Category: Market Action

It was another positive day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets gaining 9bp and DeemedRetractibles winning 33bp. PerpetualDiscounts – all four of them! – shot up 69bp to decrease the Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) to zero again. Not much volatility. Volume was average.

Sorry this is late, folks!

A good day for the Canadian preferred share market, with PerpetualPremiums up 10bp, FixedResets winning 22bp and DeemedRetractibles gaining 16bp. PerpetualDiscounts rocketted up 94bp! Good volatility, highly skewed to the upside. Volume was well above average.

PerpetualDiscounts now yield 5.02%, equivalent to 6.53% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.6% (maybe just a hair lower) so the pre-tax interest-equivalent spread (which is in this context the Seniority Spread) is now about 195bp, unchanged from the figure reported February 15.

The Greek crisis is resolved! Or is it?:

Seven months of negotiations ended in the pre-dawn hours in Brussels with Greece winning 130 billion euros ($172 billion) in aid it needs to avoid a March bankruptcy. Any respite may prove temporary after it signed up to a program of austerity and economic reform aimed at slashing debt to 120.5 percent of gross domestic product by 2020 from about 160 percent last year.

Even with investors and central bankers chipping in to relieve the debt burden, economists from Citigroup Inc. to Commerzbank AG concluded Greece may again fail to deliver amid a fifth year of recession, looming elections and social unrest. The upshot could be the removal of aid and renewed debate over the merits of fresh assistance before year-end as policy makers shift toward doing more to inoculate the rest of Europe.

I think all they’re doing is providing the incubator for the next Hitler. I wonder what this one will be like. Fortunately, Greece isn’t as large or industrialized or revanchist as 1930 Germany … except for maybe Macedonia.

The internal report isn’t too cheery:

Experts from the European Commission, the European Central Bank and the International Monetary Fund highlighted the risks and questioned the assumption that Greece will be able to return to capital markets in the coming years.

“There is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece’s competitiveness will inevitably lead to a higher debt to GDP ratio in the near term,” the analysis said.

“Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.”

However, the Europeans are trying very hard to prove the truth of the maxim: Don’t invest in European sovereigns unless you’ve got a little bit of insider pull:

Euro-area central banks will swap the Greek bonds in their investment portfolios for similar securities to avoid enforced losses during a debt restructuring, a euro-area official said.

The swap will happen today and is identical to one the European Central Bank carried out last week with the Greek bonds acquired in its asset-purchase program, the official said. The new Greek bonds will be immune to collective action clauses, or CACs, ensuring central banks don’t incur any losses when a private-sector debt write-down takes place, the official said on condition of anonymity. A spokesman for the Frankfurt-based ECB declined to comment.

The Canadian preferred share market came back a little today,with PerpetualPremiums winning 13bp, FixedResets gaining 7bp and DeemedRetractibles up 5bp. Reasonable volatility, with the Performance Highlights table skewed towards the upside and to insurance issues. Volume was a little above average.

Greece is preparing a collective action clause:

The Greek government is drawing up legislation that could be used to impose losses on investors who don’t support the debt swap that’s part of the country’s new bailout package, said two euro-region officials familiar with the situation.

The law may be introduced to parliament in Athens in the coming days, said one of the officials, who spoke on condition of anonymity because the deliberations are confidential. Euro region finance ministers are prepared to back the use of so- called collective action clauses if a voluntary debt swap doesn’t draw enough participation, the other person said.

Collective action will trigger payments on Credit Default Swaps. But here’s the really disgraceful part:

The European Central Bank is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in a debt restructuring, three euro-area officials said.

The Frankfurt-based ECB is exchanging its Greek bonds for bonds of an identical structure and nominal value, the only difference being that they would be exempt from so-called collective action clauses, the officials said late yesterday on condition of anonymity. One said the bonds have a face value of about 50 billion euros ($65 billion).

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 8bp, FixedResets off 1bp and DeemedRetractibles also gaining 8bp. There was good volatility, with all three Floaters listed in the Performance Highlights on the losing side. Volume was average.

The Europeans are going to solve all their problems by monetizing the Greek default:

European governments are considering cutting interest rates on emergency loans to Greece and using contributions from the European Central Bank to plug a new financing gap in the second bailout program for Athens, two people familiar with the discussions said.

Finance ministers wrangled over how to close the funding hole in a teleconference last night after seeing estimates that Greece’s debt would fall to 129 percent of gross domestic product in 2020, missing a target of 120 percent, said the people, who declined to be named because the talks are still in progress. Last year, the level was about 160 percent.

It was another down day for the Canadian preferred share market, with PerpetualPremiums off 5bp, and both FixedResets and DeemedRetractibles losing 31bp. PerpetualDiscounts (all four of them) were hammered for 194bp. Lots of volatility, heavily skewed towards losers. Volume was above average.

A Bloomberg editorial states:

Should European leaders fail in this endeavor, the danger is that they will be blamed if the austerity medicine fails, regardless of whether many of Greece’s troubles are self- inflicted. Already, hyperbolic analogies between Nazi and current Germany are creeping into public discussion. The politics of anger can quickly overtake rational economic debate. How that would unfold is impossible to predict, but it is unwise to assume that Greeks would never decide to roll the dice on a euro exit, putting to the test assurances that contagion won’t follow.

I’m a lot more concerned about analogies between Weimar Germany and current Greece.

One difficulty is that the gun held to Europe’s head might not be loaded:

Greece said that Europe’s wealthier countries are “playing with fire” by toying with the idea of expelling it from the 17-nation euro area as talks over a second aid program ran into new obstacles.

Finance Minister Evangelos Venizelos leveled the accusation after a decision slated for tonight on aid totaling 130 billion euros ($171 billion) was postponed until at least Feb. 20 and possibly until after a full-time Greek government emerges from elections later in the year.

“We are continually faced with new terms,” Venizelos told reporters in Athens today. “In the euro area, there are plenty who don’t want us anymore. There are some playing with fire, domestically and abroad. Some are playing with torches and some are playing with matches. But the risk is equally great.”

For example, here’s some tough talk:

The chief executive of one of Germany’s most respected manufacturers and an advisor to Chancellor Angela Merkel has called for Greece to be kicked out of the European Union because it is an “unbearable” burden.

“This state with its phantom pensioners and rich people that don’t pay taxes, a state without a functioning administration, has no place in the European Union,” Bosch CEO Franz Fehrenbach told Manager Magazin, according to a transcript of an interview to be published on Friday.

He is the latest in a number of senior German business figures to lash out at Greece over its role in the EU and a second eurozone bailout. A survey of over 300 managers in the magazine shows roughly 57% want Greece to drop out of the euro and reintroduce the drachma.

And things are getting a little testy:

Greek President Karolos Papoulias slammed Germany’s finance minister for recent comments about his country as stalled bailout talks stoked tensions between Greece and the northern European countries funding its rescue.

“I don’t accept insults to my country by Mr. Schaeuble,” Papoulias, who fought in the resistance against the Nazis during World War II, said in a speech today. “I don’t accept it as a Greek. Who is Mr. Schaeuble to ridicule Greece? Who are the Dutch? Who are the Finns? We always had the pride to defend not just our own freedom, not just our own country, but the freedom of all of Europe.”

As far as I can tell, though, he will accept a welfare cheque.

But don’t worry! Europe is saved!

China is ready to be more involved in resolving the crisis through the European Financial Stability Facility and European Stability Mechanism, said People’s Bank of China Governor Zhou Xiaochuan in a speech, echoing comments made yesterday by Premier Wen Jiabao.

Oh, and by the way … that human rights stuff is getting pretty old, you know? And the Dalai Lama should be arrested.

Canada – the land where investors are so smart, they never lose money:

Investors who were caught up in the asset-backed commercial paper freeze in 2007 may be in line for a big cheque, as regulators are hoping to distribute as much as $60-million they collected from banks who sold the money market paper.

The Investment Industry Regulatory Organization of Canada and the Ontario Securities Commission will apply to the judge who oversaw the restructuring of the ABCP for permission to distribute the money, which would go to individual and institutional investors who were affected. An announcement is expected as early as Thursday morning, said two people familiar with the plan.

Whoosh! Another nasty day for the Canadian preferred share market, with PerpetualPremiums down 25bp, FixedResets off 11bp and DeemedRetractibles losing 34bp. Lots of volatility, heavily skewed towards losers. Volume was high.

PerpetualDiscounts now yield 4.98%, equivalent to 6.47% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.5%, so the pre-tax interest-equivalent spread (which in this context is the Seniority Spread) is now about 195bp, a sharp increase from the 165 bp reported February 8.

Greece is unloved:

European officials jacked up the pressure on the Greek government to deliver budget cuts in exchange for a second bailout as they insisted that default is not an option.

Finance ministers canceled a Brussels meeting slated for tomorrow and will hold a teleconference instead to prod Greece to do more to clinch an aid package worth 130 billion euros ($170 billion) along with roughly 100 billion euros of debt relief from private bondholders.

“I did not yet receive the required political assurances from the leaders of the Greek coalition parties on the implementation of the program,” Luxembourg Prime Minister Jean- Claude Juncker, chairman of the euro finance panel [and liar – JH], said in a statement today.

Surprise, surprise:

Antonis Samaras, leader of Greece’s conservative New Democracy party and early favourite to win the next election in the spring, told party members to approve the budget cuts in a parliamentary vote on the weekend. But he angered the Europeans by signalling his intention to renegotiate the terms after voters replace the current caretaker government.

“I want to avoid jumping over the cliff today, to buy time, and to go to elections tomorrow,” he said.

Mr. Samaras at first refused to commit to the budget cuts in writing, a condition demanded of all the Greek party leaders by Brussels. But he is now expected to sign and deliver the necessary letter on Wednesday, clearing one more obstacle to the rescue.

Maybe he should bring in the Canadian defense minister as a consultant on signing the letter!

There were big losses in the Canadian preferred share market today – perhaps the recent spate of new issues has made the cunning folk nervous! PerpetualPremiums were down 59bp, FixedResets were off 44bp and DeemedRetractibles lost 64bp. The Performance Highlights table was not only very lengthy, but comprised entirely of losers, with insurance issues dominating the list. The volume table was similarly dominated by insurers – only one bank! Volume was high.

The Greek austerity measures passed:

Greek Prime Minister Lucas Papademos won parliamentary approval for austerity measures to secure an international bailout after rioters protesting the measures battled police and set fire to buildings in downtown Athens.

A total of 199 lawmakers voted in favor and 74 against, Parliament Speaker Filippos Petsalnikos said in remarks carried live on state-run Vouli TV. When, on Nov. 16, Papademos won a mandate from the Parliament to implement budget measures and secure the bailout of 130 billion euros ($172 billion) he received the support of 255 lawmakers in the 300-strong chamber.

“It is up to us, our vote, whether the country will remain in the euro or be led to a disorderly default,” Papademos told parliament. “Voting for the economic program and opening the road for a loan accord sets the basis for the modernization and recovery of the economy.”

OK, so parliament’s voted for it and all the senior party leaders are on board. So what? There will be elections soon – will any of the major parties now be major parties in June? There really needs to be a referendum on this, because I’m not convinced the political class can deliver.

Meanwhile Moody’s used its knife:

Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal and revised its outlook on the U.K.’s and France’s top Aaa rating to “negative.”

Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook, Moody’s said. It also cut Slovakia’s, Slovenia’s and Malta’s ratings.

“The uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework” and the resources that will be made available to deal with the crisis, are among the main drivers of Moody’s action, the ratings company said.

“Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness,” are also factors, it said. These factors will continue to affect market confidence, “which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.”

Call the papers! There’s been an outbreak of common sense in Europe!

The European Parliament may scrap plans to force firms that use algorithmic-trading programs to continue trading throughout the day, said Markus Ferber, the lawmaker writing the assembly’s response to the proposals. The measure was meant to prevent them creating volatility by diving in and out of the markets.

“We are really rethinking on the whole approach the European Commission has proposed,” Ferber said in an interview. The all-day trading rule was intended to promote market liquidity by ensuring a steady supply of buyers and sellers. “No one can answer me” why such firms should be expected to provide liquidity throughout the trading day, Ferber said.

Sorry, folks, but PrefLetter Weekend knocked me for a loop this time ’round. I’ll update with Monday’s performance when I get a chance.

Astonishing! There is a continued Greek crisis:

In Athens, unions struck for the second time this week and police used tear gas to counter protesters. George Karatzaferis, who heads one of the three parties supporting interim Prime Minister Lucas Papademos, said he wouldn’t support austerity measures worked out for a rescue. He spoke hours after German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that Greece was missing deficit targets.

“What has particularly bothered me is the humiliation of the country,” Karatzaferis, whose Laos party has 16 members in the 300-seat parliament, said in televised comments. “Clearly Greece can’t and shouldn’t do without the European Union but it could do without the German boot.”
…
“The Greek offer is not sufficient and they have to go away to come up with a revised plan,” Bertrand Benoit, a spokesman for the German Finance Ministry, said by telephone.

Assiduous Readers will be accustomed to my occasional rants about bond market structure and auction design – these are usually triggered by ignorant whining about exchange trading of bonds, but now the Fed has become involved:

The Federal Reserve secretly selected a handful of banks to bid for debt securities acquired by taxpayers in the U.S. bailout of American International Group Inc., and the rest of Wall Street is wondering what happened to the transparency the central bank said it was committed to upholding.

“The exclusivity by which the process has shut out smaller dealers is a little un-American,” said David Castillo, head of sales and trading at broker Further Lane Securities LP in San Francisco, who said he would have liked to participate. “It seems odd that if you want to get the best possible price that it wouldn’t be open to anyone who wants to put in the most competitive bid.”

After inviting more than 40 broker-dealers to take part in a series of auctions last year, the Federal Reserve Bank of New York asked only Goldman Sachs Group Inc. (GS), Credit Suisse Group AG (CSGN) and Barclays Plc (BARC) to bid on the full $13.2 billion of bonds offered in two sales over the past month. The central bank switched to a less open process after traders blamed the regular, more public disposals for damaging prices in 2011. This week, Goldman Sachs bought $6.2 billion of bonds in an auction.
…
“The purpose should be to get the best price for the taxpayer,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors. “Anybody knows the more bidders the better, so it’s a little hard to understand why they would essentially pick potential winners and losers. That smacks of crony capitalism.”
…
The New York Fed was criticized for damaging credit markets with the regular sales, and halted them in June after disposing of about $10 billion in face value of the assets.

It resumed the sales on Jan. 19, when it unloaded about $7 billion of assets in one block to Credit Suisse, after receiving an unsolicited bid for the securities from Goldman Sachs. Only Barclays and Bank of America were invited to also participate in that auction. Goldman Sachs won the auction for $6.2 billion of bonds this week after Credit Suisse placed an unsolicited bid for the assets. Barclays, Morgan Stanley (MS) and RBS Securities Inc. were also included in that sale. Barclays presented the second- highest offer in both auctions this year, according to a person familiar with the process.

The New York Fed didn’t announce either auction until after they closed, and said the broker-dealers it included were chosen based on the strength of previous bids. The Wall Street firms, and their clients who wished to bid on the assets, were required to sign non-disclosure agreements forbidding them from discussing the offerings. At least one investor opted not to participate for that reason.

Now, I’m not going to state that the Fed did things in the best possible way. I’m not even going to state that the auction method they chose is better than a fully public process! But I will state that calling the process “un-American” or stating that “Anybody knows the more bidders the better” is just plain pig-ignorant.

The Canadian preferred share market took a thumping today, as the very attractive GWO 5.40% Straight issue announced – and later upsized – today sucked all the money out of the market. PerpetualPremiums were down 34bp, FixedResets off 10bp and DeemedRetractibles lost 59bp. There is a very lengthy list of losers – and no winners – in the Performance Highlights table, overwhelmingly comprised of insurance DeemedRetractibles. Volume was a little on the light side.