Category: Market Action

The US regulatory agencies are seeking comment on Swap Margin and Capital Requirements:

The amount of margin that would be required under the proposed rule would vary based on the relative risk of the counterparty and of the swap or security-based swap. A swap entity would not be required to collect margin from a commercial end user as long as its margin exposure is below an appropriate credit exposure limit established by the swap entity. A swap entity would also not be required to collect margin from low-risk financial end users as long as its margin exposure does not exceed a specific threshold. The proposed margin requirements would apply to new, non-cleared swaps or security-based swaps entered into after the proposed rule’s effective date. The proposal also seeks comment on several alternative approaches to establishing margin requirements.

The BoC did not adjust the overnight rate:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
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Overall, the Bank projects that the economy will expand by 2.9 per cent in 2011 and 2.6 per cent in 2012. Growth in 2013 is expected to equal that of potential output, at 2.1 per cent. The Bank expects that the economy will return to capacity in the middle of 2012, two quarters earlier than had been projected in the January MPR.

While underlying inflation is subdued, a number of temporary factors will boost total CPI inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges to the 2 per cent target by the middle of 2012. This short-term volatility reflects the impact of recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes. Core inflation has fallen further in recent months, in part due to temporary factors. It is expected to rise gradually to 2 per cent by the middle of 2012 as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 9bp, FixedResets gaining 11bp and DeemedRetractibles being smacked for a lossof 28bp. Still not too much volatility, with only three entries in the Performance Highlights table. Good volume featured total domination of the highlights table by FixedResets.

Asset Management via mass-customization is attracting attention in the States:

The next thundering herd on Wall Street may be the ranks of low-cost portfolio managers such as MarketRiders and Folio Investing, which cater to self-directed investors like Cohen. Sites that sell prepackaged portfolios have attracted more than $3 billion in assets over the last three years as more investors leave their full-service brokers.

“Individual investors have started to realize they can actually do some things as self-directed investors reasonably well, if they’re given a platform that allows them to invest more intelligently,” said Steven Wallman, chief executive officer of Folio Investing, where investors can purchase predesigned and customized index portfolios for $29 a month.

Some of the firms, such as Flat Fee Portfolios, are too new to have any performance history. MarketRiders can’t track the actual performance of its customers’ accounts, since it doesn’t have custody of their assets. Covestor and Wealthfront Inc., which give users access to third-party investors, publish performance history for the managers they work with on their sites.

Of course, the big problem with mass-customization is that the decision makers won’t play golf with you:

“Who are the people that are advising me when I’m going to a faceless website?” said Chris Walters, head of wealth management for Pasadena, California-based CitizensTrust. He said investors should be concerned by the lack of performance history available from some of the firms.

But we’ll cut Mr. Walters some slack, as a reward for mentioning the word “performance”. Of course, I don’t see a prominent link to “Performance” on his website.

So much fuss over the leaders’ election debate! It’s a disgrace – the boys have a place to debate each other all the time if they want to … it’s called parliament. But I guess they’re too busy playing thumpy-thumpy on their wickle desks.

Another unpleasant day for the Canadian preferred share market, with PerpetualDiscounts down 25bp, FixedResets losing 6bp and DeemedRetractibles hit for 14bp. Volatility remained low, with only three entries on the performance highlights table. Volume was a little below average.

It looks like the Australians are just as frightened of competition as we are:

Australian Treasurer Wayne Swan rejected Singapore Exchange Ltd. (SGX)’s bid for ASX Ltd. (ASX), saying the deal was not in his nation’s interest and would have left the local bourse operator as a junior partner.

“It was a no brainer that this deal was not in Australia’s national interest,” Swan told reporters today in Canberra, three days after the nation’s Foreign Investment Review Board advised the government to reject it. “At the end of the day this takeover was more about growing Singapore’s financial sector than Australia’s. I am open to the right deal for Australia if it comes along.”
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“Let’s be clear here: this is not a merger,” Swan said today. “It’s a takeover that would see Australia’s financial sector become a subsidiary to a competitor in Asia.”

The Boston Fed has released a Public Policy Discussion Paper by Kevin Foster, Erik Meijer, Scott Schuh, and Michael A. Zabek titled The 2009 Survey of Consumer Payment Choice:

This paper presents results of the 2009 Survey of Consumer Payment Choice (SCPC), along with revised 2008 SCPC data. In 2009, the average U.S. consumer held 5.0 of the nine payment instruments available, including cash, and used 3.8 of them during a typical month. Between the 2008 and 2009 surveys, a period that includes the trough of the latest recession, consumers significantly increased their use of cash and close substitutes for cash, such as money orders and prepaid cards. At the same time, consumers reduced their use of credit cards and (to a lesser extent) debit cards, as well as payments made using a bank account number. Weaker economic conditions, new government regulations, and bank pricing of payment card services all likely contributed to the shift back toward cash. However, it is difficult to determine how much each of these factors contributed, and whether the shift is transitory or permanent, without more data and research on consumer payment choice. In 2009, one in three consumers had a prepaid card and nearly as many had a nonbank payment account online, while 3 percent made a mobile payment. By focusing on payments by consumers only, the SCPC complements the recent 2010 Federal Reserve Payment Study, which describes the entire noncash payments economy.

The New York Fed has published a defence of QE2 by Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack titled Large-Scale Asset Purchases by the Federal Reserve: Did They Work?.

Based on this evidence, we conclude that the Federal Reserve’s LSAP programs did lower longer term private borrowing rates, which should stimulate economic activity. While the effects are especially noticeable in the mortgage market, they appear to be widespread, extending, for example, to the markets for Treasury securities, corporate bonds, and interest rate swaps. That conclusion is promising, as it means that monetary policy remains potent even after the zero bound is reached. To be sure, achieving this further stimulus was not without its challenges, as it required a sizable expansion of the Federal Reserve’s balance sheet, and the purchase of such a large volume of securities in a relatively short time frame required the surmounting of operational hurdles. However, by restoring functioning to the mortgage market and lowering the term premium, the programs provided considerable benefits.

Portugal’s government fell because the opposition didn’t like the austerity plan. They may have shot themselves in the foot:

Europe’s rich countries pushed Portugal to make deeper-than-planned budget cuts in the heat of an election campaign in exchange for an emergency aid package estimated at 80 billion euros ($115 billion).

In an unprecedented intervention in national politics, euro-area finance ministers said an offer of relief would hinge on Portugal’s feuding leaders making cuts that go beyond measures that failed to pass parliament in March and triggered early elections.

But I’m sure that Portuguese politics is no different in substance from Canadian politics. The politicians don’t care if what they say makes any sense, or whether what they do actually improves things: they’ve said something popular and hope to increase their vote.

The latest joke out of the US is the JOINT STUDY ON THE FEASIBILITY OF MANDATING ALGORITHMIC DESCRIPTIONS FOR DERIVATIVES:

Section 719(b) of the Dodd-Frank Act requires the SEC and the CFTC (collectively the “Commissions”) jointly to study (the “Study”) the “the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions which may be used to describe complex and standardized financial derivatives,” and the extent to which such algorithmic descriptions, together with standardized legal definitions, “may serve as the binding legal definition of derivative contracts.”1 The statute also requires us to examine the “logistics of possible implementations of standardized algorithmic descriptions for derivatives contracts.” Thus, the Study presents two key questions. First, is computer technology capable of representing derivatives with sufficient precision and detail to facilitate collection, reporting, and analysis of risk exposures, including calculation of net exposures, as well as to function as part or all of a binding legal contract? Second, if the technological capability exists, in consideration of the logistics of possible implementation, should these standardized, computer-readable descriptions be required for all derivatives?

Seeing as how a large proportion of deriviatives (by number, not by traded value) are designed to allow pseudo-managers with a bond mandate to get non-bond exposure, that might be a little difficult! Anyway:

Based on the public input and its own analysis, the staff conclude, with respect to the first question, that current technology is capable of representing derivatives using a common set of computer-readable descriptions. These descriptions are precise enough to use both for the calculation of net exposures and to serve as part or all of a binding legal contract.

As to question two, the staff conclude that before mandating the use of standardized descriptions for all derivatives, the following are needed: a universal entity identifier and product or instrument identifiers, a further analysis of the costs and benefits of having all aspects of legal documents related to derivatives represented electronically, and a uniform way to represent financial terms not covered by existing definitions.

Plain vanilla! Plain vanilla for everyone!

It was a bad day for the Canadian preferred share market, with PerpetualDiscounts getting whacked for 30bp, FixedResets off 7bp and DeemedRetractibles down 17bp. For all that, there wasn’t much volatility, with only one entry in the Performance Highlights table. Volume was very light.

Nothing happened today, but it looks as if the US government might take a week off:

President Barack Obama and the top two leaders in Congress failed to reach a budget deal in their third White House meeting in two days, taking the government to the brink of a partial shutdown.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 15bp, FixedResets off 8bp and DeemedRetractibles down 6bp. Volatility remains low, and volume was light.

We’re learning more about the discount window:

Details of Fed lending released last week show that Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $37 billion, with an average daily loan amount of $12.3 billion in the 18 months after Lehman Brothers Holdings Inc. collapsed in September 2008. The House subcommittee that oversees the Fed plans hearings on the central bank’s discount window lending to offshore financial institutions next month.

By lending to Dexia, the Fed kept money flowing into local government projects throughout the U.S. as well as the money market funds that invested in them. Dexia guaranteed bonds issued by entities as varied as the Texas State Veterans Land Board in Austin and the Los Angeles County Metropolitan Transportation Authority.

“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” said Matt Fabian, a Concord, Massachusetts-based senior analyst and managing director at Municipal Markets Advisors, an independent research company. “The market has extensive exposure to foreign banks.”

It will be remembered that illiquidity is different from insolvency – I fully support the loan of funds to illiquid banks, as long as this is done at a penalty rate. It is capital injections to insolvent banks that arouses my ire.

Speaking of illiquidity and insolvency, Portugal needs help:

Portugal has asked the European Union for a bailout after a domestic political crisis helped push borrowing costs to record levels, making it the third euro region country to seek a rescue.

“I tried everything but we came to a moment that not taking this decision would bring risks we can’t afford,” Prime Minister Jose Socrates said in a televised statement from Lisbon today. “The government decided to make the European Commission a request for financial aid.”
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Portuguese bond yields have surged since Socrates offered to resign on March 23 following a parliamentary rejection of proposed budget cuts.
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Portugal has been trying to avoid requesting aid for the first time since 1983, when it received external help from the Washington-based IMF. Its credit rating was nevertheless cut by Moody’s Investors Service for the second time in three weeks yesterday, taking it to Baa1. That’s the same level as Ireland, Russia, Mexico and Thailand.

Portugal has struggled to convince investors it can avoid a bailout partly because its economy has barely grown in the past decade. It has expanded at an average annual rate of less than 1 percent in the period, ranking among Europe’s weakest growth rates. Unemployment rose to 11.1 percent in the fourth quarter, the highest since at least 1998, as the economy contracted for the first time in a year.

Portugal reported a budget deficit last week equal to 8.6 percent of the 2010 gross domestic product, higher than the 7.3 percent the government had previously forecast.

DBRS has made some changes to its split-share rating methodology:

With the release of the updated methodology, DBRS’s approach to rating split share transactions is largely unchanged. The primary rating factors are the downside protection and dividend coverage available to the preferred shares; the credit quality, diversification and volatility of the portfolio; and the size of capital share distributions and net asset value (NAV) level where distributions are suspended.

The updates to the methodology are minor in nature, including changes to the criteria for portfolio holdings, the addition of a currency hedging section and adjustments to other rating factors for assigning initial preferred share ratings and for the surveillance of existing ratings.

I was very please to see the following explicitly stated:

DBRS views the strategy of writing covered calls as an additional element of risk for preferred shareholders because of the potential to give up unrealized capital gains that would increase the downside protection available to cover future portfolio losses. Furthermore, an option-writing strategy relies on the ability of the investment manager. The investment manager has a large amount of discretion to implement its desired strategy, and the resulting trading activity is not monitored as easily as the performance of a static portfolio. Relying partially on the ability of the investment manager rather than the strength of a split share structure is a negative rating factor.

Every day I get a little more relieved that I don’t work for a big firm:

But the events at that 2009 party have become the subject of two lawsuits and an internal investigation by the firm.

The catalyst for it all was a 13-page complaint about the party penned the next day by Sarah Diebel, then a junior lawyer with the firm. She delivered it to an MDC partner in accordance with the firm’s sexual harassment policy.

In the letter, Diebel described the party as a “night of debauchery” where “free booze flowed” and where the firm’s partners became “extremely intoxicated.”

She described at length how partners behaved inappropriately, and at one point singled out Cowling and another lawyer for “rubbing their butts up against me and other women.”

Diebel later concluded: “While I like to dance, I don’t like being groped.”

Puerile garbage like that results in lawsuits, resignations, firings and, worst of all, being discussed seriously by adults more than a day afterwards? Grow up, people, and stop pretending this high-school crap is the end of the world.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts getting thumped for a loss of 20bp, FixedResets losing 1bp and DeemedRetractibles down 7bp. Not much volatility. Volume was good.

The National Bank issues subject to the issuer bid closed bid within a few pennies of the tender price. If you haven’t tendered or sold by now, you may have problems – get cracking right away! Most dealers will have a cut-off day for instructions at least one day prior to next Monday’s expiration.

PerpetualDiscounts now yield 5.52%, equivalent to 7.18% interest at the standard equivalency factor of 1.3x. Long Corporates now yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 160bp, a sharp tightening from the 170bp reported on March 30, due to an increase in long corporate yields being unmatched by PerpetualDiscounts.

There’s some cheerleading for solar power:

Electricity from coal costs about 7 cents a kilowatt hour compared with 6 cents for natural gas and 22.3 cents for solar photovoltaic energy in the final quarter of last year, according to New Energy Finance estimates.

Comparisons often overstate the costs of solar because they may take into account the prices paid by consumers and small businesses who install roof-top power systems, instead of the rates utilities charge each other, said Qu of Canadian Solar.

I’ll believe it when I see it.

There are more cross-currents in the Fed Funds rate:

U.S. money market rates dropped to about one-year lows as a change in deposit insurance fees makes some banks reluctant to lend securities and the Treasury reduces issuance of bills to avoid exceeding the debt limit.

The average rate for overnight federal funds, known as the fed effective rate, fell to 0.09 percent yesterday, the lowest since June. The rate was 0.18 at the start of the year. The average rate for borrowing and lending Treasuries for one day in the repurchase agreement market fell to 0.028 percent, the lowest since at least May 3, 2010, or as far back as index data is provided by the Depository Trust & Clearing Corp.

The Federal Deposit Insurance Corp. began last week to adjust calculations of U.S. banks’ deposit insurance fees to include all liabilities rather than just domestic deposits. The Treasury has reduced the amount of Supplementary Financing Program bills, or SFPs, it sells on behalf of the Federal Reserve by $195 billion to help avoid exceeding the U.S. debt limit.

“The new FDIC assessment structure, while intended to better protect taxpayers from large bank failures, has distorted activity in the short-term rates markets,” Brian Smedley, a strategist in New York at Bank of America Merrill Lynch, said in an interview. “This change will discourage opportunistic borrowing by insured banks in the fed funds and repo markets in particular, as banks will avoid leveraging their balance sheets unnecessarily to reduce the fees they pay the FDIC.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets gaining 5bp, and DeemedRetractibes losing 11bp. Volatility was minimal, volume was reasonable.

National Bank issues subject to the issuer bid feature in the volume highlights as the deadline approaches. The prices are now reasonable relative to the tender price, although note that this is the last day of cum-dividend trading. Tomorrow they are ex-Dividend and it will be the last day to trade for regular settlement that will settle on the tender date.

The predicted hike in the European policy rate is causing some angst:

Primed to raise its benchmark interest rate this week for the first time in almost three years, President Trichet’s European Central Bank again faces the conundrum that its monetary policy rarely suits all 17 members of the euro area, where the kaleidoscope of growth ranges from record expansion to recession paired with a sovereign-debt crisis.

The upshot may be that the normalization of rates from a record low of 1 percent will disproportionately hurt Spain, Greece, Portugal and Ireland, while failing to nip inflation threats in Germany. Such uneven fallout risks exacerbating the two-speed European recovery and dealing further damage to the bonds of so-called peripheral nations.

But the outlook for Treasuries continues to be bright (according to some):

Treasuries are signaling that the $9 trillion market will weather the end of the Federal Reserve’s quantitative easing program in June without suffering a selloff that drives long-term borrowing cost higher.

The class of investors that includes foreign central banks purchased 60 percent of the $66 billion in benchmark 10-year U.S. notes sold this year, up from 42 percent in 2010.
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Rising demand from international investors and financial institutions bodes well for bonds with the Fed’s plan to buy more than $600 billion of Treasuries more than 80 percent complete. U.S. fixed-income assets are retaining their appeal as the credit quality of European sovereign debt deteriorates and banks meet tighter risk standards governing the capital they need cushion against losses.

Algos gone wild? RBC bought 2100 shares of CIU.PR.C in 12 transactions starting at 25.05 at 12:04pm and finishing at 27.00 at 12:18. Too much time-span to be a retail market order … I wonder what happened there? The lucky seller was Byron Securities (who?), which sold 900 shares at an average price of 25.85.

Other than that, it was a relatively quiet day for the Canadian preferred share market, with PerpetualDiscounts down 1bp, FixedResets gaining 4bp and DeemedRetractibles up 5bp. Only three entries on the performance highlights table, and volume was nothing special.

There’s a new bid for the NYSE:

Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) made an unsolicited bid of about $11.3 billion for NYSE Euronext, trying to snatch the owner of the New York Stock Exchange away from Deutsche Boerse AG. (DB1)

Nasdaq OMX and ICE offered $42.50 in cash and stock for each NYSE Euronext share, according to a statement released today. The shares closed at $35.17 yesterday. Deutsche Boerse’s February all-stock agreement to purchase NYSE Euronext values the company at about $35.04 a share.

Ireland’s credit rating has been cut again:

Ireland’s credit rating was cut one level by Standard & Poor’s and put on watch for a possible downgrade by Fitch Ratings after the cost of rescuing Irish banks reached as much as 100 billion euros ($141.5 billion).

S&P today lowered the rating to BBB+ from A-, putting the country on the same level as Thailand and the Bahamas. The outlook is stable, S&P said in a statement. Fitch placed its long-term foreign and local-currency issuer default ratings of BBB+ on negative, “indicating a heightened probability of a downgrade in the near term,” it said in a statement.

But the interesting part is the wrangling over the banks’ senior debt:

Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.

“The government’s position is very clear: It doesn’t want to take action on senior bondholders for the four banks that are going forward,” said Matthew Elderfield, head of regulation at the central bank, said in an interview with Bloomberg Television. “It recognizes that, on balance, that if you want to have these viable banks able to return to the market that would hurt their capacity to do that.”
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During an election campaign last month, Eamon Gilmore, now deputy prime minister, dismissed ECB President Jean-Claude Trichet as a “civil servant” who would answer to politicians. As recently as March 28, Agriculture Minister Simon Coveney said the government planned to impose losses on senior bondholders in the banks to cut the costs of its bailout.
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The cost of insuring against losses on the senior debt of European banks fell to the lowest in more than five months today. The Markit iTraxx Financial Index, linked to the senior debt of 25 banks and insurers, dropped as much as 6 basis points to 137, the lowest since November 19, before paring the decline, according to JPMorgan Chase & Co. Credit-default swaps on Portugal, Ireland, Greece and Spain also declined.

California has problems of its own:

[California Governor Jerry ] Brown said yesterday he’s also putting together a plan to deal with the growing gap between assets and expected obligations of the California State Teachers’ Retirement System, the second-largest public pension in the U.S.

Calstrs’ so-called unfunded liability grew to $56 billion at the end of June, according to a report released yesterday. The 38 percent increase will require the state to boost its annual contribution by $140 million to $150 million, according to the pension fund. California paid $573 million toward teacher retirements last year.

Since 1999, teachers have been allowed to purchase up to five years of service credit to retire early and collect a full pension. Brown would repeal that benefit beginning in July.

DBRS has published a comment letter on the new ESMA guidelines:

The Consultation Paper seeks to clarify the endorsement regime and update the endorsement guidelines. ESMA currently interprets that “as stringent as” CRA requirements must be established by law or regulation in a third country by June 7, 2011 in order for the use of endorsement. It does not currently support the interpretation that a third country CRA would be permitted to follow “as stringent as” standards through its own policies and procedures. The Consultation Paper states that the CRA Regulation does not envisage a dual system of compliance or some combination of a third country legal/regulatory regime topped up by policies and procedures adopted by the third country CRA.

By way of background, endorsement allows the use in the EU of ratings issued outside the EU under certain conditions.
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DBRS does not support ESMA’s current interpretation that it cannot supervise EU-registered CRAs who use endorsement without an equivalent third country regulatory regime in place. The key test should be whether a third country CRA adheres to standards as stringent as those required by the CRA Regulation, whether or not a third country regime has been enacted into law.

Endorsement is important because, according to the consultation paper:

A credit rating that a registered CRA endorses in compliance with the conditions set out in article 4.3 “shall be considered to be a credit rating issued by a credit rating agency established in the Community and registered in accordance with this Regulation” (art. 4.4). These ratings can be therefore used for regulatory purposes and be distributed to the public by registered CRAs.

This endorsement process started in October, 2009. The Canadian Securities Administrators published proposed regulatory changes on March 18, due to pressure from the Europeans:

The CESR’s stance is that the “comply or explain” model is insufficient, and thus they indicated to the CSA that they would not provide an equivalency recommendation to the European Commission should the CSA proceed on that basis. As the CSA notes in the introduction to the revised proposal, it’s a threat worth paying attention to:

The failure to obtain an equivalency determination from the European Commission, and the consequent inability of a CRO that issues ratings out of Canada to rely on the endorsement or certification models in the EU Regulation, would have a negative impact on such CROs. The issuers that such CROs rate might also be negatively impacted to the extent those ratings are used for regulatory purposes in the European Union.

As a result, the CSA are now proposing that, in the absence of exemptive relief, DROs must establish codes of conduct which do not deviate from the provisions set out in the proposed Instrument. Those provisions have also been revised somewhat, to require that a DRO establish certain governance protections, such as a majority of independent directors, and a formal internal controls system.

Thus, we finally have a clear statement from the regulator that Credit Rating Agencies have the function of cheerleading for issuers. Yay.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 3bp, FixedResets up 9bp and DeemedRetractibles gaining 6bp. Volatility was muted, volume was fair.

Europe’s on credit watch:

Moody’s Investors Service said it can’t rule out further credit downgrades for euro-region nations because the agreement on a permanent bailout fund, the European Stability Mechanism, doesn’t go far enough.

European Union leaders met March 25 and set out new rules on bailout loans. Their failure so far to provide a permanent system whereby stronger nations support the finances of their weaker counterparts leaves bondholders at risk, Moody’s said.

“The absence of a fiscal-transfer mechanism and the conditions under which assistance will prospectively be made available leave downside risk to private creditors,” the rating agency said in an e-mailed report today. “Consequently, further rating downgrades cannot be ruled out.”

… so the ECB is suspending credit quality requirements:

The European Central Bank said it will accept all debt instruments backed by the Irish government as collateral against ECB loans as the country attempts to shore up its banking industry.

The Frankfurt-based ECB said Ireland’s commitment to recapitalize its banks and comply with a consolidation program prescribed by the European Union and International Monetary Fund must be assessed “positively.” The suspension of the minimum credit-rating threshold is based on “this positive assessment of the program,” a capital increase for Ireland’s four banks and the decision to “deleverage and downsize the banking sector,” the ECB said.
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It is not the first time the ECB has loosened its collateral rules to help a euro-area member state in distress. In May last year, the ECB announced it would accept all Greek government debt as collateral when lending to banks, suspending minimum credit-rating thresholds to support a 110 billion-euro bailout of the debt-strapped nation. Ireland was the second of the now 17 euro-area members to receive a bailout last year.

The ECB “deems debt instruments issued or guaranteed by the Irish government to fulfill the credit standards required for collateral in Eurosystem credit operations,” the bank said. “The relevant risk control measures will be reviewed on a continuous basis.”

It was a good day to end the month in the Canadian preferred share market, with PerpetualDiscounts gaining 10bp, FixedResets exactly flat and DeemedRetractibles winning 13bp. Volatility was muted, with only two entries on the Performance Highlights table. Volume was average.

Europeans seem to want to blame commodity price inflation on speculators – Hoenig blames the Fed:

The Federal Reserve’s “highly accommodative” monetary policy is partly to blame for rapidly increasing global commodity prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1 percent soon.

“Once again there are signs that the world is building new economic imbalances and inflationary impulses,” Hoenig, the central bank’s longest-serving policy maker and the lone dissenter at Fed meetings last year, said in the text of a speech today in London. “The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth.”

This was also discussed in the post QE2 and Inflation.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts getting whacked for 23bp, FixedResets down 2bp and DeemedRetractibles gaining 10bp. Not a lot of volatility, with only three entries in the Performance Highlights table. Volume was above average.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at this year’s standard conversion factor of 1.3x. Long Corporates now yied 5.5%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 170bp, a significant tightening from the 180bp reported on March 23.