Category: Market Action

Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, had some words of interest regarding MMFs at the European Commission High Level Conference, Brussels, 27 April 2012:

Money funds do not use committed lines of credit from banks. Claims on money funds have, in effect, become monetary assets in the hands of savers. In parts of the world, especially the US, they are treated like current accounts. Given the restrictions on their asset holdings, they resemble narrow banks, in mutual-fund clothing. But for a normal mutual fund, as an open-ended investment vehicle, the value of investments in it fluctuates with the value of the vehicle’s asset portfolio. By contrast, most money funds hold themselves out as offering par under any circumstances; when they “break the buck”, they must unwind. Their investors run at that prospect; and so the funds themselves are flighty investors. Compared to most types of shadow banking, money funds do not borrow – in the usual sense. But by promising par, they are in effect incurring debt-like obligations. And they can be exposed to leverage. At least in the run up to the crisis, some invested in levered paper, some of it in what amounted to Russian Doll shadow banking – a money fund buys short-term ABCP backed by CDOs, etc.
What I suggest here is that:

• Money Market Funds should be required to choose between being
  • Variable Net Asset Value (NAV) funds or Constant NAV funds
  • Any remaining CNAV funds should be subject to capital requirements of some kind
  • All should be subject to “gates” or other measures that can be used to delay withdrawals, to make runs less likely

That package would not completely prevent runs; regular mutual funds can suffer runs. But it would make them somewhat less brittle.

Bank loan concentration risk is becoming an issue:

The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), told the Federal Reserve that a limit on their credit exposure is unnecessary and “fundamentally flawed.”

The Fed’s proposed rules on single-counterparty credit limits would have a negative impact on banks, their customers and the U.S. economy, according to a letter sent to the central bank today by five banking trade groups, including the Clearing House Association.
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In December, the Fed proposed tougher standards to supervise the largest banks whose collapse could jeopardize the economy. The central bank set a limit of 10 percent for credit risk between a company considered systemically important and counterparty when each has more than $500 billion in total assets.
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The 10 percent credit risk limit is more restrictive than that contained in the Dodd-Frank financial overhaul law, which allowed for a 25 percent limit.
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The Fed did not explain why it changed the credit risk limit to 10 percent for the largest banks. The Dodd-Frank act allows the Fed to make the change if it determines it is necessary to “mitigate risks to the financial stability.” The banks argue the Fed should first try the 25 percent limit and, if it proves inadequate, adopt the 10 percent limit.

It seems to me that this would benefit from a mathematical treatment. The banking rules are calibrated to allow for the chances of insolvency of a bank based on a mathematical model of asset values that assume independence of counterparty default. With a single major counterparty, then the risk becomes a lot chunkier since the correlation of counterparty A defaulting with counterparty A defaulting is, by definition, 1.0.

Spend-Every-Penny will continue to flog a dead horse:

Finance Minister Jim Flaherty has drawn a line in the sand for the first time in his for a national securities regulator, setting a one-year deadline before he walks away.

Mr. Flaherty has long fought for a national regulator, making it one of his signature goals since became finance minister. But he suffered a setback in December when the Supreme Court of Canada ruled such a plan would be unconstitutional by infringing on provincial independence.

Mr. Flaherty vowed to continue his quest for at least some form of a regulator, even if its mandate is not as far-reaching as the first proposal. On Friday, he said there is only a finite amount of time to strike a deal.

Who knows? An opt-in system, like the HST could work. Another plan is for willing provinces to merge their securities commissions. A fully-national regulator has always been a pipe-dream – but today’s Conservatives are a rather contemptible group.

DBRS has confirmed TA at Pfd-3 Stable:

DBRS has today confirmed the ratings of TransAlta Corporation’s (TAC or the Company) Unsecured Debt/Medium-Term Notes and Preferred Shares at BBB and Pfd-3, respectively, both with Stable trends. The confirmation reflects (1) the Company’s high level of contracted output with reasonable fuel hedging positions and (2) increased geographical and fuel diversification. These strengths have lowered TAC’s business risk level to below the industry average. A well-hedged portfolio and/or contractual position are key to reducing the volatility of earnings and cash flow as power generators generally operate in competitive environments where profitability varies with commodity pricing (both output and inputs) and production volumes. TAC’s contracted output is expected to remain high, at over 65% of net generating capacity, at least until Alberta purchase power arrangements (APPA) expire in 2020.
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TAC faces a number of other challenges, including aging coal plants in Alberta, which could continue to result in a high level of unplanned outages as evidenced by the Sundance coal-fired generation Unit 1 and Unit 2 shutdown since December 2010. The ultimate outcome of the Sundance arbitration process remains uncertain. An unfavourable resolution of this matter (i.e., accrued penalties and repair costs) could have material financial impacts. The Company has limited financial flexibility to withstand any adverse events due to its high leverage and dividend payout ratio. Any further significant increase in leverage could cause TAC’s credit risk profile to deteriorate to a level that is no longer commensurate with the current BBB rating. DBRS expects TAC to fund the majority of any unexpected material costs primarily with equity (including preferred shares and the dividend re-investment program) to maintain its current leverage level.

It was a day of modest gains for the Canadian preferred share market, with PerpetualPremiums gaining 8bp, FixedResets up 6bp and DeemedRetractibles winning 12bp. Volatility picked up, but there is no clear pattern in the Performance Highlights table, beyond a tilt to winners. Volume was very low.

OSFI’s empire has expanded:

Canada’s primary lender of taxpayer-backed mortgages is coming under tighter oversight, as new legislation will require Canada Mortgage and Housing Corp. to report to the national banking regulator.
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One of the most anticipated aspects relates to the government’s decision to change the oversight structure for CMHC, which is expected to see its portfolio of mortgages grow well beyond $500-billion this year.

Under the current structure, CMHC is primarily overseen by Human Resources Minister Diane Finley. The budget legislation would give the finance minister a greater role in oversight and would make the Office of the Superintendant of Financial Institutions the main watchdog for CMHC.

The covered bond legislation didn’t get as much attention, but DBRS commented:

The federal government today announced a legislative framework for governing covered bonds in Canada. There are no rating implications as a result of this announcement. As anticipated, the legislation does not allow any insured mortgages to be included as covered bond collateral. The legislation, which will also require Canada Mortgage & Housing Corp. (CMHC) to establish and maintain a registry for covered bonds, better defines who can issue covered bonds (banks and co-operative credit societies), and specifies bankruptcy and insolvency protection for covered bonds. There was also no mention of whether the current 4% regulatory limit on covered bonds will change.

Because many of the principles in the legislative framework were anticipated, there were a significant number of covered bond issuances by Canadian banks since the beginning of calendar 2012. At the end of March 2012, $63 billion was outstanding versus $50 billion at December 2011, with Bank of Nova Scotia being the most active, accounting for $5.5 billion of the change. Given the solid reputation of Canadian banks globally, the increased funding diversification and access to new buyers of debt, almost all of the issuances during this time period were U.S. dollar denominated. Given that several of the banks still have insured mortgages, DBRS believes some of the Canadian banks will continue to fund using these instruments before the bill receives royal assent.

Moody’s cut Ontario:

Moody’s Investors Service has today downgraded the Province of Ontario’s issuer and debt ratings to Aa2 with stable outlook from Aa1 with negative outlook, affecting approximately CAD202 billion in debt securities.

“The downgrade of Ontario’s rating reflects the growing debt burden and the risks surrounding the province achieving its medium-term fiscal plan given the subdued growth outlook, extended timeframe back to balance and ambitious expenditure targets,” said Moody’s Assistant Vice President Jennifer Wong, lead analyst for the Province of Ontario.
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Expense growth targets appear particularly ambitious in light of growth in expenses averaging 7% annually in the five years to 2011-12 and continued pressures on health expenses, the province’s largest expense item, due to demographic pressures.

DBRS took a more sanguine view:

DBRS has today confirmed the long and short-term debt ratings of the Province of Ontario (Ontario or the Province) at AA (low) and R-1 (middle), both with a Stable trend. Overall, DBRS views the continuation of the fiscal recovery plan and the increasing emphasis on cost containment as an encouraging step in the right direction. However, as demonstrated by the recent budget negotiations, the political environment remains fragile and DBRS believes that implementing the tough measures required to achieve fiscal targets and limit debt growth will be very challenging and will require a significant pickup in fiscal resolve.
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Ontario’s debt trajectory remains largely consistent with last year’s plan. In 2011-12, DBRS-adjusted debt is estimated to have grown by 9.3%, resulting in a debt-to-GDP ratio of 39.2%, the third-highest among all provinces. Debt growth is expected to slow in 2012-13, with the debt-to-GDP ratio forecast to reach 41.3% before eventually reaching a peak of somewhat below 45% within the next two to three years. However, DBRS cautions that this is dependent on the Province achieving its fiscal targets, which entail considerable execution risk, especially given the constraints of a minority government.

S&P cut Spain:

Spain’s sovereign credit rating was cut to BBB+ from A by Standard & Poor’s on concern the nation will have to provide further fiscal support to the banking sector as the economy contracts.
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“Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P wrote in the statement. “At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain’s net general govern debt could rise further.”

Yields on 10-year Spanish bonds surpassed 6 percent on seven trading days this month, boosting concern that borrowing costs may reach levels that prompted bailouts for Greece, Ireland and Portugal. The rate was 5.83 percent.

Towers Watson produced their Pension Finance Watch for March:

The Towers Watson Pension Index tracks the performance of a hypothetical pension plan invested in a 60% equity/40% fixed income portfolio. This portfolio recorded a 1.3% return for March. We also track two other investment portfolios with different levels of equity exposure. Monthly returns on the 80% and 40% equity portfolios were 1.9% and 0.7%.
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Similar to bond prices, values for pension obligations move in the opposite direction of interest rates. Our liability index (based on projected benefit obligations) decreased 2.3% for March, reflecting the offsetting impacts of interest accumulation and the increase in the discount rate.

The changes in asset and liability values resulted in a 3.6% increase in the Towers Watson Pension Index to 66.2.
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The index reflects the PBO funded ratio (market value of assets/projected benefit obligation) for a benchmark pension plan. The asset value changes from month to month based on the investment performance of the 60% equity portfolio, assumed contributions and benefit payments. Liability values increase with benefit accruals and interest cost, offset by benefit payments, and are adjusted to reflect changes in financial assumptions.

The index was hovering around 90% as recently as mid-2008.

Telus has squared its rot for a good boo-hoo-hoo:

Telus Corp. … is weighing whether to use a legal tactic to prevent a U.S. hedge fund from exercising its voting power to defeat the company’s share-consolidation plan.
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Telus is trying to eliminate its dual-share structure and give non-voting shareholders a vote. But New York-based Mason, which has amassed roughly 18.7 per cent of Telus’s common voting shares, is trying to defeat the plan – a stance that has fuelled an escalating fight between the money manager and the company.
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But while the fund purports to champion the interests of the voting class, Telus has accused it of being an opportunistic investor out to earn a quick buck by using a trading strategy that exploits the historical price gap between the two classes of shares.

I think that it’s scandalous that the securities of a Canadian company be used as a vehicle to earn a quick buck! This is Canada, for heaven’s sake! Our country, where we play cooperative games with our dollies!

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets up 5bp and DeemedRetractibles winning 10bp. Volatility remained low. Volume was quite low.

Looks like a double-dip in the UK:

The U.K. economy shrank in the first quarter as Britain slid into its first double-dip recession since the 1970s, forcing Prime Minister David Cameron to defend his spending cuts in Parliament.

Gross domestic product fell 0.2 percent from the fourth quarter of 2011, when it declined 0.3 percent, the Office for National Statistics said today in London. The median of 40 estimates in a Bloomberg News survey was for an increase of 0.1 percent. A technical recession is defined as two straight quarters of contraction.

But the EU has a plan!

Bankers (SX7P) face a backlash from European Union lawmakers determined to cut their bonuses as part of a quest to reshape lenders as utilities like water and electricity providers rather than money-making machines.

The European Parliament is proposing an array of amendments to a draft law implementing capital rules by the Basel Committee on Banking Supervision to attack the bonus culture legislators partly blame for bringing the region’s economy to the brink of collapse. A vote is set for May 8.

I don’t think anybody’s given any thought about the potential consequences for capital markets.

US housing is getting some good press:

Data released yesterday showing better-than-estimated new- home sales and a slowdown in price declines are bolstering optimism that the market is poised for a sustainable recovery. Economists including Bank of Tokyo-Mitsubishi UFJ’s Chris Rupkey, Bank of America Corp.’s Michelle Meyer and Mark Fleming of CoreLogic Inc. are also predicting prices are close to a trough after a 35 percent slump from a July 2006 peak, even as the threat of more foreclosures loom to boost supply.

The FOMC statement was no surprise:

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.
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Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.

The Globe comments:

Investors, you are on your own.

The Federal Reserve’s policy committee ended a two-day meeting Wednesday by issuing a statement that is almost identical to the one the Federal Open Market Committee posted after its previous session in March.

A separate release showed the Fed is only marginally more optimistic about the economic outlook than it was at the start of the year. The central bank’s forecast for economic growth this year, based on the projections of 17 policy makers, is between 2.4 per cent and 2.9 per cent, compared with 2.2 per cent and 2.7 per cent previously. The forecast for 2013 is 2.7 per to 3.1 per cent, essentially unchanged.

Rumours are swirling about Canadian mortgage finance:

In late March, the federal budget took aim at supervision of Canada Mortgage and Housing Corp., which controls about 75% of the mortgage default insurance market. In Thursday’s budget implementation bill, Ottawa is expected say how this oversight will change.

CMHC now falls under the jurisdiction of the minister responsible for Human Resources and Skills Development Canada. But, as first reported by the Financial Post, Ottawa has been examining putting the Crown insurer under the direct supervision of the Office of the Superintendent of Financial Institutions — a powerful financial regulator with the power to enforce a broad range of actions.

The government said Wednesday it plans to introduce a law “to implement certain provisions of the budget,” according to a document known as the Notice Paper.
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There may also be details Thursday about a new covered bond program, which will be available to federally and provincially regulated mortgage lenders in Canada and administered by CMHC.

“A legislative framework will support financial stability by helping lenders find new sources of funding and my making the market for Canadian covered bonds more robust,” according to the budget.

S&P has a negative outlook on Ontario:

• We are revising our outlook on the Province of Ontario to negative from stable.
• At the same time, we are affirming our ratings, including our ‘AA-‘ long-term and ‘A-1+’ short-term issuer credit ratings on the province.
• The outlook revision reflects our view regarding the minority legislature’s ability to meet what we view as challenging cost containment targets in the next one to two years necessary for the debt burden to peak in fiscal 2015 as planned.

We believe the province’s main credit challenges include its continuing weak budgetary and debt metrics and its challenging cost-containment plan required to achieve budgetary balance by fiscal 2018. In fiscal 2012, it recorded an operating deficit of about 12% of operating revenues (Standard & Poor’s adjusted) and an after-capital deficit of more than 22% of total revenues (Standard & Poor’s adjusted), which bettered the government’s forecast for a third consecutive year, but which remains stubbornly high, in our view.

DBRS confirmed AIM.PR.A at Pfd-3 Stable:

DBRS has today confirmed Groupe Aeroplan Inc.’s (Aeroplan or the Company) Issuer Rating and Senior Secured Debt rating at BBB and its Preferred Shares rating at Pfd-3, all with Stable trends. The ratings continue to benefit from the Company’s (1) brand strength in its core markets, (2) strong relationships with key Accumulation Partners and (3) stable free cash generating capacity. The ratings also reflect the fact that the Company’s overall performance depends heavily on consumer spending patterns and general economic conditions, and some degree of revenue concentration still exists.
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In terms of financial profile, operating cash flow in F2012 is expected to be somewhat negatively affected by the European Court of Justice (ECJ) value-added tax (VAT) judgment (slated to be completed toward the end of F2012). That said, DBRS still anticipates cash flow from operations (after changes in working capital and deferred revenue) to increase to the range of $290 million to $310 million. Dividends are expected to increase modestly and capital expenditures are expected to be slightly higher at approximately $55 million in F2012 to fund software development initiatives that were set toward the end of F2011. As such, DBRS expects Aeroplan to generate healthy free cash flow levels of $115 million to $135 million in F2012.

Although Aeroplan would have the capacity to further reduce debt and improve its financial profile, DBRS expects the Company will use its free cash flow primarily to fund its growth ambitions and increased returns to shareholders. As such, DBRS expects Aeroplan’s debt-to-adjusted EBITDA to operate within the range of 2.0x to 2.5x in the near to medium term.

It was a mildly negative day for the Canadian preferred share market, with PerpetualPremiums losing 9bp, while both FixedResets and DeemedRetractibles were down 4bp. There was not much volatility; what there was was uniformly negative. Volume was average.

PerpetualDiscounts now yield 5.25%, equivalent to 6.82% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.6%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, a slight (and perhaps spurious) narrowing from the 225bp reported April 18.

Fascinating developments in High Frequency Trading technology:

Currently, data take 64 milliseconds (give or take a few fractions of an eye blink) to travel round-trip between New York and London along a cable built in 1998 called the AC-1.

According to its New Jersey-based operator, Hibernia Atlantic, the $300 million Project Express will be 5.2 milliseconds faster than the AC-1, with an execution time of 59.6 milliseconds. That will make Project Express the world’s fastest transatlantic cable when it opens in 2013 and the first to achieve round-trip trading speeds of less than 60 milliseconds. Unless someone beats them to it.

As of this morning, it appears someone will. A small company called Perseus Telecom, in partnership with a subsidiary of India’s big telecom company, Reliance Communications, has announced the launch of QuanTA, a fiber-optic cable stretching from Long Island to the U.K. with an expected round-trip execution time of less than 60 milliseconds by the end of 2012.

This must be for arbitrage between Europe & New York – if it was just New York, it would be easier to set up the infrastructure here, with colocation on the Exchange floor.

The Europeans are getting a little testy:

German Chancellor Angela Merkel said balanced budgets are the best answer to the debt crisis, rebuffing French Socialist presidential candidate Francois Hollande’s campaign pledge to reverse Europe’s austerity drive.
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Merkel, who faces two German state elections in May and a national election in the fall of 2013, joined with Sarkozy to craft the euro area’s crisis response over the past year and backed him for re-election. She insisted on the need for austerity today, saying Europe’s “credibility” depends on reducing deficits and debt.

“We’re not saying that saving solves all problems,” she told a conference in Berlin. Still, “you can’t spend more than you take in. You can’t live your whole life this way. Everybody knows this.”

It has become an article of faith that you shouldn’t trust the mainstream Credit Rating Agencies because – gasp! – they’re paid by the issuers. You should choose a investor-pay agency:

The U.S. Securities and Exchange Commission accused Egan-Jones Ratings Co. and founder Sean Egan of making misrepresentations about the firm’s experience rating asset-backed and government securities in a 2008 application to become a nationally recognized statistical ratings organization.

Egan-Jones falsely claimed in the application that it had about 150 outstanding ABS issuer ratings and 50 government ratings, the SEC said today in an administrative proceeding filed in Washington. At the time of the July 2008 application, the firm hadn’t issued any such ratings and therefore didn’t meet requirements for registration as an NRSRO, the SEC said.

Egan-Jones is one of nine firms registered with the SEC as an NRSRO, which means companies can use their credit ratings to meet regulatory requirements. Egan-Jones is paid by investors.

There’s some more cheerful European bank news:

European lenders, more reliant than ever on emergency aid after borrowing $1.3 trillion from their central bank, may need additional cash infusions until policy makers stem the crisis engulfing Spain and Italy.

After more than 30 bond sales in the first quarter, no bank has sold unsecured debt this month, and the cost of insuring against default has soared to levels last seen in January. Financial stocks, which rallied 20 percent following the European Central Bank’s December decision to provide unlimited three-year loans, are now 2 percent lower since then.

Investors are balking after some lenders used the ECB cash to boost holdings of sovereign debt and governments struggled to rein in deficits. Because banks post collateral in exchange for the ECB loans, the amount unsecured bondholders would get back in a default has shrunk. That has raised funding costs for what Morgan Stanley estimates is about 700 billion euros ($924 billion) of debt lenders must refinance by the end of 2013.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 6bp, FixedResets up 6bp and DeemedRetractibles winning 9bp. The Performance Highlights table is comprised entirely of BAM winners, but I don’t think much can be read into that: the PerpetualDiscounts are just bouncing back from a bit of weakness, and the BAM Floaters are the only Floaters in the index. Volume was below average.

Update, 2012-4-25: This post originally reported after-tax yields. The following is pre-tax:

The Dutch government is in disarray:

Dutch Prime Minister Mark Rutte offered to quit, a move that would trigger early elections, as he sought to win parliamentary support for additional budget cuts needed to steer the Netherlands clear of the debt crisis.
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With budget deliberations dragging on since March 5, the fate of Rutte’s minority government was thrown into doubt on April 21 when Wilders and his Freedom Party unexpectedly withdrew its support over how to narrow the shortfall. That prompted Rutte to cite new elections as “an obvious scenario” to try to resolve the deadlock.

In the Netherlands, the euro-area’s fifth biggest economy, the 2013 budget shortfall is currently forecast at 4.6 percent of gross domestic product. To pare it to 3 percent as specified by the European Commission, Rutte needs to find at least 9.5 billion euros of extra cuts to submit to Brussels by April 30.

“The package is way too rigorous and it’s bad for the economy,” Emile Roemer, head of the Socialist Party, which would double its seats to 30 according to latest polls, said in broadcast remarks. “We need to have elections and clarity as soon as possible.”

The opposition Labor Party is willing to cooperate with the government on preparing a complete 2013 budget only if elections are held in September, party leader Diederik Samsom told NOS television April 21. Economic growth is more important than meeting the 3 percent deficit target, Samsom said.

I mentioned a classic example of how investment managers are hired on April 18, 2011. The CalPERS story continues:

The former chief executive of the California Public Employees’ Retirement System was sued by U.S. regulators over claims he defrauded an investment firm into paying $20 million in fees to a friend’s placement agencies.

Federico Buenrostro, who served as Calpers CEO from 2002 to 2008, and his friend Alfred Villalobos, the former deputy mayor of Los Angeles, fabricated documents given to New York-based private-equity firm Apollo Global Management (APO), the Securities and Exchange Commission said today in a lawsuit filed in U.S. District Court in Nevada. California regulators sued the two men in May 2010 over similar claims.
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The documents gave the false impression that Calpers had reviewed and signed placement-agent fee-disclosure letters in accordance with its established procedures, the SEC said. The lawsuit also names Villalobos and his firm ARVCO Capital Research LLC as defendants.

“Buenrostro and Villalobos not only tricked Apollo into paying more than $20 million in placement agent fees it would not otherwise have paid, but also undermined procedures designed to ensure that investors like Calpers have full disclosure of such fees,” John McCoy, associate regional director of the SEC’s Los Angeles office, said in a statement.

DBRS has released the Split Share Funds Quarterly Report – Q1 2012.

It was a mixed, unexciting day for the Canadian preferred share market, with PerpetualPremiums down 4bp, FixedResets up 5bp and DeemedRetractibles gaining 1bp. Volatility was muted. Volume was low.

Nothing happened today, so I went to a flamenco show. During an informal question and answer period after the show (you aren’t allowed to merely enjoy anything nowadays, particularly dance: you must show diligence in getting booked up) Ms. Enrique explained that the large fans held by the women were mocking the fans held at one time by the nobility at court, exaggerated for satirical purposes; the long trains on some of the dresses are in the same vein.

Which got me to wondering: how are the rich mocked today? I’m not convinced that they are, at least not in North America, where there is a degree of social mobility lacking in a structured society. We don’t mock their wine cellars – because we all want a 5,000 bottle wine cellar. We don’t mock their private planes – because we all want a private plane. Even rap artists, who one might expect to be the most logical source of mockery, make a big fuss about how wonderful it is to have big cars and drink champagne and all the rest of it. We don’t mock the rich, because they are us. The rich are not like you and me – they have more money!

It was a soft day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets losing 16bp and DeemedRetractibles down 11bp. Volatility was good. Volume was heavy, with quite a few issues trading more than 100,000 shares.

There’s a dilemma the politicians are having a problem with: how can you square long-term lending risk with zero short term lender risk? The Europeans are trying hard!

European Union lawmakers are considering rules to protect bank depositors that may stymie two of the main funding sources for the region’s lenders.

The proposals risk limiting how much banks can raise from covered bond sales and European Central Bank loans by placing curbs on the assets they can use for security. The aim is to boost protection for account holders and other creditors.
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Tying up assets in collateralized fundraisings is known as encumbrance and pushes unsecured creditors further back in the queue for payment in a default. Any move to limit secured debt issuance risks hurting banks that have relied on record covered bond sales and the 1 trillion euros ($1.3 trillion) of loans that the ECB has pumped into the system since December.

But getting too cocky about Anglo-Saxon capitalism, remember US efforts to eliminate liquidity:

Wall Street banks will have two years to implement the so-called Volcker rule so long as they make a “good faith” effort to comply with the ban on proprietary trading, U.S. regulators said.

Banks will have the “full two-year period” provided by the Dodd-Frank financial overhaul law to “fully conform” their activities and investments, the Federal Reserve and four other U.S. agencies said in a statement today. The Fed has the authority to extend the period of compliance beyond July 21, 2014, the regulators said.

France and Spain paid up for funding:

France sold 8 billion euros ($10.5 billion) in debt today as risks linked to the French presidential election drove up yields.

The amount sold was at the maximum target set by Agence France Tresor, the country’s debt-management body. France sold 2.7 billion euros of benchmark five-year debt at an average yield of 1.83 percent, up from 1.78 percent on March 15.

Earlier today, Spain sold 2.54 billion euros in two- and 10-year bonds, slightly more than the maximum target of 2.5 billion euros. Borrowing costs rose as Spanish Prime Minister Mariano Rajoy’s struggles to meet deficit targets.

Scrutiny of both countries is increasing amid the fading effect of the European Central Bank’s longer-term refinancing operation, which injected about 1 trillion euros of liquidity into the region’s financial system. The yield on Spain’s benchmark 10-year bond has jumped about 1 percentage point since the beginning of March to above 6 percent, while the yield on the equivalent French debt has gained more than 10 basis points with Socialist Francois Hollande leading in election polls.

It would seem that the bond market shaves the Spanish barber:

Spain sold 2.54 billion euros ($3.3 billion) of bonds, just above the maximum target for the auction, and its borrowing costs rose. Bonds declined after the sale.

The Treasury sold its 10-year benchmark bond at an average yield of 5.743 percent, compared with 5.789 percent on the secondary market before the sale and 5.403 percent when it last sold them in January. It sold two-year securities at 3.463 percent.

It was a quiet day overall for the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets up 3bp and DeemedRetractibles off 2bp. Oddly, there was a violent move in the PerpetualDiscount sector – the Performance Highlights table is comprised entirely of three losers of this ilk. However, these three issues were responsible for the entire PerpetualDiscount index move. Volume was below average.

Chapter 4 of the IMF Global Financial Stability Report is a fascinating review of longevity risk:

Private pension providers and governments are particularly exposed to longevity risk and this risk is greatly increased in the current low-interest-rate environment. In line with other estimates in the literature, the analysis in this chapter finds that the liabilities of U.S. pension plans would rise by 9 percent for a three-year increase in longevity. Governments may be even more exposed: many not only sponsor defined benefit pension plans for their employees, but maintain extensive old-age social security systems covering most of the population. In addition, the government is likely liable for the “tail” of longevity risk: in the case of a longevity shock affecting the entire population, the private sector would likely be overwhelmed by the financial consequences. In that case, the losses are likely to be assumed by the government in some way, including through pension fund guarantee schemes that take on the pension liabilities of failing institutions and social security schemes that aim to prevent old age poverty.

However, the section that attracted press attention was Chapter 2: Sovereigns, Banks, and Emerging Ma rkets: Detailed Analysis and Policies:

Looking ahead, many European banks have announced medium-term business plans with reductions in assets amounting to about $2.0 trillion in total.
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The variations in the scale of bank deleveraging across scenarios are mainly driven by differences in the extent of cyclical pressures. Under the complete policies scenario – where cyclical pressures ease – assets are cut back by $2.2 trillion, mostly reflecting banks’ own business plans. By contrast, in the weak policies scenario – where cyclical pressures are stronger – banks reduce assets by $3.8 trillion (Figure 2.27). As cyclical pressures intensify, the impact on EU credit rises disproportionately. This is because with stronger cyclical headwinds, more banks need to work their way further down the deleveraging pecking order when reducing their balance sheets, and so EU and domestic credit is curtailed more.

It was an unexciting day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets flat and DeemedRetractibles down 5bp. A bright spot was the floating rate sector, which again scored a lock-out on the positive side of the Performance Highlights table. Volume was slightly below average.

PerpetualDiscounts now yield 5.18%, equivalent to 6.73% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 225bp, a marked widening from the 215bp reported April 13.

The Bank of Canada sounded a warning note:

The Bank projects that the economy will grow by 2.4 per cent in both 2012 and 2013 before moderating to 2.2 per cent in 2014. The degree of economic slack has been somewhat smaller than the Bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013.

As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer than anticipated in January. After moderating this quarter, total CPI inflation is expected, along with core inflation, to be around 2 per cent over the balance of the projection horizon as the economy reaches its production potential, the growth of labour compensation remains moderate, and inflation expectations stay well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

Is this a first? If not globally, then for a super-major bank? Citibank had a negative say-on-pay vote:

Citigroup Inc. (C) shareholders rejected the bank’s executive compensation plan in an advisory vote amid criticism it would let Chief Executive Officer Vikram Pandit collect rewards too easily.

About 45 percent of the votes were in favor of the plan, which Citigroup had argued would help attract and retain top talent, according to a preliminary tally at the New York-based firm’s annual meeting in Dallas today.

“That’s a serious matter,” Chairman Richard Parsons said in response to the outcome. “The board of directors takes this matter seriously” and will seek a more quantitative, formula- based method for setting top executives’ pay, he said.

Comrade Peace-Prize is demonizing speculation:

President Barack Obama urged Congress to bolster federal supervision of oil markets, including bigger penalties for market manipulation and greater power for regulators to increase the amount of money that traders must put up to back their energy bets.

Obama asked Congress to fund a six-fold increase for surveillance and enforcement staff at the Commodity Futures Trading Commission to put “more cops on the beat” overseeing oil markets.

He is seeking to empower the CFTC to raise margin requirements for traders’ oil positions and also asked lawmakers to raise civil and criminal penalties for businesses that are guilty of market manipulation to $10 million from $1 million. The plan would cost $52 million.

“Rising gas prices means a rough ride for a lot of families” Obama said in remarks in the White House Rose Garden today. “When gas prices go up it’s like an additional tax that comes right out of your pocket.”

The European market is a shell game:

Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors.

Holdings of Spanish government debt by lenders based in the country jumped 26 percent in two months, to 220 billion euros ($289 billion) at the end of January, data from Spain’s treasury show. Italian banks increased ownership of their nation’s sovereign bonds by 31 percent to 267 billion euros in the three months ended in February, according to Bank of Italy data.

German and French banks, meanwhile, have cut holdings of those countries’ bonds, as well as Irish and Greek debt, by as much as 50 percent since 2010 in some cases. That leaves domestic firms on the hook for a restructuring such as Greece’s last month and their main financier, the European Central Bank, facing losses. Like Greece, governments would have to rescue their lenders with funds borrowed from the European Union.

“The more banks stop cross-border lending, the more the ECB steps in to do the financing,” said Guntram Wolff, deputy director of Bruegel, a Brussels-based research institute. “So the exposure of the core countries to the periphery is shifting from the private to the public sector.”

This is very much to the politicians’ advantage. Should there be another default, one in which the ECB loses money, they will be able to point at banks and evil bonus-seeking traders as the cause of the losses, rather than the sovereign default.

How does one get ahead in life? Bootlicking is a perennial favourite:

The Bank of England has its eye on Canada’s central bank chief, the Financial Times reports today.

The newspaper said that a member of the Bank of England’s court, the group that oversees the central bank but does not set policy, recently approached Mr. Carney about the idea of replacing Mervyn King in June, 2013.

The Bank of Canada told The Globe and Mail that the newspaper report indicating Mr. Carney had been approached as a potential candidate was not accurate. Mr. Carney, who is respected around the world, and most recently was also tapped to head the global Financial Stability Board, would not comment to the newspaper.

It’s rocket science! It’s an entirely unheard of approach to investing! Imagine, a pension plan sitting down to determine what they want to accomplish before investing!

Healthcare of Ontario Pension Plan’s big bet on bonds paid off in 2011, as the plan ended the year up 12.2 per cent on its investments and more than fully funded.

What happens, however, when rates rise and that bond bet turns around? Not what you might think, according to HOOPP. Yes, the bonds may decline in value, but that shouldn’t leave the plan with a funding gap.

HOOPP, which runs about $40-billion, is a booster of an approach to pension management known as liability driven investment (LDI). For adherents of LDI, beating market benchmarks is considered largely irrelevant and the goal is simply to remain in a fully funded state with enough assets to cover projected liabilities.

Geez, I don’t know about my Assiduous Readers, but I think these guys should all get Nobel Prizes. Two each! Taking account of client objectives prior to formulating an investment strategy is revolutionary!

There was a good upward move in the Canadian preferred share market today, with PerpetualPremiums gaining 3bp, FixedResets up 9bp and DeemedRetractibles winning 14bp. The Performance Highlights table is comprised entirely of winning Floaters, presumably driven up by thoughts of imminent BoC rate hikes. Volume was well below average.

Spain looks as if it’s sliding down the greasy path:

A Spanish minister called on the European Central Bank to do more to stem the sovereign debt crisis as the cost of insuring the country’s bonds against default surged to a record.

“They should step up purchases of bonds,” Jaime Garcia- Legaz, a deputy minister in Luis de Guindos’s Economy Ministry, said yesterday in an interview.

His comments came as ECB officials split over the steps to tame the crisis amid growing expectations that Spain will be the next euro member to seek a European bailout. Spanish banks’ borrowings from the ECB surged almost 50 percent in March, data showed yesterday, as they took almost a third of the longer-term lending offered to euro-region institutions.

But China is inching towards convertibility:

China’s decision to widen the yuan’s trading band against the dollar for the first time since 2007 signals a drive toward a convertible currency that also saw overseas investors get bigger investment quotas this month.

The increase to 1 percent from 0.5 percent takes effect tomorrow, the People’s Bank of China said on its website yesterday. This month, regulators raised quotas for foreigners buying onshore stocks and bonds to $80 billion from $30 billion and increased the amount of yuan held offshore that can be invested locally.

Spanish troubles have led the Europeans to admit that the Euro is only a reserve currency in good times – in bad times, not so much:

European officials travel to Washington this week seeking a larger global war chest to combat the two-year debt crisis as the Spanish government battles to quell renewed market turmoil over its finances.

Three weeks after European leaders unveiled emergency euro- area funding exceeding the symbolic $1 trillion mark, concerns about Spain’s position have ratcheted the nation’s borrowing costs to the highest levels this year. Crisis-fighting resources will dominate talks at the International Monetary Fund’s spring meeting in Washington from April 20-22.

Sarkozy wants the ECB to inflate Europe out of its difficulties, although he’s very careful to cast this in a more politically correct manner:

French President Nicolas Sarkozy, speaking to the biggest rally of his re-election bid, said the European Central Bank should do more to promote economic growth, reviving an issue he raised in his 2007 campaign.

“On the question of the ECB’s role in boosting growth, we French are going to open the debate,” Sarkozy told a crowd today in central Paris that his aides estimated at more than 100,000. “If Europe is not going to sink in the international economy, it must renew with growth.”
…
“Europe must cut its debts, it has no choice,” Sarkozy said. “But between deflation and growth, it has no choice either. If it chooses deflation, it will disappear.”

Krugman is on board with the idea:

The way economist Paul Krugman sees it, Europe has two options.

It can continue with its current path, imposing austerity on governments in an attempt to rein in ever-worsening fiscal situations. Or, it can opt for the reverse, wherein the European Central Bank and eurozone leaders move to implement expansionary monetary and fiscal policies to spur growth.

Right now Europe has chosen austerity and according to Mr. Krugman, that choice is clearly showing that Europe is carrying out economic suicide.

“Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression,” he said in a column in the New York Times.

It was a modest day for the Canadian preferred share market, with PerpetualPremiums up 1bp, FixedResets gaining 4bp and DeemedRetractibles winning 5bp. Volatility was muted. Volume was below average, despite a fair amount of good-sized blocks.