Category: Market Action

Ireland looks like it’s heading for the debt trap:

Ireland will today try to sell as much as 1.5 billion euros ($1.96 billion) in bonds as the government tries to convince investors the country can avoid a European Union bailout.

One day after the premium on Irish 10-year debt over German equivalents rose to a record, the Dublin-based National Treasury Management Agency is offering between 1 billion euros and 1.5 billion euros of four- and eight-year bonds. The auction results will be announced after 10 a.m.

Investors’ concerns about the fiscal health of some euro nations are resurfacing four months after the EU announced an almost $1 trillion rescue package to stamp out contagion from Greece’s fiscal crisis. The spread on Irish debt over bunds yesterday exceeded 400 basis points as the government struggles to cap the cost of bailing out its banking system. In Portugal, the spread climbed as high as 399 basis points.

The Bank Act review cycle has started again:

The Honourable Jim Flaherty, Minister of Finance, today launched the scheduled review of legislation governing federally regulated financial institutions.

“The Government reviews the statutes that govern federally regulated financial institutions every five years to ensure Canada remains a global leader in financial services,” said Minister Flaherty. “This practice sets Canada apart from almost every other country in the world.”
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“Some fine-tuning to the system may be required, but wholesale change is not necessary,” he said. “The Government would like to hear the views of all Canadians on how to improve our financial system.”

My wish-list includes greater clarity on the status of Bankers’ Acceptances in bankruptcy (are they covered bonds? Can investors look through the bank guarantee to the actual issuer of the paper?) and a requirement that the seniority of instruments within the “general” bucket be specified … if I own a BDN, is that more or less senior than a BA?

The FOMC Statement was gloomy:

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

and accordingly:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

This had an effect:

Gold rose to a record, Treasury two-year yields slid to an all-time low while the dollar weakened as the Federal Reserve said it’s willing to ease monetary policy further if needed to boost the economy. Most U.S. stocks fell.

Gold futures surged as much as 0.9 percent to $1,292.40 an ounce as of 4 p.m. in New York as the dollar depreciated against 15 of 16 major counterparts. The 10-year Treasury yield lost 13 basis points to 2.58 percent and the 2-year yield slid to a record low of 0.4155 percent.

Quadravest, purveyor of SplitShare funds, has announced:

Dividend Select 15 Corp. (“The Company”) is pleased to announce the filing of a preliminary prospectus dated September 17, 2010 for a proposed new offering of equity shares at $10.00 per share.
The Company has been created to provide investors with an opportunity to invest in a portfolio (the “Portfolio”) of 15 high quality Canadian companies (the “Portfolio Companies”) whose shares provide an attractive dividend yield, and which have shown solid earnings growth and have a history of capital appreciation. The Company will employ a covered call writing strategy to generate additional income to the Portfolio. The 15 Portfolio Companies will be selected from among the following 20 companies listed on the Toronto Stock Exchange: [Usual suspects – JH]

Interestingly, the prospectus makes the flat statement:

The Company will not borrow money or use leverage as part of its investment strategies.

In accordance with the usual state of affairs, the prospectus fully discloses the investment managers’ experience, but is completely silent regarding the investment managers’ performance.

The Canadian preferred share market continued to move from strength to strength on heavy volume today, with PerpetualDiscounts up 27bp and FixedResets gaining 18bp.

Stub quotes will be butted out:

NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets sought permission from regulators yesterday to eliminate stub quotes, or bids and offers as low as pennies or as high as thousands of dollars provided by market makers that were blamed for worsening the May 6 crash.
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Stub quotes are placeholders provided by market makers at prices as low as 1 cent to satisfy a regulatory obligation to submit both bids and offers. Transactions aren’t meant to occur at those levels.

I don’t understand why stub quotes were ever allowed in the first place. As some HFT firms have pointed out:

In exchange for meeting stricter obligations, market makers are generally given advantages over other market participants, which act like subsidies,” RGM, Hudson River, Allston and Quantlab said in their letter. “These advantages have typically involved preferential access to the markets, lower fees and informational advantages. These advantages come at a substantial cost for all investors as they degrade competition and raise barriers to entry for new participants.”

Why market makers would be permitted to pay for these presumably valuable privileges with stub quotes is quite beyond me.

The pointless nature of financial journalism was well illustrated by two stories published back to back. The first was Fed Will Retain Policy on Assets, Low-Rate Pledge, Survey Shows:

The Federal Reserve next week is likely to affirm its pledge to keep interest rates low for an “extended period” and maintain the floor on its holdings of securities, say economists surveyed by Bloomberg News.

The Fed’s Open Market Committee at its Sept. 21 meeting will hold off from expanding the balance sheet by purchasing securities, according to 60 of 64 analysts surveyed Sept. 16-17. Fifty-four of 63 economists said the Fed will leave unchanged a sentence saying high unemployment and low inflation warrant “exceptionally low” rates for an “extended period.”

… and the second was Treasury Notes Gain on Bets Fed’s Statement Will Signal More Accommodation:

Treasury 10-year notes rose for the first time in four weeks as traders speculated the Federal Reserve will be more accommodative in its policy statement next week as the economic recovery showed signs of stalling.

A rally in two-year notes pushed yields down this week the most since May after the central bank bought shorter-maturity government debt and as investors bet that Japan’s purchases of securities will favor the front end of the U.S. yield curve after it sold the yen to weaken its currency. Notes climbed before the Sept. 21 Fed meeting as the annual rate of inflation excluding food and energy stayed at a 44-year low.

There’s a negative CDS basis in bank bonds:

Gaps between credit-default swaps and bonds have widened to 25 basis points from less than 2 basis points about three months ago, according to Citigroup Inc. Pimco, the manager of the world’s largest bond fund is finding as much as 1 percent of extra yield even after paying to insure bank debt, said Mark Kiesel, a managing director at the Newport Beach, California- based firm.

A rally that started in June may gain momentum as the divergence between swaps and yields gives investors extra incentive to own corporate debt. The increase in the so-called negative basis is attracting buyers that seek to profit by buying the debt while also purchasing credit swaps.
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The 100-basis-point gaps Pimco is identifying in bank bonds and 25 basis points in the broader market compare with the average difference of more than 250 basis points after the bankruptcy of Lehman Brothers Holdings Inc. two years ago, just before bonds posted a record rally. The all-time wide gaps emerged as credit markets seized up, causing bond spreads to soar while demand for swap protection failed to keep up.

“When capital is scarce, the basis becomes more negative,” said Alberto Gallo, a New York-based strategist at Goldman Sachs Group Inc. He said the basis should narrow as monetary policy and regulation reduce risk in the financial system and stabilize funding costs.

Negative-basis CDS spreads were discussed in Canadian Bond Liquidity Premia

I have sent the following communication to Canada Post and True North Public Affairs, where James Roche, Chairman of the Canada Post Foundation for Mental Health, has his day-job:

Sirs,

One of your clerks advised me that you were “collecting for mental health” today while I was purchasing stamps and requested a donation.

I strongly object to being importuned by beggars while going about my business and wish to advise you that I will have my first class mail serviced by your competitors in future.

I have often observed that precious little do-gooders tend to behave as thugs and therefore have a question: do you make it clear to your front-line staff that participation in this disgraceful exhibition of poor manners is entirely voluntary and there will be no repercussions on those who do not wish to humiliate themselves by begging? Or are they forced to participate as a condition of employment?

Sincerely,

Beggars! It’s enough to make a strong man go postal!

Hellzapoppin’ on the Canadian preferred share market today, with PerpetualDiscounts up 55bp and FixedResets gaining 12bp on heavy volume.

Ireland needs some green:

Treasuries rose while the cost to insure Irish government bonds jumped to a record amid concern that Europe’s debt crisis is worsening and American consumer confidence is slumping.
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The yield on the 10-year Irish bond surged 26 basis points to 6.29 percent in London. The spread with German bunds widened to as much as 389 basis points, or 3.89 percentage points, the most on record, according to Bloomberg generic data.
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Corporate creditworthiness in Europe is the best ever compared with governments, credit-default swap prices show, as companies cut debt while governments struggle with budget deficits.

The difference between the Markit iTraxx Europe Index of corporate credit-default swaps and the Markit iTraxx SovX Western Europe Index of contracts tied to government debt widened 1 basis point to a record 49, according to data from CMA and JPMorgan Chase & Co.

I don’t think there’s much need to worry. I think all those patriotic Americans who funded the IRA back in the eighties will be overjoyed to cut cheques to help out the old country.

Speaking of Europe, there’s a very good article on Greece, with the obligatory “It’s all Goldman Sachs’ fault” paragraph in the middle, by Michael Lewis, titled Beware of Greeks bearing bonds (hat tip: Financial Webring Forum).

A day of big volume on the Canadian preferred share market, with very strong returns: PerpetualDiscounts were up 45bp and FixedResets gained 12bp.

Nothing happened today.

Volume was very good on the Canadian preferred share market, while PerpetualDiscounts were up 9bp and FixedResets gained 10bp – although the vagaries of the index calculations meant that the reported yield for FixedResets crept up 2bp (returns are a mean; YTW is a median). MFC issues were, for a change, missing from both the performance and volume highlights.

OSFI has released its annual performance assessment:

A total of 49 one-on-one interviews were conducted among Chief Executive Officers (CEOs), Chief Financial Officers (CFOs), Chief Risk Officers (CROs), Chief Compliance Officers (CCOs), other senior executives, auditors and lawyers of deposit-taking institutions regulated by OSFI.

The regulated profess that the regulator is doing a great job!

Maple bonds issues are picking up:

Maple issuance may accelerate to C$6 billion ($5.8 billion) to C$8 billion next year, according to Greg McDonald, vice president and director of debt capital markets at Toronto- Dominion Bank’s TD Securities unit. The rest of this year may see an additional C$1 billion to C$1.5 billion in the Canadian dollar-denominated foreign debt, adding to the C$2.4 billion raised since January, he said.

Sales of Maple bonds, nicknamed after the leaf on the Canadian flag, surpassed the C$1.37 billion raised in all of 2009 in April, according to data compiled by Bloomberg. There haven’t been any Maple sales since July, when National Australia Bank Ltd. and Nederlandse Waterschapsbank NV raised C$600 million from two issues, as concern of a global economic slowdown drove investors to the refuge of government debt.

Would you like to diversify your fixed income portfolio with some Maples? Tough. The regulators say you’re too damn stupid for them to allow such a thing.

Subsidies to solar power lobbyists are continuing:

Prices for photovoltaic panels that convert sunlight into electricity may fall about 10 percent next year, less than analysts forecast, as European demand increases.

First-quarter prices will drop to an average of $1.65 a watt compared with $1.50 in the previous median estimate of five analysts surveyed by Bloomberg News. Analysts who contributed to the surveys included John Hardy at Gleacher & Co. in Connecticut and Sanjay Shrestha at Lazard Capital Markets. This year, contracts may average $1.80 to $1.85 a watt, they forecast.
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Developers have rushed to complete solar-energy projects ahead of planned declines in government incentives in Germany and Spain. At the same time, smaller markets expanded in France, the Czech Republic and the U.S. Increased orders will extend to 2011, when the analysts forecast sales to increase 20 percent.

Demand growth in Europe and North America will outpace higher production in Asia, Hardy and Shrestha said.

Evidence of currently reduced supply can be found in inventories and in some order terms.

Julie Williams, Chief Counsel for the OCC testifed on covered bonds:

Another important component of a statutory covered bond program is the types of assets eligible to collateralize the covered bonds. Typically, in Europe, covered bonds are associated with high quality assets comprised of residential or commercial mortgage loans and public-sector debt. While some have advocated a broad statutory spectrum of U.S. asset types, including credit card, student, small business, and auto loans, more recent proposals have tended to narrow the eligible asset classes.
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Various types of standards could be embodied in a covered bond regulatory framework. For example, all covered bonds, by asset class, should have minimum eligibility criteria setting asset quality standards to promote the inclusion of high quality assets in the cover pool. Most European jurisdictions prescribe asset quality criteria for the assets subject to the statutory covered bond program. Those standards in the U.S. could be set by statute or by the covered bond regulators through rulemaking. Given the likely detail involved, regulatory standards seem preferable.
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Covered bond legislation could authorize the covered bond regulators to establish minimum overcollateralization requirements for covered bonds backed by different eligible asset classes. As a related standard, legislation also could set forth a framework requiring each cover pool to satisfy an asset coverage test that assesses whether the minimum overcollateralization requirements are met, and obligates the issuer and an independent “Asset Monitor” to confirm on a periodic basis whether the asset coverage test is satisfied.
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Similar to the default situation approach, a statutory framework could create a
separate estate for the covered bond program similar to those in certain European jurisdictions. A recent legislative proposal creates a structure with the following general components when the FDIC is appointed as conservator or receiver for an insolvent issuer:

• Creation of a separate estate and provision to the FDIC of an exclusive right for 180 days to transfer the issuer’s covered bond program to another eligible issuer.
• A requirement that the FDIC as conservator or receiver, during the 180-day period, perform all monetary and nonmonetary obligations of the issuer until the FDIC completes the transfer of the covered bond program, the FDIC elects to repudiate its continuing obligations to perform, or the FDIC fails to cure a default (other than the issuer’s conservatorship or receivership).

US state pensions are in a bad way:

Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled for the Cities and Debt Briefing hosted by Bloomberg Link in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent.

Benefits paid by funds in at least 14 states equaled more than 10 percent of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pensions can earn their way back to financial health.

Expect to see more furious attacks on the reckless banks. Some misdirection is occurring already:

California sued Robert Rizzo, the ousted city manager of Bell who was paid almost $800,000 a year, and seven current and former officials, seeking the return of “excess salaries” and reductions in pension payouts.
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“We are filing our lawsuit on behalf of the public to recover the excess salaries that Bell officials awarded themselves and to ensure their future pensions are reduced to a reasonable amount,” state Attorney General Jerry Brown said in a statement.

But this is funny:

Fannie Mae agreed to finance loans to homebuyers putting as little as $1,000 down without getting the approval of the U.S. agency in charge of minimizing the costs of the mortgage company’s bailout.
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Fannie Mae is buying the Affordable Advantage loans from housing finance authorities in Massachusetts, Minnesota, Wisconsin and Idaho, Janis Smith, a spokeswoman, said today in a telephone interview. She declined to comment further.

The state housing authorities last year created the loan product aimed at first-time buyers, the New York Times reported Sept. 5. The mortgages come with 30-year fixed rates, require homeownership counseling, and are available to people with credit scores of at least 680 or 720, the paper said.

I love the bit about homeownership counselling. People only do naughty things because they don’t know better! That’s the only reason!

What makes this even funnier is some research from FRB-Richmond by Andra C. Ghent and Marianna Kudlyak, titled Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States with the abstract:

We analyze the impact of lender recourse on mortgage defaults theoretically and empirically across U.S. states. We study the effect of state laws regarding deficiency judgments in a model where lenders can use the threat of a deficiency judgment to deter default or to shorten the default process. Empirically, we find that recourse decreases the probability of default when there is a substantial likelihood that a borrower has negative home equity. We also find that, in states that allow deficiency judgments, defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu of foreclosure.

They classify Minnesota and Wisconsin, two of the states mentioned with respect to the $1,000-down programme, as being non-recourse!

Another day of good returns and good volume on the Canadian preferred share market, with PerpetualDiscounts gaining 21bp and FixedResets up 10bp. MFC issues continued to be prominently displayed in the volume and performance tables.

PerpetualDiscounts now yield 5.67%, equivalent to 7.94% interest at the standard equivalency actor of 1.4x. Long Corporates now yield 5.4%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 255bp, a sharp tightening from the 270bp reported on September 8.

The Treasury Market Practices Group has updated its Best Practices Guidelines. The TMPG is a relatively recent creation:

The TMPG was formed in February 2007 in order to encourage dialogue on market issues and to offer recommendations for best practices in the Treasury cash, repo, and related markets. This private-sector group is currently composed of representatives from dealers, buy-side firms, custodians, and other market participants. In light of its aforementioned expansion, the TMPG’s membership composition will likely evolve over time to ensure robust support of the group’s efforts across the Treasury, agency debt, and agency MBS markets.

Sure, a private-sector group. When push comes to shove, which dealer in Treasuries is going to piss off the New York Fed?

One of the “best practices” is highly peculiar and likely to be counter-productive:

Market participants should be responsible in quoting prices and should promote overall price transparency in the interdealer brokers’ market.

• Although legitimate price discovery activities are an integral part of the Treasury, agency debt, and agency MBS markets and should be encouraged, market participants should avoid pricing practices that do not have the objective of resulting in a transaction, or that otherwise result in market distortions.
• Price discovery relies on efficient price reporting and transparent markets. Market participants should not conduct trades through interdealer voice brokers with electronic trading screens without having a record of the transaction published on the screen at the time of the transaction. In addition, market participants should avoid conduct that deliberately seeks to evade regulatory reporting requirements or impedes market transparency efforts.

Ludicrous. Remember, kiddies, bond trading is a cooperative game. It’s not about winning, it’s about being good citizens.

Not sure what to make of this:

International Business Machines Corp. Chief Executive Officer Sam Palmisano, who will turn 60 next year, said the practice of the company’s CEOs retiring from the position at that age isn’t “cast in stone.”

Ain’t nuthin’ cast in stone. You can carve things in stone and you can cast them in iron, but I’ve never heard of casting stone.

Another good day on good volume for the Canadian preferred share market, with PerpetualDiscounts up 24bp and FixedResets gaining 9bp. The yield on latter index is inching slowly towards 3%…

MFC.PR.A continues to trade heavily, at about even yield with the recent bond issue.

Deutsche Bank’s not letting the grass grow under their feet:

Deutsche Bank AG, Germany’s largest bank, plans to raise at least 9.8 billion euros ($12.5 billion) in its biggest-ever share sale to take over Deutsche Postbank AG and meet stricter capital rules.
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Deutsche Bank fell 2.32 euros, or 4.6 percent, to 47.70 euros in Frankfurt trading on Sept. 10, giving the company a market value of 29.6 billion euros. Postbank jumped 1.23 euros, or 4.8 percent, to 27.04 euros, valuing the bank at 5.9 billion euros.

Ackermann, who previously said the bank would only raise capital for acquisitions, is trying to build up the bank’s so- called stable businesses of retail banking and asset management, and reduce reliance on investment banking, which accounted for 78 percent of pretax profit in the first half.
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Postbank’s Tier 1 capital ratio, a measure of financial strength, fell to 6.6 percent under the most severe scenario of the European Union stress tests conducted in July, compared with the 6 percent minimum required to pass. Deutsche Bank’s ratio, by contrast, stood at 9.7 percent under the toughest test.

There is continued feeling that High Frequency Traders aren’t quite our type of person, dear:

The U.S. Securities and Exchange Commission has spent 15 years remaking the stock market into 11 competing exchanges and hundreds of computer-driven traders. In the process it has virtually eliminated the traditional market makers who bought and sold stocks when no one else would.

Now the SEC is concerned the revolution has gone too far, leaving markets vulnerable when selling starts to snowball.
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Specialists at the NYSE maintained “fair and orderly” markets by stepping in themselves when buyers and sellers weren’t available. Similar to market makers on the Nasdaq, they took risks in return for the ability to see supply and demand for stocks and profit from the difference between the bid and offer prices. Both businesses suffered when exchanges started pricing stocks in penny increments in 2001, squeezing profit out of the bid-ask spread.

The SEC is in the “early stages of thinking about whether obligations on market makers akin to what used to exist might make sense,” Schapiro told reporters on Sept. 7. The issue is “whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times,” she said during a speech in New York the same day.
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“The playing field has leveled dramatically,” said Joe Ratterman, chief executive officer of exchange operator Bats, which accounts for 11 percent of U.S. stock trading. “It used to be easy for a specialist to work off a 6- or 12-cent spread, but when he had to offer a penny spread it became hard to make a fat living. A new breed of firms stepped in and learned to be efficient. Those firms replaced the ones that were less efficient.”
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The Brady Commission report on the October 1987 crash found NYSE specialists and Nasdaq market makers performed erratically and didn’t stem the downward slide of prices. Many Nasdaq market makers didn’t answer their phones, ignoring customers, while overwhelmed NYSE specialists who had bought as sell orders flooded in later gave up or halted trading, according to the January 1988 report by the Presidential Task Force on Market Mechanisms, led by former New Jersey Republican Senator Nicholas Brady.

The article highlighted Vanguard’s comment letter:

Vanguard and its investors have benefited fiom the competition that today’s market structure facilitates. Over the past fifteen years, the competition among trading venues and significant technologtcal advancements have greatly reduced transaction costs for all investors across our markets. Although Vanguard does not engage in “high frequency trading” and does not operate a “dark pool,” we believe much of the public concern over “high fiequency trading” is misplaced and believes such activity, appropriately examined, contributes to a more efficient market that benefits all investors.
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Various groups have attempted to quantify the reduction in transaction costs over the last ten to fifteen years. The Commission will continue to receive this data throughout the comment period. While the data universally demonstrate a significant reduction in transaction costs over the last ten to fifteen years, the precise percentages vary (estimates have ranged from a reduction of 35% to more than 60%). Vanguard estimates are in this range, and we conservatively estimate that transaction costs have declined 50 bps, or 100 bps round trip. This reduction in transaction costs provides a substantial benefit to investors in the form of higher net returns. For example, if an average actively managed equity mutual fund with a 100% turnover ratio would currently provide an annual return of 9%, the same fund would have returned 8% per year without the reduction in transaction costs over the past decade.
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Vanguard supports a trade-through rule that provides “depth-of-book protection because protecting quotations at multiple price levels encourages the display of limit orders, which, for the reasons set forth above, benefits all investor.

The recent IIROC report trumpeted Canadian-style depth-of-book protection.

Vanguard believes the Commission should consider the costs and benefits of a “trade-at” rule in which a trading center that was not displaying the NBBO price at the time a marketable order was received could either: “1) execute the order with significant price improvement (such as the minimum allowable quoting increment (generally one cent)); or 2) route lSOs to full displayed size of NBBO quotations and then execute the balance of the order at the NBBO price.”

Such a rule would clearly provide an incentive to display limit orders which, as discussed above, Vanguard believes is in the best interests of all investors.

Vanguard is missing the point. The purpose of public markets is to give the private school guys the opportunity to make a fat living with no brains and less work. What do customers have to do with it?

Another good move upwards on hefty volume in the Canadian preferred share market, with PerpetualDiscounts gaining 32bp and FixedResets up 4bp. MFC issues had a notable day, with three issues featured on the nice side of the performance table. MFC.PR.A had another day of high volume; I see on CBID that the recent MFC senior bond issue, 4.079% of 2015, are quoted to yield 4.12% … basically even-yield with the preferreds, so the 160-odd bp of tax effectiveness looks very nice for a five-year term.

The Market Update will be delayed. TMX DataLinx advises that the “Application is currently unavailable.”

While I have prices that are … pretty close … to the closing quotations, I would rather do a proper update when the exchange restarts its DataLinx product.

Update, 2010-9-11, 2am, and I hope you guys appreciate this: DataLinx came back up about an hour ago.

PerpetualDiscounts continued to charge ahead on the Canadian preferred share market, gaining 35bp total return, while FixedResets slipped down by 4bp. Volume was good.

Deutsche Bank is rumoured to be considering a big equity issue:

Deutsche Bank AG has approached investment banks to assess their interest in managing a stock sale to raise as much as 9 billion euros ($11.4 billion), said three people with knowledge of the discussions.
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Proposed rules under consideration by the Basel Committee on Banking Supervision may also lead banks to raise reserves. Germany’s 10 biggest lenders, including Deutsche Bank and Commerzbank AG, may need about 105 billion euros in fresh capital because of new regulation, the Association of German Banks estimated on Sept. 6.

The lenders would need to raise that sum to reach an estimated 10 percent Tier 1 capital ratio, a key measure of financial strength, according to Dirk Jaeger, who is responsible for regulatory topics at the group.

The Swiss are hoping to grab some of the UK hedge fund business:

Swiss managers rank third in Europe, with 4 percent of the market, behind London’s 75 percent share and Sweden with 5 percent. Brevan Howard Asset Management LLP, Europe’s biggest hedge fund, and third-ranked BlueCrest Capital Management Ltd. have both opened offices in Geneva this year.

“Heavy competition between cantons has helped to keep tax rates low,” making Switzerland more appealing, Regina Anhorn, one of the study’s authors, said in a presentation in Zurich. “We have seen famous names move part of their institution to Switzerland. We may see many more to come.”

There are signs that fees charged by Swiss hedge funds fell over the past two years, from a typical 2 percent management fee and a 20 percent share of performance, according to the study. A 1 percent management fee is “increasing in popularity” together with a performance fee of 10 percent, it said.

A laudatory article about CalPERS new boss highlights the gravity of the US pension committments:

In 2000, more than half of the 50 states had the funds to cover what they owed. By 2008, that number had shrunk to four — Florida, New York, Washington and Wisconsin — as total unfunded liabilities reached a record $1 trillion, according to a February 2010 report by the Pew Center on the States that uses the latest available data.
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[CalPERS] has earned an annualized 2.88 percent return on its assets through the 10 years ended on June 30, far below the 7.75 percent it must collect every year to meet its obligations to 1.6 million beneficiaries.

Calpers’s unfunded liabilities amounted to $240 billion as of 2008, leaving it with only half of the assets it needs to make its required payouts, according to a Stanford University study released in April.
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As a group, state retirement systems earned a median 3.4 percent annualized return for the 10 years ended on June 30, according to Wilshire Associates Inc., a Santa Monica, California-based investment consulting firm. That about matches the performance of U.S. Treasury bonds.
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Even if pensions do exploit the latest financial engineering and hit their 8 percent annualized return target, many will run out of money in the next 20 years, beginning with Illinois in 2018, says Joshua Rauh, an associate professor of finance at Northwestern University near Chicago. California would run dry in 2030, he says.

So who’s going to solve the problem?

Dear is an unlikely candidate to refashion Calpers’s investment approach. In contrast to past CIOs, he doesn’t have a Ph.D. in economics or experience in managing money on the Street. He’s a one-time labor official who came up through the hurly-burly of state politics in Washington.

Great move! Perhaps the Maple Leafs should start hiring non-hockey players, too!

Blair W. Keefe of Tory’s wrote a very good article titled Canada: Financial Institutions Experience Slower Activity In Capital Markets:

In April, Canadian banks provided a quantitative impact study to OSFI on the implications of the proposed changes for individual institutions. And OSFI submitted data from the study to the Basel Committee in mid-May. Although the submission is confidential, we understand that the Basel III capital rules would have a significant negative impact on the existing capital ratios of the Canadian banks; the data will be analyzed, together with the results from other jurisdictions, and the preliminary findings will be presented to the Basel Committee in July.
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However, no new offerings of innovative Tier 1 capital will be made because such instruments will not be permitted under the Basel III capital rules.9 It is uncertain how long the existing innovative Tier 1 instruments will be grandfathered when the new rules come into force. This is significant, since Canadian financial institutions currently have over C$20 billion in innovative Tier 1 instruments outstanding and they were products favoured by institutional investors.

Finally, with the uncertainty over the ultimate definition of capital and the quantity of capital that will be required, OSFI has been advising institutions that any material redemption of capital instruments should be funded with new capital issuances. In that regard, the aggregate amount of innovative Tier 1 capital that is scheduled to be redeemed on June 30 or December 31 of this year is C$2.1 billion.

It was a very good day with high volume on the Canadian preferred share market, with PerpetualDiscounts gaining 56bp and FixedResets winning 13bp. MFC issues were again prominent in the volume highlights.

Nothing happened today.

It was a strong day on the Canadian preferred share market AGAIN, on good volume AGAIN, with MFC issues featured on the volume table AGAIN. This is getting a little dull. PerpetualDiscounts were up 28bp, while FixedResets gained 8bp, taking the median weighted average yield on the latter class down to 3.06% … creeping slowly towards the magic 3% mark.

PerpetualDiscounts now yield 5.75%, equivalent to 8.05% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.35%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at 270bp, a significant tightening from the 280bp reported on September 1, as PerpetualDiscount yields and long corporate yields made small moves in opposite directions.