PrefBlog

On December 14 I highlighted Hoenig’s dissent from the FOMC decision and speculated:

It occurs to me that Mr. Hoenig is being used – probably with his enthusiastic cooperation – as a straw man. The Fed wants to send an explicit signal that they’ve thought about this, discussed this and reached a concensus to reject this. There’s no shortage of blogs out there claiming hyperinflation is imminent! Given the increased public discussion of economic data, with various levels of competence, one wonders if more public pronouncements by governments and their agencies will set up straw men in their releases and recognize that forecasts are necessarily imprecise.

Hoenig has delivered a speech on the topic, titled Monetary policy and the role of dissent:

Based on audience questions, news coverage and pundit columns throughout the year, it has become obvious to me that the role of dissent in the FOMC is misunderstood and viewed without context. The idea that a dissenting vote is confusing, counterproductive, and generally undesirable is unhealthy. It is also historically inaccurate.

In my remaining time today, I will discuss why dissenting views at the FOMC are critical to the success of the Federal Reserve System and that public debate was the intent of its congressional founders. I will also describe how open debate and dissent are fundamental to achieving transparency of FOMC deliberations and to supporting the credibility of the committee in difficult economic times.
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As an economist, I cannot be certain that my views are correct. Certainly, a majority of my counterparts on the FOMC last year did not agree with my views. But it is important to recognize that in the face of uncertainty, arriving at the best policy decision is built on divergent opinions and vigorous debate.

Because of this, the role of open dissent is at least as critical to FOMC monetary policy decisions as it is to deliberations by the Supreme Court, the United States Congress or any other body with important public responsibilities from the local through the federal level. If you find it unusual to consider the FOMC as being similar to these other deliberative bodies, it is perhaps because many–including some former Federal Reserve officials–tend to speak of Fed policy as being done by a single actor.
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A deliberative body does not gain credibility by concealing dissent when decision making is most difficult. In fact, credibility is sacrificed as those on the outside realize that unanimity – difficult in any environment – simply may not be a reasonable expectation when the path ahead is the most confounding.
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As for me, I recognize that the committee’s majority might be correct. In fact, I hope that it is. However, I have come to my policy position based on my experience, current data and economic history. If I had failed to express my views with my vote, I would have failed in my duty to you and to the committee.

In these days of political obsession with staying “on message”, and puerile voters who want a simple story just like mommy used to tell them, Hoenig’s expression of his views is rather refreshing!

Contingent Capital as a concept has often been criticized on the basis that it might be difficult to sell – but banks have been selling this type of issue with gusto:

Barclays Plc, based in London, and UBS AG in Zurich led more than a dozen banks selling reverse convertibles, which are short-term bonds generally marketed to individuals that convert into stock if a company’s share price plummets.
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Structured note sales rose 46 percent last year to a record $49.4 billion in the U.S., Bloomberg data show. The securities fed demand from individual investors frustrated with record low rates on everything from certificates of deposit to money market funds with the Federal Reserve holding its target interest rate for overnight loans between banks in a range of zero to 0.25 percent since 2008. Banks issued $33.9 billion in 2009, according to StructuredRetailProducts.com, a database used by the industry.

Royal Bank of Scotland Group Plc sold $1.15 million in three-month notes tied to Rochester, New York-based Eastman Kodak Co. on June 10 that paid 24 percent annualized interest, a filing with the U.S. Securities and Exchange Commission shows. That’s 24 times the average rate on one-year certificates of deposit, according to data from Bankrate Inc. in North Palm Beach, Florida.

Buyers couldn’t lose money unless shares of the camera maker fell to below $3.54 from $5.06. Kodak dropped to $3.50 on Aug. 31 in New York trading. RBS converted the bonds into stock and investors lost about 18 percent even with the high interest rate.

I will admit, however, that the perpetual nature of Contingent Capital is another difficulty in flogging it.

Regular debt is selling pretty well, too!

Company bond sales in the U.S. surged to the most on record this week and relative yields on investment-grade debt shrank to the narrowest since May as investors boosted bets that economic growth is gaining momentum.

Issuance soared to $48.2 billion, eclipsing the $46.9 billion raised in the week ended May 8, 2009, as General Electric Co.’s finance unit sold $6 billion of notes in the largest sale in 11 months, according to data compiled by Bloomberg. Investment-grade bond spreads narrowed to 162 basis points, or 1.62 percentage points, the tightest since May 4, 2010, Bank of America Merrill Lynch index data show.

Investors’ appetite for company debt is growing even after annual sales topped $1 trillion for the second consecutive year as the securities outperform Treasuries.
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Offerings from foreign borrowers dominated U.S. sales this week, with transactions by companies from Sydney-based Macquarie Group Ltd. to the U.K.’s Barclays Plc accounting for 57 percent of the total, Bloomberg data show. Relative yields on U.S. corporate bonds became narrower than those on company debt worldwide last month for the first time on record, Bank of America Merrill Lynch index data show.

The Canadian preferred share market had a good day on average volume, with PerpetualDiscounts gaining 21bp and FixedResets up 10bp. Sun Life PerpetualDiscounts saw some good volume.

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	0.1725 %	2,315.5
FixedFloater	4.81 %	3.54 %	29,489	18.92	1	0.0442 %	3,497.2
Floater	2.58 %	2.37 %	46,908	21.28	4	0.1725 %	2,500.1
OpRet	4.80 %	3.33 %	64,571	2.33	8	-0.1142 %	2,397.8
SplitShare	5.33 %	1.30 %	668,053	0.92	4	0.2620 %	2,453.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1142 %	2,192.5
Perpetual-Premium	5.66 %	5.28 %	124,399	5.21	20	0.1087 %	2,023.4
Perpetual-Discount	5.42 %	5.48 %	232,597	14.72	57	0.2055 %	2,038.7
FixedReset	5.24 %	3.41 %	297,153	3.09	52	0.1036 %	2,269.7

Performance Highlights
Issue	Index	Change	Notes
PWF.PR.P	FixedReset	-2.70 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 24.40 Evaluated at bid price : 24.45 Bid-YTW : 4.15 %
TRP.PR.B	FixedReset	-1.63 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 24.69 Evaluated at bid price : 24.74 Bid-YTW : 3.76 %
FTS.PR.F	Perpetual-Discount	-1.52 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 22.58 Evaluated at bid price : 22.75 Bid-YTW : 5.45 %
HSB.PR.D	Perpetual-Discount	1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 23.03 Evaluated at bid price : 23.25 Bid-YTW : 5.41 %
PWF.PR.I	Perpetual-Premium	1.08 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2011-05-30 Maturity Price : 25.25 Evaluated at bid price : 25.30 Bid-YTW : 4.48 %
W.PR.J	Perpetual-Discount	1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 24.23 Evaluated at bid price : 24.52 Bid-YTW : 5.73 %
ELF.PR.F	Perpetual-Discount	1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 21.95 Evaluated at bid price : 22.25 Bid-YTW : 5.97 %
MFC.PR.B	Perpetual-Discount	1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 21.56 Evaluated at bid price : 21.56 Bid-YTW : 5.45 %
TD.PR.E	FixedReset	1.34 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 27.66 Bid-YTW : 2.87 %
NA.PR.O	FixedReset	1.97 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-17 Maturity Price : 25.00 Evaluated at bid price : 27.70 Bid-YTW : 2.85 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BAM.PR.N	Perpetual-Discount	158,604	RBC crossed five blocks: 22,900 shares, 25,000 shares, 40,000 and two of 25,300 each, all at 20.63. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 20.56 Evaluated at bid price : 20.56 Bid-YTW : 5.83 %
SLF.PR.D	Perpetual-Discount	125,402	Desjardins crossed blocks of 70,900 at 20.40 and 49,700 at 20.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 20.43 Evaluated at bid price : 20.43 Bid-YTW : 5.49 %
SLF.PR.A	Perpetual-Discount	84,690	Desjardins crossed 71,400 at 21.88. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 21.81 Evaluated at bid price : 21.81 Bid-YTW : 5.49 %
BNS.PR.Q	FixedReset	74,651	RBC crossed 50,000 at 26.10. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-24 Maturity Price : 25.00 Evaluated at bid price : 26.06 Bid-YTW : 3.28 %
CM.PR.H	Perpetual-Discount	70,352	Desjardins crossed blocks of 38,300 and 15,000, both at 22.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 22.43 Evaluated at bid price : 22.62 Bid-YTW : 5.31 %
SLF.PR.C	Perpetual-Discount	51,660	TD crossed 25,000 at 20.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-06 Maturity Price : 20.43 Evaluated at bid price : 20.43 Bid-YTW : 5.49 %
There were 29 other index-included issues trading in excess of 10,000 shares.

This entry was posted on Thursday, January 6th, 2011 at 9:23 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.