MFC.PR.N FixedReset 101,200 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.35
Bid-YTW : 6.60 %
TRP.PR.K FixedReset 91,577 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-05-31
Maturity Price : 25.00
Evaluated at bid price : 25.86
Bid-YTW : 4.16 %
MFC.PR.R FixedReset 86,691 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 4.26 %
TRP.PR.J FixedReset 68,103 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-05-31
Maturity Price : 25.00
Evaluated at bid price : 26.68
Bid-YTW : 3.70 %
There were 42 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.A Deemed-Retractible Quote: 22.85 – 23.25
Spot Rate : 0.4000
Average : 0.2807

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.85
Bid-YTW : 5.99 %

TRP.PR.B FixedReset Quote: 14.06 – 14.39
Spot Rate : 0.3300
Average : 0.2449

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 14.06
Evaluated at bid price : 14.06
Bid-YTW : 3.95 %

MFC.PR.J FixedReset Quote: 21.44 – 21.67
Spot Rate : 0.2300
Average : 0.1550

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.44
Bid-YTW : 5.94 %

CM.PR.Q FixedReset Quote: 22.46 – 22.67
Spot Rate : 0.2100
Average : 0.1424

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 22.07
Evaluated at bid price : 22.46
Bid-YTW : 4.15 %

CU.PR.D Perpetual-Discount Quote: 24.64 – 24.85
Spot Rate : 0.2100
Average : 0.1517

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 24.35
Evaluated at bid price : 24.64
Bid-YTW : 4.99 %

SLF.PR.D Deemed-Retractible Quote: 22.38 – 22.61
Spot Rate : 0.2300
Average : 0.1754

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.38
Bid-YTW : 6.16 %

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