Category: Market Action

I noted on June 19 that James Bullard of the St. Louis Fed had dissented against the latest decision. He has taken the unusual – but certainly not unknown – step of explaining why:

Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.

While President Bullard found much to disagree with in this decision, he does feel that the Committee can conduct an appropriate and effective monetary policy going forward, and he looks forward to working with his colleagues to achieve this outcome.

Sun Life Financial’s sale of its US annuities book met a small positive response from the Credit Rating Agencies. Now, SLF has announced:

On December 17, 2012, Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) entered into a definitive stock purchase agreement to sell its U.S. annuities business and certain of its U.S. life insurance businesses to Delaware Life Holdings, LLC, which was expected to close before the end of the second quarter of 2013, subject to regulatory approvals and other closing conditions. Approvals for the transaction have since been obtained from a number of regulators, including the Delaware Department of Insurance and the Financial Industry Regulatory Authority (FINRA). The approval process is also underway with the New York Department of Financial Services. The Department has recently undertaken a review of private investor groups as owners of annuity businesses, and we anticipate that the review will delay the close of the transaction beyond the end of the second quarter of 2013. We are continuing to work with Delaware Life Holdings, LLC, to obtain approval from the New York Department of Financial Services for the transaction and to close the transaction as soon as possible. Both parties have made substantial progress in preparing for the close and for the transition of employees and operations to support the business going forward.

The NY Dept. of Financial Services has made waves before:

The regulator, led by Superintendent Benjamin Lawsky, has expressed concern over whether the firms will be sufficiently careful with investments that back long-term obligations to retirement savers. Guggenheim, Apollo and Harbinger have announced deals to buy units that sell fixed annuities, which provide streams of payments to retirees and other customers.

“The risk that we’re concerned about at DFS is whether these private-equity firms are more short-term focused, when this is a business that’s all about the long haul,” Lawsky said in an April 18 speech. “Their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.”
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Lawsky is seeking e-mails, pitchbooks, memos, and information about investment allocations and return assumptions, the person said. Bloomberg reported last month that Wall Street firms have been acquiring life insurance companies and adding investments such as mortgage-backed securities that have drawn attention from regulators accustomed to simpler portfolios.

The regulator wants to understand the risks the companies are taking on and how they’re presenting the deals to investors, and the information may be used to craft new regulations, the person said. The Wall Street Journal reported on the subpoenas earlier today.

US regulators are considering a DSIB rule that actually means something:

U.S. regulators last year proposed implementing the 3 percent international requirement for what’s known as the simple leverage ratio. Now the Federal Reserve and Federal Deposit Insurance Corp., under pressure from lawmakers, are weighing increasing that figure for some of the biggest banks, according to the people, who asked not to be identified because the discussions are private.

“The 3 percent was clearly inadequate, nothing really,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “Going up to five or six will make the rule be worth something. Having a lot of capital is crucial for banks to be sound. The leverage ratio is a good safety tool because risk-weighting can be gamed by banks so easily.”
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By going above the figure adopted in 2010 by the Basel Committee on Banking Supervision, the U.S. also could put pressure on Europe to affirm its commitment to the standard, which is seen as a tool to rein in risk in the financial system. Regulators in the U.K. and Switzerland told banks yesterday to increase their ratios of capital to total assets.

U.S. banks have had to comply with a simple leverage requirement of 4 percent for two decades. The new version, proposed last June, expands the definition of what counts as assets in calculating the ratio, incorporating some commitments such as lines of credit kept off balance sheets under current accounting rules. The draft is an attempt to bridge U.S. and international accounting standards.
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FDIC Vice Chairman Thomas Hoenig has called for scrapping risk-based rules entirely in favor of a 10 percent leverage ratio, calculated to include even more off-balance-sheet assets than allowed under Basel and define capital more narrowly. To reach Hoenig’s requirements, the three largest U.S. banks — JPMorgan, Bank of America and Citigroup (C) — would have to stop distributing dividends for about five years, according to FDIC data and analysts’ earnings expectations compiled by Bloomberg.

The Systemic Risk Council, an advisory group led by former FDIC Chairman Sheila Bair, has called for 8 percent. Bair fought for a global leverage ratio in Basel committee meetings when she led the U.S. agency.

A bipartisan Senate bill introduced in April by David Vitter, a Louisiana Republican, and Ohio Democrat Sherrod Brown would set the leverage ratio at 15 percent. Banks have assailed the proposal. It “would limit an institution’s ability to lend to businesses, hampering economic growth and job creation,” the Securities Industry & Financial Markets Association, a Washington-based lobbying group, said at the time.

A modest upward move in the overall index (TXPR up 10bp) masked a great deal of internal movement for the Canadian preferred share market today, with PerpetualPremiums down 19bp (a lot of these are actually ‘PendingPerpetualDiscounts’ at this time, of course), FixedResets gaining 4bp (despite poor performance from the new issue, which was just a catch-up) and DeemedRetractibles winning 43bp. There is another very lengthy Performance Highlights table as the market readjusts to new levels; there’s no readily discernable pattern in these returns. Volume remained very high, but well off yesterday’s peak.

The OSC has approved a new investment platform. As one might expect when government agencies agree on something really, really good, it’s over-regulated, vomit-inducingly precious and has little to do with either innovation or capital-raising:

The portal is called MaRS VX, and it works like an online dating site, matching as it does investors with companies in Ontario that meet MaRS’s financial, social-impact and governance standards. The platform caters to both for- and non-profit organizations tackling problems such as climate change, persons with disabilities or poverty. Issuers must also have less than $25-million in revenue.
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Joining the program is free to investors once they are verified by MaRS as “patient capitalists” with an interest in having an impact as well as the potential for financial return. Companies pay a fee that covers some of MaRS’s costs.

Once issuers secure investments, they’re required to report biannually to investors on their finances and their impact, said Mr. Spence. “Having that kind of ongoing reporting requirement means these folks are engaged in good governance practices and using their money for the purposes indicated.”

Should a company require more financing for additional projects, they must reapply and undergo another review.

A day of thrills and chills!

Gold futures sank to $1,283.50 an ounce, after tumbling 6.4 percent yesterday. Holdings (GDTRGOLD) in the SPDR Gold Trust, the world’s largest exchange-traded product backed by bullion, fell below 1,000 metric tons for the first time in four years.
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The S&P 500 (SPX) extended June 19’s 1.4 percent slump and fell to the lowest level since May 1 as all 10 of its main industry groups retreated at least 2.2 percent. The benchmark index extended its decline from its last record reached May 21 to 4.9 percent, trimming its 2013 advance to 11 percent and its rally from its bear-market low in 2009 to 135 percent.
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The stock sell off pushed the MSCI all-country gauge down more than 7 percent from a five-year high reached May 21, the day before Bernanke raised the possibility of reducing stimulus should U.S. economic indicators improve. About $2.4 trillion was erased from global equity values over that stretch, with indexes in Hong Kong and Japan sliding more than 20 percent into bear markets.
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Yields on 10-year Treasuries touched 2.47 percent, the highest level since August 2011, before closing six basis points, or 0.06 percentage point, higher at 2.42 percent. Thirty-year U.S. bond yields jumped 11 basis points to 3.52 percent, the highest level since August 2011, and two-year rates increased two basis points to 0.33 percent.
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The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, increased 5.7 basis points to a mid-price of 91.4 basis points in New York, after climbing 3.9 basis points June 19, according to prices compiled by Bloomberg. That’s the biggest two-day jump on a closing basis since the measure rose 8.8 in the period ended May 14, 2012, excluding rolls into new series of the benchmark.

I have the feeling that tomorrow’s going to be a long day.

As for today, there was total carnage on the Canadian preferred share market with PerpetualPremiums down 176bp, FixedResets off 59bp and DeemedRetractibles losing 194bp. As might well be expected, the Performance Highlights table is ridiculously long. Volume was enormous. Super-colossal. Gigantic. Brobdingnagian.

The MMF industry is resisting even the ineffective reforms proposed by the SEC:

The compromise, unanimously approved by SEC commissioners June 5, would harm investors and the economy, and would increase systemic risk, the Investment Company Institute said today. The group supported an alternative option offered by the SEC to limit withdrawals when funds come under stress.

“Our opposition to floating NAV remains as firm as ever,” Paul Schott Stevens, president of the Washington-based ICI, said in the text of a speech he is scheduled to deliver today in Baltimore. “Forcing funds to float their NAVs doesn’t address the problem.”

The plan would exempt funds that buy only U.S. government-backed securities and retail funds, a concession regulators made to address concerns of fund providers.
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The commission’s proposal includes the option of allowing a fund’s board to temporarily halt withdrawals and require it to impose a fee of 2 percent on all redemptions if the fund’s weekly liquid assets fell below 15 percent of total assets. The commission left open the option of adopting either floating NAV or withdrawal restrictions, or both together.

“Liquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressure in periods of market turmoil,” Schott said in his speech at a conference organized by research firm Crane Data LLC.

Of course, they do nothing to address the core problem of default in the underlying portfolio, but who cares?

The Fed released the FOMC statement:

The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
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Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Bernanke added a little colour at the press conference (emphasis added because the Globe did):

Federal Reserve Chairman Ben S. Bernanke said the central bank may start reducing bond purchases later this year and end them in the middle of 2014 if the economy continues to improve as the central bank forecasts.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Bernanke said today in a press conference in Washington. “If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

Market reaction was modestly negative:

U.S. stocks retreated, following a two-day rally in the Standard & Poor’s 500 Index, as the Federal Reserve said risks to the economy have decreased, spurring concern the central bank will reduce its stimulus efforts.

Eight of 10 groups in the S&P 500 fell, even as the Fed said it will keep buying bonds at a pace of $85 billion a month. Utility and phone shares fell the most, extending losses to at least 0.5 percent.

Switzerland is resisting US hegemony:

Swiss parliament rejected a bill designed to resolve a dispute over undeclared bank accounts held by U.S. citizens, potentially setting the stage for American prosecution of the country’s banks.

Members of parliament’s lower house voted 123 to 63 against the bill, which would have allowed Swiss banks to cooperate with the U.S. and to settle a long-running dispute over wealthy American tax evaders. The government has said it has no plan B, in the event of the bill failing to pass.

Today’s award for disingenuity is given to David Phillips of First Leaside:

He said he was delighted with the findings of a third-party report prepared by accounting firm Grant Thornton Ltd. in August, 2011, which concluded First Leaside needed to raise money to remain viable. The OSC has asked First Leaside to commission the review because it was concerned about the firm’s health.

Mr. Phillips said he saw the report as an “affirmation” and “vindication” of his strategy and thought it would address the OSC’s worries. He said it was unsurprising to him that Grant Thornton said the firm needed to raise cash to remain viable, because that was always the case for an investment company.
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The report said First Leaside’s viability hinged on its ability to raise new funds from investors because it did not have enough cash to support its operations, and said the company had an “equity deficit” because its real estate assets were worth less than their outstanding mortgages.

It was back to carnage as usual for the Canadian preferred share market, with PerpetualPremiums losing 33bp, FixedResets off 21bp and DeemedRetractibles down 29bp. The Performance Highlights table is suitably gory, with only one winner among many, many losers – many of them Brookfield issues. Volume was quite high.

It’s nice to see someone with a brain making an impact amidst all the SEC lawyers:

Concern that American stock markets have become more susceptible to split-second crashes due to computerization isn’t supported by the data, a Securities and Exchange Commission official said.

Most “mini-flash crashes,” a term sometimes applied when an individual U.S. stock briefly surges or plunges for no obvious reason, are the result of human errors, not broken software, said Gregg Berman, head of the SEC’s Office of Analytics and Research.
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In September, the Senate Subcommittee on Securities, Insurance and Investment held hearings on the impact of computerized trading amid concern algorithmic and high-frequency strategies are contributing to investor uncertainty.

“A popular meme has emerged that, taken collectively, sudden price spikes indicate a broken market” and may be harbingers of another crash like the one in 2010, Berman said in New York today at a conference sponsored by the Securities Industry and Financial Markets Association. Critics who blame everything on electronic trading “may be looking in the wrong place,” he said.

DBRS has downgraded the debt of TCA and TRP but left the preferred share ratings unchanged:

DBRS has today downgraded the Issuer Rating and Unsecured Debentures & Notes rating of TransCanada PipeLines Limited (TCPL) to A (low) from “A”, the Junior Subordinated Notes rating of TCPL to BBB from BBB (high) and the Medium-Term Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. (NGTL), a wholly owned subsidiary of TCPL, to A (low) from “A”, all with Stable trends. The NGTL rating action reflects DBRS’s view that continued financial and liquidity support from TCPL is key to NGTL’s long-term debt rating.

DBRS has also confirmed the preferred share ratings of TCPL and of TransCanada Corporation (TCC, TCPL’s parent company) at Pfd-2 (low) with Stable trends, reflecting DBRS’s belief that the existing ratings are already conservative relative to TCPL’s Issuer Rating and that DBRS views it as unlikely that any debt instruments will be issued at TCC. These actions remove all of the above-noted ratings from Under Review with Negative Implications where they were placed on March 28, 2013.DBRS has today downgraded the Issuer Rating and Unsecured Debentures & Notes rating of TransCanada PipeLines Limited (TCPL) to A (low) from “A”, the Junior Subordinated Notes rating of TCPL to BBB from BBB (high) and the Medium-Term Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. (NGTL), a wholly owned subsidiary of TCPL, to A (low) from “A”, all with Stable trends. The NGTL rating action reflects DBRS’s view that continued financial and liquidity support from TCPL is key to NGTL’s long-term debt rating. DBRS has also confirmed the preferred share ratings of TCPL and of TransCanada Corporation (TCC, TCPL’s parent company) at Pfd-2 (low) with Stable trends, reflecting DBRS’s belief that the existing ratings are already conservative relative to TCPL’s Issuer Rating and that DBRS views it as unlikely that any debt instruments will be issued at TCC. These actions remove all of the above-noted ratings from Under Review with Negative Implications where they were placed on March 28, 2013.
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Finally, TCC’s financial profile remains reasonable, as capex has been lower than previously anticipated due to the Keystone XL delay, partly offsetting weaker earnings and cash flow in 2012. DBRS believes that the recent weakness in credit metrics, compared with prior periods, was partly due to factors that are not likely to reoccur on an ongoing basis, including the Sundance A power purchase agreement (PPA) force majeure, the increased planned outage days at Bruce Power’s Unit A3 and A4 and the lower-than-expected capacity payments at the Ravenswood natural gas and oil-fired generating facility. DBRS notes that Bruce Power’s Unit 1 and Unit 2 were both placed into commercial service during Q4 2012 following a significant refurbishment program. The Company will likely experience a significant free cash flow deficit once capex on Keystone XL gets underway, if approved, likely resulting in a moderately negative impact on credit metrics prior to improvement in subsequent years as some projects are placed into service and begin to generate cash flow.

It’s not just Standard & Poor’s (see report) that’s pressuring Spectra:

Spectra Energy Corp., which distributes natural gas in Ontario and operates in British Columbia as Westcoast Energy Inc., is facing pressure to spin off its Canadian assets from an activist investor.

In a June 17 letter to Spectra chief executive Greg Ebel, Thomas E. Sandell, chief executive of New York-based Sandell Asset Management, said Spectra should review strategic alternatives for Westcoast, including a potential initial public offering. Spectra should also consider transforming itself into a holding company akin to Kinder Morgan Inc., Williams Companies, Inc. and Oneok, Inc., Sandell said.

Another down day for the Canadian preferred share market – but with a difference! PerpetualPremiums were off 1bp, FixedResets lost 20bp and DeemedRetractibles were down 10bp. FixedResets are prominent in the Performance in the Performance Highlights table, which is comprised entirely of losers. Volume was high.

Overall it was mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets up 5bp and DeemedRetractibles off 1bp. The averages concealed a lot of underlying volatility, however, as the Performance Highlights table is quite lengthy and features a number of BAM FixedReset losers. Volume was quite high.

This housing news is counter-intuitive:

Home repossessions in the U.S. jumped 11 percent in May after declining for the previous five months as rising prices and limited inventory for sale across the country spurred banks to complete foreclosures.

Lenders took back 38,946 homes, up from 34,997 in April, according to Irvine, California-based data firm RealtyTrac, which tracks notices of default, auction and seizures. Thirty-three states had increases in the number of homes repossessed, RealtyTrac said in a report today.

Banks are more willing to move to the final stage of foreclosure because there is sufficient demand and prices are improving, said Eric Workman of Tinley Park, Illinois-based Mack Cos., which aggregates single-family rental homes and resells them to individuals and institutional investors. U.S. home prices advanced almost 11 percent in the year through March, the biggest 12-month gain since April 2006, according to the S&P/Case-Shiller index of values in 20 cities.
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Private-equity firms, hedge funds and individuals are all buying foreclosed or distressed homes to turn into rental properties as prices remain 28 percent below their 2006 peak. Companies including Blackstone Group LP (BX), which has invested more than $5 billion to buy almost 30,000 homes, and Colony American Homes Inc., which owns more than 12,000 properties, are helping to increase prices in areas hit hard by the real estate crash by draining the market of inventory as low borrowing costs and improving employment fuel demand from buyers.

Guess who’s the latest big bankruptcy?:

Detroit (9845MF), on the brink of bankruptcy with $17 billion in liabilities, will suspend payments on $2 billion of unsecured debt, beginning with an installment due today, Emergency Manager Kevyn Orr said.

With today’s missed $39.7 million payment on debt issued to fund pensions, Detroit becomes the most populous U.S. city to default since Cleveland in 1978. Unsecured creditors may receive as much as 10 cents on the dollar under a deal Orr offered to more than 100 creditors and union representatives today.

The city would create a regional water agency to take the place of its municipally owned department, and active and retired workers would see their pensions reduced under the plan. Detroit also would spend $1.25 billion over a decade to improve services, eliminate blight and create a more livable community.

If our experience is any indication, a regional water agency is just another tax grab – rates in Toronto have soared, while personnel have unchecked power and huge arrogance.

Meanwhile, in the reaching for yield department:

Junk-rated borrowers from Rite Aid Corp. (RAD) to Atkins Nutritionals Holdings Inc. are raising a riskier type of loan that offers a lesser claim on their assets at a pace last seen before the financial crisis.

Second-lien loan issuance has climbed to $17.1 billion this year, versus $18.6 billion in all of last year and on pace to surpass the record $28.7 billion issued in 2007, according to data compiled by Bloomberg. Rite Aid, the third-largest U.S. drugstore chain, reduced the interest rate on its $500 million loan due to increased investor demand, while dieting company Atkins raised $355 million in loans, including second-lien debt, to fund a dividend.

Investors are turning to the junior-ranking loans that would shield them from an increase in interest rates and offer more protection than bonds, which have been pummeled as speculation increases the Federal Reserve (FDTR) will pare back its unprecedented stimulus. Second-lien loans have fallen just 0.3 percent since Fed Chairman Ben S. Bernanke said the central bank could reduce its asset purchases if the economy shows sustained improvement, while junk bonds have lost 9 times more.

The BoE is losing a good man:

Incoming Bank of England Governor Mark Carney will get an early chance to overhaul management of the U.K. central bank after Paul Tucker said he will step down as deputy governor.

Beaten by the Canadian to the governorship, Tucker said today he will end three decades in policy making later this year and work in U.S academia. Fellow deputy Charlie Bean is also scheduled to leave in the next year and other officials are nearing the ends of their terms. Carney has already left the Bank of Canada and formally starts work in London on July 1.

The UK’s loss is a US win. Tucker, by the way supported high trigger CoCos.

Nothing to do with economics, but this is alleged Medicare fraud too good to ignore:

Based in part on surreptitious tape recordings, an FBI affidavit lays out allegations that a Sacred Heart pulmonologist kept patients too sedated to breathe on their own, then ordered unneeded tracheotomies for them — enabling the for-profit hospital to reap revenue of as much as $160,000 per case.
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The affidavit contains an allegation that tracheotomy patients were lucrative for doctors as well as the hospital: The physician could bill $160 each time he visited a tracheotomy patient at the hospital, versus $32 for seeing a ventilator patient in a nursing home.

Today’s puzzle in included in the recent article Four tips for nervous bond investors:

Step 4: Understand the differences between individual bonds, bond funds and guaranteed investment certificates.
Bond fund prices move in the opposite direction of interest rates – they fall when rates are rising and rise when rates decline. With the exception of a fairly obscure category called the target date bond ETF, there is no maturity date where your original investment is handed back to you.

Individual bonds give you that maturity date, although investors may not get back exactly what they paid for their bonds. That’s because many bonds today sell with a price premium over their issue price. When they’re redeemed, it will be at the issue price.

GICs are a big problem-solver for investors worried about holding bonds in a rising rate world. GICs aren’t easily sold before maturity unless you buy a cashable version (which will mean a sacrifice in yield). But they can provide higher yields than government and many high quality corporate bonds, with the additional benefit of deposit insurance from either the federal Canada Deposit Insurance Corp. or credit union plans that vary from province to province. “I like GICs in a rising rate environment,” said [fixed income strategist at TD Wealth] Mr. [Sheldon] Dong. “They preserve your capital.”

Is the assertion that GICs have less interest rate risk than any other bond with the same cash-flows? If so, then I trust all readers will be aware that this is hogwash. You can’t eliminate risk by ignoring it.

It was a day of recovery (or sucker’s rally!) for the Canadian preferred share market today, with PerpetualPremiums (many of which should really be called PendingPerpetualDiscounts, until the month-end rebalancing of the indices!) winning 28bp, FixedResets gaining 18bp and DeemedRetractibles up 22bp. The very lengthy Performance Highlights table is dominated by winning Straight Perpetuals. Volume was above average.

Riding the tiger is easy … the hard part is getting off:

Federal Reserve Chairman Ben S. Bernanke has repeatedly said a reduction in the Fed’s $85 billion in monthly bond purchases wouldn’t mean an end to record easing. Investors are behaving as if they don’t believe him.

The yield on the 10-year Treasury note has risen to 2.19 percent, an almost 14-month high, from 1.63 percent on May 2 as investors bet the Fed will begin trimming bond buying. The surge is undermining Bernanke’s unprecedented effort to hold down borrowing costs and combat 7.6 percent unemployment.
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Investors interpret policy makers’ talk of reduced bond purchases as a signal the Fed will begin to increase its main interest rate as soon as next year. They see a 47 percent chance the Fed will raise the rate to at least 0.5 percent from zero to 0.25 percent by December 2014, according to prices for federal funds futures contracts.

That’s an increase from about 20 percent probability two months ago. It also contrasts with a majority of 14 Fed officials who forecast in March that the FOMC won’t increase the federal funds rate until 2015 or later. The Fed has held the rate banks charge one another for overnight loans near zero since December 2008.

I mentioned a pseudo-scandal in the FX market yesterday … naturally it is being used as an excuse for more regulation:

Global regulators may start overseeing currency rates in a widening response to benchmark-rate setting scandals that began with revelations on the manipulation of Libor, according to two people familiar with the matter.

The International Organization of Securities Commissions, a Madrid-based group known as Iosco that harmonizes market rules, may propose final guidelines improving transparency and oversight of benchmarks, including the WM/Reuters rates, as soon as next month, said the people, who asked not to be named because the talks aren’t finalized.

There was a bit of a rebound for the Canadian preferred share market today, with PerpetualPremiums winning 13bp, FixedResets up 10bp and DeemedRetractibles gaining 6bp. The lengthy Performance Highlights Table has more winners than losers, for a change, with BAM PerpetualDiscounts continuing to head the loser list. Volume was above average.

Apple’s CFO is doubtless celebrating his $1.5-billion trading win:

Investors are nursing losses of up to 9 per cent on Apple’s record-breaking $17bn bond offering, less than six weeks after the securities landed in their portfolios.

The technology giant tapped the white-hot bond market for the largest debt fundraising to date on April 30, but a sharp turn in interest rates has caused a sell-off in corporate bonds and wiped hundreds of millions of dollars off the value of the offering.

Apple sold $3bn of bonds maturing in 2043, locking in a low interest rate of 3.9 per cent for the next 30 years, but the market price of these bonds had fallen to 90.36 per cent of face value in late trading on Monday, according to Trace data.Investors in the offering paid 99.418 per cent of face value for the new bonds, but institutional and retail demand was so high that they traded as high as 101.97 in the secondary market.

So I have a question for the Europeans: how much bonus is appropriate for this man?

You know, some people just ask to be cheated (emphasis added):

Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.
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Companies and asset managers typically ask banks to buy or sell currencies at a specified WM/Reuters fix later in the day, most commonly the 4 p.m. London close. That arrangement is open to abuse, as it gives traders a window in which they can adjust their own positions and try to move the benchmark to boost their profit, three of the dealers said.

What a pack of idiots. Anybody who complains under those circumstances should simply lose his license. It should be obvious that you can only front-run if you have a fiduciary relationship, which is not generally the case in such circumstances; if you don’t, you are at perfect liberty to take advantage of the counterparty’s stupidity. More gently, it can be called ‘positioning prior to a trade’, in precisely the same way as government bond primary dealers short bonds of tenor X before an auction of tenor X. However, the clients will typically not want a fiduciary relationship, because then they wouldn’t be able to boast about what hard-nosed BSDs they are.

There is continued chatter about a takeover of CIT Group:

CIT Group Inc. (CIT) Chief Executive Officer John Thain, whose commercial lending firm has drawn takeover speculation, said the logic of selling to a larger bank is “obvious.”

“The big banks are awash in deposits and they can’t generate attractive assets,” Thain said today in a Bloomberg Television interview with Erik Schatzker and Sara Eisen. “We, in all our businesses, are able to generate very high-yielding, attractive assets, so the logic of that is obvious.”

I confess, I still don’t fully understand why the logic of this wasn’t obvious in 2008.

Inflation? What inflation?

Some Federal Reserve policy makers are citing the lowest inflation rate in at least five decades as an alarm bell for the economy. Economists at UBS Securities LLC say the figure isn’t as troubling as it appears.

Consumer prices climbed 1.1 percent in the 12 months through April, according to a measure watched by the Fed that excludes food and fuel — matching the smallest increase since records began in 1960. That’s down from 1.9 percent in the year ended April 2012.
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Fed officials meeting June 18-19 in Washington will weigh how much changes in inflation and the labor market will influence the pace of their $85 billion in monthly asset purchases. James Bullard, president of the St. Louis Fed, this week said inflation below the central bank’s 2 percent target may warrant prolonging bond buying.

DBRS placed Spectra Energy under Review-Negative:

This rating action follows the announcement that Spectra Energy Corp (Spectra Energy, Spectra Capital’s 100% owner and guarantor of all series of notes outstanding under the Senior Indenture of Spectra Capital) intends to drop down all of its remaining U.S. Transmission and Storage Assets to Spectra Energy Partners (SEP, a master limited partnership controlled by Spectra Energy) by the end of this year, subject to market conditions. By completing this drop-down, Spectra Energy expects to provide its investors with higher dividend growth of approximately 12 cents per year compared with the current rate of eight cents per year. Management expects to provide more details concerning this transaction in its Q2 earnings call scheduled for August 6, 2013.

Spectra is an American company and does not directly issue Canadian preferred shares, but it is the parent of Westcoast Energy, which does (W.PR.H & W.PR.J). Westcoast has heavy capex that will keep cash flows negative for a while, but DBRS did not explicitly state a dependence upon parental support in their last review. Still, it’s worth mentioning.

GMP Capital, proud issuer of GMP.PR.B, was confirmed at Pfd-3(low), Trend Negative by DBRS:

The Company’s risk exposures are somewhat mitigated by low capital and liquidity requirements, its strong market position in its chosen niches, its integrated business model and a flexible expense base accompanied by a strong entrepreneurial culture. Nevertheless, the market tone continues to be very negative and is particularly unfriendly for broker-dealers. Additionally, the Company is more aggressively capitalized than it had been in earlier cycles following the $115 million issue of preferred shares in Q1 2011 and over $72 million in share buybacks during 2011, resulting in a total debt-to-capitalization ratio of over 30%, which is in the upper range of what is acceptable in this rating category. Without strong earnings, total debt-to-cash flow is increasing, and fixed charge coverage ratios have fallen to levels that are in the lower bounds of what is perceived as acceptable for this rating category. DBRS does recognize that the current environment represents a low point in the cycle and thus metrics are expected to be in the weaker end of the ranges; however, an extended period of weakness without the Company being able to generate more positive results remains a concern. DBRS notes favourably the Company’s decision to preserve capital in the current uncertain environment by cutting its common share dividend in half in 2012 and not utilizing its share buyback program in the past year. DBRS expects GMP to continue a prudent approach to retaining capital given the tough market environment.

It was another unfriendly day for the Canadian preferred share market … on the bright side, the losses are slowing down! PerpetualPremiums were down 23bp (a lot of these are now PendingPerpetualDiscounts!), FixedResets gained 7bp and DeemedRetractibles were off 7bp. There is another lengthy performance highlights table but (brace yourselves!) there were a significant number of gains on this list. Volume was quite high.

PerpetualDiscounts now yield 5.11%, equivalent to 6.64% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.30%, so the interest-equivalent pre-tax spread (in this context, the “Seniority Spread”) is now about 235bp, a significant widening from the 225bp reported June 5.

The BAM Straight Perpetual 4.90% new issue closes tomorrow with the symbol BAM.PF.D. It will not be pretty.

Interesting piece on Australian covered bonds:

Australia’s covered bond boom is waning less than two years after the market started as yield-hungry buyers more than double purchases of residential mortgage-backed securities.

Issuance of the debt, backed by the borrower and mortgages that stay on its balance sheet, fell 64 percent to $9.9 billion this year, data compiled by Bloomberg show. The decline in Australian offerings outpaced a 41 percent slump from banks worldwide, according to the data.

Renewed appetite for RMBS, as the market recovers after being decimated by the 2008 U.S. subprime collapse, has seen sales surge while banks reserve covered-bond allowances for when market conditions worsen. Commonwealth Bank of Australia (CBA)’s 2017 covered securities offered just 33 basis points more than swaps last month, compared with a 47 basis-point premium on shorter-dated unsecured notes sold by Westpac Banking Corp., Bloomberg-compiled data show. Global financial debt pays a 141 basis-point spread, Bank of America Merrill Lynch data show.

Does this sound familiar?

A one-bedroom, 55-square meter (592-square feet) apartment in Hoegalidsgatan, in the neighborhood where Larsson’s troubled heroine Lisbeth Salander grew up, sold last month for 3.75 million kronor ($569,000), 17 percent above the listing price, after a bidding war involving nine parties.

That level of demand is typical in the Swedish capital, where a shortage of construction, a population boom and mortgage rates below 3 percent have pushed prices in central Stockholm up 35 percent since early 2009. Borrowing for home purchases has in turn fueled record household debt across the country. That’s sparking concern among policymakers over potential damage to the economy and preventing the central bank from cutting rates, even as Sweden’s exporters say action must be taken to weaken the currency to protect thousands of jobs.

Another day, another slaughter for the Canadian preferred share market, with PerpetualPremiums down 48bp, FixedResets off 36bp and DeemedRetractibles losing 49bp. Naturally enough, the Performance Highlights table is again quite lengthy, comprised entirely of losers, dominated by Straight Perpetuals with a scattering of relatively low-reset FixedResets. BAM issues led the decline … their 4.90% Straight Perpetual new issue settles Friday … it won’t be pretty! Volume was extraordinarily high.

Last Friday we had good news regarding North American employment – now there is good news from the UK:

The pound had its biggest weekly gain versus the dollar in more than three years as U.K. manufacturing, services and home-price data beat economist forecasts, boosting confidence in the economy.

Sterling appreciated for the first week in six against the euro. It rallied to the strongest level in more than three months versus the greenback, as the U.S. currency dropped versus all but two of its 16 major counterparts. U.K. government bonds fell for a third week after Bank of England policy makers kept stimulus measures unchanged at Governor Mervyn King’s final meeting.

It will be interesting to see what happens to Treasury yields this week:

For the first time since 2009, U.S. bond yields are rising at the same time inflation is slowing, providing a cushion for investors in Treasuries whether or not the Federal Reserve slows the pace of its debt purchases.

While 10-year (USGG10YR) yields reached 2.23 percent May 29, the highest since April 2012, the personal consumption expenditure deflator, the Fed’s preferred gauge of inflation, rose 0.7 percent in April from a year earlier, the smallest increase since 2009. The yield gap between Treasury Inflation-Protected Securities, or TIPS, and non-indexed bonds show investors have cut their expectations for consumer price increases to the lowest level since July.

Ever get the feeling that you were in the wrong business?

To get at the heart of a hearing aid’s cost, we can turn to data data unearthed by a German regulator (PDF) studying the major manufacturers. Based on this information, it costs about $250 to make a device that will get sold to an audiologist retailer for $1,000. Hearing aid makers spend $75 per device on research and development and $250 on marketing and then chalk up $425 in profit. The retailers then mark up the price $2,000 to cover overheard and make a profit, resulting in a $3,000 price tag.

And, with respect to financial repression:

New collateral rules for hedge funds, insurers and others in the $633 trillion over-the-counter derivatives market are poised to boost demand for U.S. Treasuries, potentially slowing rising yields as the Federal Reserve considers scaling back unprecedented stimulus.

Swaps traders will need to come up with $800 billion to $4.6 trillion to meet Dodd-Frank Act regulations requiring that the derivatives be backed by clearinghouses that collect upfront collateral such as cash or Treasuries, according to estimates from the Treasury Borrowing Advisory Committee. The regulations take effect today for the second group of firms designated by the Commodity Futures Trading Commission in the market for interest-rate and credit-default swaps.

DBRS confirmed LCS.PR.A at Pfd-5(high):

On October 25, 2012, DBRS downgraded the ratings of the Preferred Shares to Pfd-5 (high) from Pfd-4 (low), due to the volatility in the NAV of the Company and the insufficient levels of downside protection in the months leading up to the rating action. Since then, the NAV of the Company has recovered, with downside protection available to holders of the Preferred Shares reaching 32.2% as of May 30, 2013. However, the Preferred Share dividend coverage ratio is rather low at 0.6 times and there is less than one year remaining until the Preferred Shares mature. While Canadian life insurance companies have recovered, the industry as a whole continues to experience stress as interest rates remain at all-time lows. As a result, the rating of the Preferred Shares has been confirmed at Pfd-5 (high).

E-L Financial has sold The Dominion to a US insurer:

One of Canada’s oldest insurance companies is being sold for $1.125-billion to a major U.S. insurer, in a deal that will see the business fall into foreign hands for the first time since it was founded by Sir John A. Macdonald in 1887.

Dominion of Canada General Insurance Co. is to be acquired by The Travelers Companies Inc.
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E-L Financial hasn’t yet decided what it will do with the cash left on its books after the sale closes in the last quarter of the year, pending regulatory approvals and other conditions.

There was carnage for the Canadian preferred share market today, with PerpetualPremiums down 55bp, FixedResets off 41bp and DeemedRetractibles losing 73bp. As might be expected, the Performance Highlights table is very lengthy, with only a single winner – ELF.PR.F, which merely recovered some of Friday’s extraordinary loss. Volume was quite high, though not – yet! – sufficient to indicate widespread panic.