February 20, 2013

The lawyers and do-gooders at IIROC are continuing their efforts to destroy the Canadian corporate bond market:

>Four years ago, the head of the investment industry’s self-regulator said that a plan to create surveillance to protect fixed income investors was a priority. At last, the final step needed to make that happen appears to be here.

The regulator has been taking things in bites. First, in 2009, there was a demand for better disclosure of what people were paying banks and securities firms to trade debt. Then, in 2011, a rule demanding that all securities firms “ensure clients received fair prices on debt transactions.”

So now, the Investment Industry Regulatory Organization of Canada is amping up trade reporting requirements to create something at least resembling the kind of surveillance that has long been there in equity markets, where a computer system watches every trade to ensure investors are getting the best available price at any given point.

The new rule will require securities dealers to report every trade, once it’s done. IIROC will use that to build a database that is the start of a real surveillance mechanism. It’s still not the real-time computerized flagging of trades that aren’t done at the best possible price, but it’s perhaps the biggest step yet toward that happening.

As the linked article in the Globe shows, the IIROC honcho who started this mess was Susan Wolburgh Jenah who, as far as I can tell from her official biography, has never traded a security in her life.

To my chagrin, the proposed rule cites a paper promoted by the CFA Institute and published as part of their Codes, Standards and Position Papers and comes complete with an “Issue Brief”. The paper itself is titled An Examination of Transparency in European Bond Markets and I must say I consider it very disappointing in terms of rigour; however, a full rebuttal will require enough work and length that it will be more suitable to PrefLetter than PrefBlog.

The basic problem with this idea is that it makes it less lucrative for bond dealers to hold inventory. This means fewer offerings of individual bonds to retail and it means small size markets being called for institutional players. This in turn leads to a migration of bond issues to the private placement market and decreased functionality of the capital markets in general. Essentially, the problem that fairness brings to bond markets is the same as that of socialisn: in a socialist economy, everything’s cheap but nothing’s available; in a “fair” bond market, all the spreads are narrow, but the market makers won’t back up their quotes – when given – with significant risk capital.

It was a mixed day for the Canadian bond market, with PerpetualPremiums down 11bp, FixedResets up 9bp and DeemedRetractibles off 9bp. Volatility was low. Volume was extremely high.

PerpetualDiscounts now yield 4.90%, equivalent to 6.37% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.35%, so the pre-tax interest-equivalent spread is now about 200bp, a small rebound from the 195bp reported February 6.

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 0.2245 % 2,599.4
FixedFloater 4.11 % 3.44 % 25,710 18.42 1 -0.2591 % 3,954.6
Floater 2.56 % 2.85 % 78,416 20.08 5 0.2245 % 2,806.6
OpRet 4.78 % 1.56 % 45,219 0.35 5 -0.1691 % 2,606.8
SplitShare 4.58 % 4.13 % 40,572 4.29 2 0.4249 % 2,943.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1691 % 2,383.6
Perpetual-Premium 5.25 % 0.64 % 82,627 0.09 29 -0.1099 % 2,354.2
Perpetual-Discount 4.85 % 4.90 % 129,545 15.60 4 -0.0507 % 2,647.9
FixedReset 4.89 % 2.55 % 273,057 3.06 78 0.0917 % 2,503.3
Deemed-Retractible 4.87 % 1.93 % 145,739 0.26 45 -0.0851 % 2,438.4
Performance Highlights
Issue Index Change Notes
IAG.PR.G FixedReset 1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.74
Bid-YTW : 2.76 %
PWF.PR.A Floater 1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-02-20
Maturity Price : 23.03
Evaluated at bid price : 23.30
Bid-YTW : 2.23 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.D Perpetual-Premium 115,455 TD crossed 49,700 at 26.11 and 50,000 at 26.07.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-03-22
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : -35.71 %
BMO.PR.H Deemed-Retractible 103,763 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-03-27
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 4.59 %
TRP.PR.A FixedReset 83,025 Desjardins crossed two blocks of 31,000 each, both at 25.99.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.90
Bid-YTW : 2.97 %
BMO.PR.Q FixedReset 68,286 Nesbitt crossed 35,600 at 25.35; Nesbitt bought 15,000 from TD at 25.37.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 2.91 %
SLF.PR.I FixedReset 52,328 Scotia sold two blocks of 10,000 each to anonymous, both at 26.68.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.66
Bid-YTW : 2.61 %
ENB.PR.F FixedReset 52,195 Nesbitt crossed 19,300 at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.45 %
There were 61 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.B FixedReset Quote: 26.71 – 27.05
Spot Rate : 0.3400
Average : 0.2418

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.71
Bid-YTW : 1.17 %

BAM.PR.G FixedFloater Quote: 23.10 – 23.49
Spot Rate : 0.3900
Average : 0.2972

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-02-20
Maturity Price : 23.31
Evaluated at bid price : 23.10
Bid-YTW : 3.44 %

BNS.PR.L Deemed-Retractible Quote: 25.92 – 26.14
Spot Rate : 0.2200
Average : 0.1343

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-26
Maturity Price : 25.75
Evaluated at bid price : 25.92
Bid-YTW : 1.93 %

W.PR.J Perpetual-Premium Quote: 25.42 – 25.62
Spot Rate : 0.2000
Average : 0.1196

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-03-22
Maturity Price : 25.00
Evaluated at bid price : 25.42
Bid-YTW : -7.87 %

IFC.PR.C FixedReset Quote: 26.61 – 26.84
Spot Rate : 0.2300
Average : 0.1511

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.61
Bid-YTW : 2.51 %

ENB.PR.F FixedReset Quote: 25.65 – 25.87
Spot Rate : 0.2200
Average : 0.1510

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.45 %

One Response to “February 20, 2013”

  1. […] PerpetualDiscounts now yield 4.91%, equivalent to about 6.38% interest at the standard conversion rate of 1.3x. Long corporates now yield about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a significant widening from the 200bp reported February 20. […]

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