Category: Market Action

Deflation fears?

Wholesale prices in the U.S. fell in October for a second month, reflecting cheaper energy costs.

The 0.2 percent drop in the producer-price index followed a 0.1 percent decline the prior month, a Labor Department report showed today in Washington. The decrease matched the median estimate in a Bloomberg survey of 75 economists. The so-called core measure, which excludes food and energy, increased 0.2 percent as the cost of cars jumped by the most in four years.

Server fiddling continues. PrefInfo.com has been moved to the new server and works fine! PrefShares.com has also been moved; the DNS change should be propogated across the Internet by 6pm Friday 22.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 24bp, FixedResets gaining 3bp and DeemedRetractibles off 3bp. BAM issues were conspicuous in the Performance Highlights, with Floaters down and PerpetualDiscounts up. Volume was well above average.

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.8%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 245bp, a slight (and perhaps spurious) decline from the 250bp reported November 6.

A tale of two economies! Europe contemplates easing:

The European Central Bank is considering a smaller-than-normal cut in the deposit rate if officials decide to take it negative for the first time, according to two people with knowledge of the debate.

Policy makers would reduce the rate for commercial lenders who park excess cash at the ECB to minus 0.1 percent from zero, said the people who asked not to be identified because the talks aren’t public. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The concept, which has been discussed by Governing Council members, doesn’t yet have a consensus, the people said.

Members of the council, which is holding a mid-month meeting in Frankfurt this week, have said that a negative deposit rate is a potential tool for warding off deflation. They’ve also cautioned that the consequences of such an unprecedented measure aren’t clear. The central bank this month refrained from cutting the deposit rate even as it reduced its benchmark lending rate to a record low of 0.25 percent, and Governing Council member Jens Weidmann has warned against further loosening of monetary policy.

… while the US contemplates less easing:

The U.S. Federal Reserve is getting closer to curbing its experiment in buying financial assets – but is still a long way from ending the age of easy money.

Recent communications by the central bank show that policy makers are poised to reduce, or “taper,” their monthly bond-buying program. Minutes of the Fed’s October policy meeting, released Wednesday after the customary three-week delay, state that “some” officials believed the pace of purchases could be slowed at “one of the next few meetings,” so long as key indicators continue to show the U.S. economy gaining strength.
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But the Fed minutes also make it clear that policy makers will slow the bond-buying program because they are nervous about unintended future outcomes – not because they think the economy is ready for higher short-term rates. The majority of the Fed’s leaders favour leaving its benchmark rate near zero for a period that most likely will be measured in years rather than months.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 9bp, FixedResets up 7bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is dominated by losers. Volume was well above average.

Nothing happened today, as the world waits with bated breath for me to finish server-fiddling.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both down 9bp, while DeemedRetractibles were up 18bp. Volatility was long-term normal. Volume was average.

Nothing happened today.

However, I am having server problems. After having given sterling service on the farm for many years, IBM informs me that my server is getting unreliable. Rather than refurbish the old server, I have rented a new one and am in the process of copying files and installing software and, when that nightmare is over, will be changing the DNS. Ideally, this will be invisible to Assiduous Readers.

It was a modestly good day for the Canadian preferred share market, with PerpetualDiscounts winning 14bp, FixedResets gaining 1bp and DeemedRetractibles up 10bp. There was a relatively lengthy Performance Highlights table, with FixedResets scattered around like straws in the wind. Volume was average.

Nothing happened today, except web server problems for me. Joy!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 39bp and DeemedRetractibles gaining 5bp. The Performance Highlights table was dominated by losing low-Spread FixedResets. Volume was well above average.

The Beaudoin-Bombardier family is doing what it does best:

Bombardier Inc.’s Beaudoin-Bombardier family owns a controlling stake in McInnis Cement, a Quebec company that is in talks with the provincial government over financial backing for its proposed $1-billion cement plant in Port-Daniel-Gascons, Que.

As Assiduous Reader Nestor said in the comments, tapering is a long long way off:

Janet Yellen, nominated to be the next chairman of the Federal Reserve, signaled she will carry on the central bank’s unprecedented stimulus until she sees improvement in an economy that’s operating well below potential.

“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” Yellen said in testimony for her nomination hearing before the Senate Banking Committee today in Washington. “Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

The Ban-the-Bond movement is having an effect:

Moody’s Investors Service cut its ratings on four of the biggest U.S. banks after deciding the government would be less likely to help them repay creditors in a crisis.

Morgan Stanley (MS), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Bank of New York Mellon Corp. had their senior holding company ratings lowered one level yesterday after Moody’s concluded a review of eight U.S. banks that began in August. Spokesmen for the four companies declined to comment.

U.S. banking regulators have been preparing rules and procedures that seek to allow the government to wind down even the largest financial companies without providing taxpayer assistance. The plans would require investors to accept losses and could require bonds to be converted into equity capital.

“We believe that U.S. bank regulators have made substantive progress in establishing a credible framework to resolve a large, failing bank,” Robert Young, a managing director at Moody’s, said in a statement. “Rather than relying on public funds to bail out one of these institutions, we expect that bank holding company creditors will be bailed-in and thereby shoulder much of the burden to help recapitalize a failing bank.”

Premier Wynne is terribly, terribly concerned about Rob Ford. In less important news:

Heinz said it is closing its plant in Leamington, Ont., in mid-2014, a move that will cost 740 jobs and end almost a century of ketchup making in the southern Ontario town.
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Other Canadian food plants slated to close include:

– Lance Canada Ltd.’s bakery in Cambridge, which employs 130 people. It will close in May, the company’s North Carolina parent said.

– Canada Bread’s snack cake plant in Shawinigan, Que., is scheduled to close in May.

– Kraft Canada’s coffee plant in Oakville, Ont., is expected to close this year.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets winning 18bp and DeemedRetractibles up 12bp. A modest – by recent standards – Performance Highlights table is comprised entirely of winners and dominated by FixedResets. Volume was average.

Good times to be in corporate finance:

Canadian companies are borrowing more than ever, breaking records for selling new debt in a push to lock in low interest rates before borrowing costs rise.

Corporations and financial institutions have set a new mark for fixed-income sales this year by issuing more than $100-billion in debt, higher than the full-year record set in 2012.
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As usual, Canadian banks dominate bond sales this year, raising $47-billion, up 23 per cent from 2012, according to CIBC. However, non-bank borrowers have increased their game, raising an usually large amount of debt, helping to push total issuance to sky-high levels.

ETFs and mutual funds have the great virtue of increasing liquidity for retail investors – I often recommend bond ETFs to clients. But the mismatch between retail liquidity and underlying liquidity is getting worrisome:

A recent presentation by Citi’s Matt King, includes a chart entitled “Entrance with No Exit” that has been costing me sleep. Mr. King’s chart asserts that if and when a significant percentage of the holders of almost $900-billion (U.S.) invested in U.S. corporate debt mutual funds and ETFs (investment grade plus high yield debt) want to sell, there may not be anyone to bid for them.

In the past, large banks carried enormous portfolios of both investment grade and high yield debt issues and provided liquidity to the market – buying bonds when the market was weak and selling when it was strong.

Since the financial crisis, however, U.S. banks have responded to regulatory pressure over proprietary trading and capital requirements by drastically reducing their holdings – from about $300-billion to less than $100-billion – while mutual fund and ETF fixed income assets have almost doubled from just under $500-billion.

There’s $900-billion in corporate debt funds and ETFs and a tenth of that in the banking system so, there is no way the banks can offset a buyers strike in bond funds if it occurs.

Click for Big

If an apocalypse happens due to this, it will be bargain season for long term investors, but those who need the cash – or even the margin – might find themselves a little embarrassed.

Decreased liquidity in corporate bonds was discussed on November 5, while US regulatory moves to extend their power over asset managers was discussed November 6. Does anybody else see a pattern here? Mark my words, there will be enforced ‘gating’ of mutual fund and ETF redemptions soon (ETF redemptions coming in big blocks from arbitrageurs). All that power has to go somewhere! We will then see ETFs trading at a discount to NAV, and a lot of very unhappy mutual fund fund clients.

So what’s the solution? As far as I can tell, there ain’t one. Companies will have to keep a little extra cash on hand in case the markets decide to shut down for a while; investors will have to keep a little more cash on hand than otherwise for the same reason. Ultimately, the benefits of allowing retail decent access to the corporate bond markets outweighs the harms … but you can bet the regulators won’t see it that way. Nobody must be hurt! If anybody is ever hurt by anything, it’s because of a Wall Street conspiracy!

It was a day of small gains for the Canadian preferred share market, with PerpetualDiscounts winning 10bp, FixedResets gaining 5bp and DeemedRetractibles up 7bp. Surprisingly, the Performance Highlights table is relatively lengthy. FloatingResets traded up a storm today on big blocks through Nesbitt, with an assist from Scotia, although there is no way of telling whether or not they were ‘real’ crosses or internal crosses; volume was above average.

It might be a while before we see tapering:

Federal Reserve Bank of Atlanta President Dennis Lockhart, who has backed record stimulus, said he wants to see inflation accelerate toward the Fed’s 2 percent goal before the central bank reduces $85 billion in monthly bond purchases.

“I’d like to see some movement toward the target” before tapering, Lockhart said today in a Bloomberg Radio interview with Kathleen Hays. Inflation is “stable but too low” and a move up would “give me some confidence we are not dealing with some downside scenario that might develop,” said Lockhart, who doesn’t vote on policy this year.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts down 28bp, FixedResets up 20bp and DeemedRetractibles off 5bp. In the Performance Highlights table the three losers are all PerpetualDiscounts while FixedResets dominate the winning side. Volume was above average with the highlights comprised entirely of FixedResets.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 8bp, FixedResets up 27bp and DeemedRetractibles off 3bp. A fairly lengthy Performance Highlights table is comprised entirely of winners, mostly FixedResets. Volume was average.

There was a good US jobs number:

The addition of 204,000 workers followed a revised 163,000 gain in September that was larger than initially estimated, Labor Department figures showed today in Washington. The median forecast of 91 economists surveyed by Bloomberg called for an increase of 120,000. The jobless rate rose to 7.3 percent from an almost five-year low.

This didn’t help the Treasury and gold markets much:

Treasuries sank the most since July and gold slid as a bigger-than-forecast increase in American payrolls fueled speculation the Federal Reserve may trim stimulus earlier than expected. The dollar strengthened against all 16 major peers while U.S. stocks advanced.

The yield on 10-year Treasuries jumped 14 basis points to 2.74 percent at 12:58 p.m. in New York and climbed as much as 16 basis points. Gold futures dropped 1.8 percent to $1,285.00 an ounce. The Standard & Poor’s 500 Index (SPX) rebounded 0.9 percent after tumbling 1.3 percent yesterday. French bonds fell after S&P downgraded the country’s debt. The dollar climbed 0.4 percent against the euro. AT&T Inc. and BNP Paribas SA led 21 billion euros ($28 billion) of bond sales in Europe this week, the busiest in two months.

That’s right, S&P downgraded France:

• We believe the French government’s reforms to taxation, as well as to product, services, and labor markets, will not substantially raise France’s medium-term growth prospects, and that ongoing high unemployment is weakening support for further significant fiscal and structural policy measures.
• Furthermore, we believe lower economic growth is constraining the government’s ability to consolidate public finances.
• We are therefore lowering our long-term foreign and local currency sovereign credit ratings on France to ‘AA’.
• The outlook is stable, reflecting our view that the probability that we will raise or lower the rating on France over the next two years is less than one-in-three.

Angst is rising over the Fed exit from QE:

The Fed’s financial-crisis actions — from acquiring debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc. to three rounds of quantitative easing — have led so far to the record payments. Now, the prospect of a stronger economy and rising interest rates means the value of the Fed’s bond holdings will fall at the same time its funding costs climb because the central bank pays interest on the excess reserves it holds for banks.

This could cause operating losses and invite increased scrutiny from lawmakers already critical of the central bank’s policies.

That’s a risk central bankers are grappling with as they consider when to slow the $85 billion monthly pace of their government and mortgage-backed securities purchases. Federal Reserve Bank of New York President William C. Dudley said in a speech last month that the central bank’s balance-sheet expansion does “create some budget risk” that threatens the institution’s independence.

I know a number of Asset Managers read this blog. How would you guys like a quarter like these guys?

Pacific Investment Management Co., the world’s largest fixed-income manager, had $39 billion in net redemptions during the third quarter as investors fled bonds in anticipation of rising interest rates.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 51bp, FixedResets up 22bp and DeemedRetractibles gaining 2bp. As might be expected, the Performance Highlights table is fairly lengthy, with the down side dominated by Perpetual Discounts and winners by FixedResets. Volume was very high.