November 11, 2010

France has joined Germany in urging easy sovereign defaults:

French Finance Minister Christine Lagarde said investors must share the cost of sovereign debt restructurings, backing a German call that helped send yields on Irish and Portuguese bonds to record highs.

“All stakeholders must participate in the gains and losses of any particular situation,” Lagarde said during an interview yesterday in Paris for Bloomberg Television’s “On the Move” with Francine Lacqua. “There are many, many ways to address this point of principle.”

Lagarde’s comments mark France’s most explicit backing of German proposals to make bondholders contribute in bailouts, which deepened the slump in bonds of the so-called euro peripherals. Risk premiums that investors demand to buy their debt have risen since an Oct. 29 European Union summit when German Chancellor Angela Merkel sparred with European Central Bank President Jean-Claude Trichet over her demand “to see that it’s not just taxpayers who are on the hook, but also private investors.”

Merkel’s views on sovereign default were reported on November 2.

The EU stands vigilant with a policy of quantitative wheezing:

The European Union said Thursday it is prepared to financially help Ireland as investors continued dumping bonds issued by the Irish government and other fiscally weak countries in the euro zone.

“We have all the necessary instruments,” European Commission President Jose Manuel Barroso told reporters in South Korea, where he was attending the summit of the Group of 20 industrialized and emerging nations. “The EU is ready to support Ireland.” He declined to speculate on whether the EU’s new €440 billion sovereign rescue fund would be needed.

“With three countries in the euro area now having virtually lost access to capital markets, the implications for the region as a whole could easily become systemic again,” market analysts at the Royal Bank of Scotland said in a note.

RBS said the ECB’s government bond-purchasing program will “be scaled up meaningfully” by another €100 billion by early next year. “The more it waits the bigger the purchase program will have to be,” it said.

Econbrowser‘s Jim Hamilton highlights a paper by Ke Tang and Wei Xiong titled Index Investment and Financialization of Commodities:

This paper finds that concurrent with the rapid growing index investment in commodities markets since early 2000s, futures prices of different commodities in the US became increasingly correlated with each other and this trend was significantly more pronounced for commodities in the two popular GSCI and DJUBS commodity indices. This finding reflects a financialization process of commodities markets and helps explain the synchronized price boom and bust of a broad set of seemingly unrelated commodities in the US in 2006-2008. In contrast, such commodity price comovements were absent in China, which refutes growing commodity demands from emerging economies as the driver.

In his post Commodity inflation, Prof. Hamilton highlights the correlations against the USD.

My view has been that the Fed needs to prevent a repeat of Japan’s deflationary experience of the 1990s, but that it also needs to watch commodity prices as an early indicator that it’s gone far enough in that objective. In terms of concrete advice, I would worry about the potential for the policy to do more harm than good if it results in the price of oil moving above $90 a barrel.

And we’re uncomfortably close to that point already.

It was a restful, slightly negative day for the Canadian preferred share market, as PerpetualDiscounts were down 2bp on the day, while FixedResets lost 6bp. Volume was relatively 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 0.1017 % 2,231.5
FixedFloater 4.94 % 3.55 % 26,950 19.11 1 0.0455 % 3,404.4
Floater 2.67 % 2.34 % 65,737 21.40 4 0.1017 % 2,409.4
OpRet 4.78 % 3.05 % 77,665 1.86 9 0.1144 % 2,399.5
SplitShare 5.81 % -24.66 % 67,053 0.09 2 0.4225 % 2,422.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1144 % 2,194.1
Perpetual-Premium 5.62 % 5.05 % 161,091 3.07 24 -0.0447 % 2,028.7
Perpetual-Discount 5.28 % 5.29 % 256,901 14.94 53 -0.0202 % 2,067.4
FixedReset 5.19 % 2.85 % 346,008 3.20 50 -0.0550 % 2,296.6
Performance Highlights
Issue Index Change Notes
IAG.PR.C FixedReset -1.81 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 27.06
Bid-YTW : 3.73 %
ENB.PR.A Perpetual-Premium -1.56 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-12-11
Maturity Price : 25.00
Evaluated at bid price : 25.32
Bid-YTW : -13.20 %
ELF.PR.F Perpetual-Discount 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-11
Maturity Price : 22.77
Evaluated at bid price : 23.00
Bid-YTW : 5.82 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.T FixedReset 62,650 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-11
Maturity Price : 23.10
Evaluated at bid price : 25.01
Bid-YTW : 4.24 %
TRP.PR.A FixedReset 62,203 TD crossed 57,400 at 26.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.51
Bid-YTW : 3.21 %
RY.PR.X FixedReset 55,002 RBC crosse 25,000 at 28.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 28.06
Bid-YTW : 2.85 %
BAM.PR.B Floater 43,550 Desjardins crossed 30,000 at 17.11.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-11
Maturity Price : 17.11
Evaluated at bid price : 17.11
Bid-YTW : 3.09 %
GWO.PR.G Perpetual-Discount 29,590 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-11
Maturity Price : 23.82
Evaluated at bid price : 24.11
Bid-YTW : 5.45 %
BMO.PR.J Perpetual-Discount 21,550 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-11
Maturity Price : 22.91
Evaluated at bid price : 23.09
Bid-YTW : 4.88 %
There were 24 other index-included issues trading in excess of 10,000 shares.

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