PrefBlog

Julia Dickson, OFSI Superintendent, has released a speech made to Langdon Hall Life Insurance Forum:

It is best to see the current cycle through before making major changes to Minimum Continuing Capital and Surplus Requirements (MCCSR);
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Pillar 3 is all about disclosure and transparency. Shedding additional light on these issues will encourage better risk management. Sunlight is a great disinfectant and I think it encourages good risk management.
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The changes OSFI made to the seg fund guarantee capital requirements reflected the same thinking – the need for something that stands up to evaluation and is reasonable.

The trouble is, of course, is that

• A massive change has been made to the MCCSR rules
• OSFI itself is a secretive organization that seldom, if ever, justifies or explains its decisions
• The reasoning behind the seg fund guarantee requirements has not even been exposed for evaluation, much less stood up to it.

There has been an inverted credit curve on some financial issues for quite some time, but FT Alphaville has pointed out this is now more common than not:

FT Alphaville claims this is due to front-end-loaded default fears, but Across the Curve says there’s another factor in play:

Time Warner offering of 5 year and 10 year bonds. The 10 year priced at T+525 and recently someone quoted the issue 510/490.

That two tranche offering yesterday pricedwith an inverted credit curve. As I mentioned the 10 year was T+525 but the 5 year issue required a wider spread to Treasury paper and that paper priced at T+590. This phenomenon is not confined to Time Warner but manifests itself in quite a few other names.

Traditionally, that would indicate that investors see a greater a chance for default sooner rather than later and require a wider spread to protect portfolios from that risk.

Conversations with market participants, though, lead to a different conclusion. The credit spread inversion is a function of demand for duration. There is much more demand for 10 year assets from insurance companies and pension funds and that demand is evident in the number of credits which experience the inversion.

Like everything else in the investment world, I’ll suggest that there’s a bit of truth to every half-way reasonable explanation. Here in the preferred share world, I’ve been puzzled for some time as to why BAM Perps yield less than BAM retractibles (discussed on August 22) … the duration hypothesis from Assiduous Reader prefwatcher didn’t convince me at the time and doesn’t convince me now … but who knows?

There were twenty-eight other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Friday, November 14th, 2008 at 10:25 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.