Category: Market Action

Sorry it’s late!

Some hilarity about account statements:

Whether it’s out of dread or complacency, a lot of investors aren’t reading their account statements.

That’s the conclusion to be drawn from a J.D. Power survey in which investors were asked if they noticed any change during the past year in how fees and performance information was communicated by their advisory firm. Just 23 per cent noticed a change, a strikingly low number in light of the fact that new regulatory transparency rules have added some key data to client statements. Over all, the number of investors reporting a complete understanding of fees was 24 per cent, down from 27 per cent in 2016.

Let us all congratulate the Canadian Securities Administrators on their fine work in performing user acceptance testing prior to enacting a vast load of idiocy!

PerpetualDiscounts now yield 5.33%, equivalent to 6.93% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 305bp, the same as reported August 16.

Sorry it’s late!

The Government of Canada is considering reopening an ultra-long bond issue:

The Government of Canada is considering issuing ultra-long bonds, subject to favourable market conditions, through a reopening of the 2.75% December 1, 2064 ultra-long bond, using a modified auction process. The potential for issuing ultra-long bonds and the option of issuing via auction were highlighted in the Debt Management Strategy for 2017–18.

The additional issuance of bonds in the ultra-long sector is in keeping with the commitment that the Government made in Budget 2017 to reallocate short-term issuance towards long-term bonds in order to lock in low funding costs and reduce refinancing risk.

Any ultra-long bond issuance would be subject to a set of issuance criteria. These criteria include projections of cost savings based on market expectations of interest rates over time and the costs of rolling over short-term funding relative to the constant costs of issuing long-term debt, and indications of sufficient demand for ultra-long bonds.

That said, ultra-long bond issuance remains a tactical funding measure and is not part of the regular bond program. There is no commitment to issue ultra-long bonds and other factors may preclude the Government from issuing these securities, even if the above criteria are met.

To facilitate market preparations for potential ultra-long bond issuances, the Government will consult its primary dealers regarding possible issuance dates and auction sizes. Potential issuance dates during the current quarter will be assessed and potential issuance dates in future quarters will be communicated through quarterly bond schedules posted on the Bank of Canada’s website. If a decision is made to hold an ultra-long bond auction, a Call for Tenders confirming the date and size of the auction will be posted on the Bank of Canada’s website.

The WSJ has a nice piece titled The Wage Paradox Explained:

So why haven’t wages risen faster amid an increase in hiring and unfilled jobs? One answer is that wages have actually been growing at a faster clip—around 4% to 5%—at least for full-time workers with steady jobs. But new full-time workers who are generally paid less than the retirees they replace are dragging down the average wage increase.

Researchers at the San Francisco Fed this week updated their 2016 paper that disaggregated the wages of full-time workers with steady employment from recent entrants—that is, new workers or those returning to full-time work. Their earlier analysis showed that average wage growth had slowed less than expected during the recession while staying relatively flat during the recovery.

That’s because workers who lost jobs during the recession were generally lower skilled and lower paid, so average weekly wages didn’t fall significantly. However, many of those workers have since been rehired at below-average wages, which has depressed the aggregate.

In prior expansions, wage growth has been driven mostly by continuously full-time employed workers, and the researchers find that’s still the case. Wage growth for these workers is now close to the pre-recession 2007 peak. But there are now many more workers who have been on the labor-force sidelines who are moving to full-time employment, thus creating a drag on wages.

Unfortunately, the San Francisco Fed’s website seems to have collywobbles at the moment so I can’t access the paper.

PerpetualDiscounts now yield 5.34%, equivalent to 6.94% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 305bp, the same as reported on August 9.

Remember the Teachers / BCE deal? Bloomberg has a look back, ten years later:

Another is what happened to BCE after the deal imploded. It flourished—with what Jim Leech, head of Ontario Teachers’ Pension Plan’s private capital arm at the time, says is much of the board and management team his bidding group would have put in charge.

Today the company’s shares are up more than 150 percent from the day the deal collapsed.

“It would have been a home run,” Mark Wiseman, then head of private investment at the competing bidder Canada Pension Plan Investment Board, says. “It didn’t beat what we projected—it crushed what we projected.”
…
Wiseman:Hindsight is 20-20. As it turns out, the company could have easily supported the debt, given its outperformance. What’s missed in the middle of this is that [KPMG’s] Susan Glass helped save Citibank. If she had gone the other way on her going-concern opinion, Citi would have been on the hook for at least C$20 billion in the middle of the financial crisis. Could you imagine the loss they would have taken in trying to place that debt?

Joel Wagner of the BoC has published a Staff Paper, Downward Nominal Wage Rigidity in Canada: Evidence Against a “Greasing Effect”:

The existence of downward nominal wage rigidity (DNWR) has often been used to justify a positive inflation target. It is traditionally assumed that positive inflation could “grease the wheels” of the labour market by putting downward pressure on real wages, easing labour market adjustments during a recession. A rise in the inflation target would attenuate the long-run level of unemployment and hasten economic recovery after an adverse shock. Following Daly and Hobijn (2014), we re-examine these issues in a model that accounts for precautionary motives in wage-setting behaviour. We confirm that DNWR generates a long-run negative relation between inflation and unemployment, in line with previous contributions to the literature. However, we also find that the increase in the number of people bound by DNWR following a negative demand shock rises with inflation, offsetting the beneficial effects of a higher inflation target. As an implication, contrary to previous contributions that neglected precautionary behaviour, the speed at which unemployment returns to pre-crisis levels during recessions is relatively unaffected by variations in the inflation target.

Global bonds were strong today:

•The yield on 10-year Treasuries held at 2.22 percent after declining five basis points on Thursday.
•Ten-year yield on Australian government notes fell five basis points to 2.62 percent

Canada was not immune, with the five-year Canada yield falling to 1.51%, from 1.65% at month-end.

Americans are doing better with their retirement plans:

A string of record 401(k) and IRA account totals now stretches across three consecutive quarters, according to second-quarter data from Fidelity Investments. The data covers 22,155 companies and 15.1 million 401(k) plan participants, as well as 8.8 million IRA accounts. The performance reflects the impressive display of endurance training by a stock market that just keeps on running, as well as increased employee and employer contributions to retirement accounts.

The average 401(k) account balance stands at $97,700 as of June 30. That’s a 9.6 percent gain from the $89,100 average of a year ago, and a big leap from the $73,300 average of five years ago. Average IRA totals, meanwhile, rose to $100,200 from $89,600 a year ago and $73,100 in 2012. For the 12 months ending June 30, market gains accounted for 72 percent of the rise in retirement account balances at Fidelity. Over that same period, the Standard & Poor’s 500 had a total return of 17.9 percent.
…
Employees put a record average of $5,850 into their 401(k)s over the past 12 months, a 4 percent increase from a year ago. Ninety-five percent of active employees contribute to their 401(k)s, and many defer enough of their pre-tax salary to get the average company match, which is 4.5 percent. But about 21 percent of employees can’t, or aren’t, contributing enough to get the full match. Many are likely to have been auto-enrolled into their 401(k) at a salary deferral rate of 3 percent, and left it there.

The bit of good news is that many savers don’t have that far to go before getting the full match—53 percent are 1 or 2 percentage points away. Competing financial priorities may mean saving another 1 or 2 percent of salary isn’t feasible until a raise or bonus comes into play. But if extra cash flow exists, a relatively small increase in savings rates can make a big difference over a long career.

PerpetualDiscounts now yield 5.25%, equivalent to 6.82% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.0%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 280bp, a sharp narrowing from the 295bp reported July 26.