Category: Market Action

Regulators have discovered there’s one teeny-tiny problem with quality: it costs money:

A push to water down stringent standards proposed last year by the Basel Committee on Banking Supervision, and to allow more time to implement them, is led by France and Germany, according to bankers, regulators and lobbyists involved in the talks. Representatives from the U.S. and the U.K., who have sought to rein in risk-taking, are willing to compromise on how capital is defined to reach an agreement at a committee meeting that begins tomorrow, the people said.

Another concession may involve granting transition periods of up to 10 years to ease concerns of some member countries that their banks and economies won’t be able to bear the burden of tougher capital requirements until a recovery takes hold. As a result, the amount of capital European banks will be forced to raise in the next two years won’t be as much as investors fear.
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One part of the definition would exclude minority interests that banks hold in other financial institutions when calculating common equity on the theory that they can’t readily withdraw the capital. Many European lenders, which have lobbied against the rule, have non-controlling stakes in emerging-market banks that would no longer count as the highest level of capital, while the assets of the subsidiaries would have to be included in the banks’ risks.
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European banks are likely to win a concession on the minority-stakes rule, according to the people involved in the talks. One possible compromise would allow a bank to count part of its stake in relation to the risk the capital is supposed to cover at the entity in which it invested, the people say.
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A study released in June by the Institute of International Finance, which represents more than 375 financial companies, said the regulations could erase 3.1 percent of gross domestic product in the U.S., the euro region and Japan by 2015. About 9.7 million fewer jobs could be created over the five-year period than would otherwise be the case, the IIF said.

Regulation is “never free,” said Bank of New York Mellon Corp. Chief Executive Officer Robert Kelly, who visited London and Brussels in June to meet lawmakers and regulators with the Financial Services Roundtable, a Washington-based industry group. “There has to be some impact on growth and jobs.”

The Basel committee, whose members have touted the benefits of financial stability, is preparing its own economic impact study with the help of the Bank for International Settlements in Basel and the International Monetary Fund.
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Banks currently need to hold capital equal to a minimum of 8 percent of risk-weighted assets. Half of that must be Tier 1 and half of the Tier 1 needs to be common stock. The Basel committee might triple the common ratio requirement and double Tier 1, [Paul Miller, an analyst for FBR Capital Markets] estimates.
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BNY Mellon’s Kelly said the original Basel proposals would have forced some banks’ return on equity, a measure of profitability, to mid-single digits.

“If that was true, then they effectively become government utilities, because you couldn’t really raise capital in the private markets after that,” he said.

The IIF report is titled Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes in the Banking Regulatory Framework and is available via a lengthy press release.

I will be most interested to see the promised regulatory response to that and will review the papers on PrefBlog when available … but I am ecstatic that this is being discussed. In Canada we – or OSFI and the politicians, anyway – are always touting the benefits of a very highly capitalized banking system, but never discuss the cost; and there is a cost. That’s a lot of capital tied up that could be invested in other things. I’m not saying I advocate lower capitalization … what I am advocating is an honest debate.

The Canadian experience is interesting … with banks, we obsess about stability and never discuss cost, whereas with electricity we obsess about cost and never discuss stability.

A good day on low volume for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp and FixedResets up 15bp.

Naturally, the poster child for the financial crisis is the American homeowner, flim-flammed into buying a house and now being foreclosed. But see Subprime mortgages: Myths and reality for one take on this … and now it’s hitting the papers:

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

One of the big problems with the US system is that, typically, mortgages are extended without recourse. Instead of layering on extra rules, as I reported Fannie Mae did on June 23, simply charge a premium for non-recourse mortgages. Piece of cake, and one big source of problems eliminated.

Low volume today, but prices did OK, with PerpetualDiscounts up 7bp and FixedResets up 5bp.

There’s some criticism of the European stress tests:

Regulators have told lenders the tests may assume a loss of about 17 percent on Greek government debt, 3 percent on Spanish bonds and none on German debt, said two people briefed on the talks who declined to be identified because the details are private.

“This isn’t a stress test,” said Jaap Meijer, a London- based analyst at Evolution Securities Ltd. It’s “merely the current valuation of government bonds.”

Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by CEBS. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or restructuring.

“I wonder how much these stress tests are reverse- engineered to inspire confidence in the market” and banks, said Bruce Packard, an analyst at Seymour Pierce Ltd. in London.

Reverse engineering? Surely not! That’s done by evil bonus-seeking bankers underwriting sub-prime, not by Holy Regulators!

American banks are hoping to generate investor opposition to fair value accounting:

The American Bankers Association opposes the Financial Accounting Standards Board’s plan to apply fair-value rules to all financial instruments, including loans, rather than just to securities. The group says the rule could make strong banks appear undercapitalized.

The association’s website, noting that FASB’s stated mission is to serve investors, provides a sample letter for people writing to the board and suggests they focus on why the proposal isn’t “useful for investors.”

The ABA has devoted a whole page to the campaign.

State Street reached for yield – and suffered:

State Street Corp., the third-largest U.S. custody bank, reported second-quarter earnings that missed analysts’ estimates because of a $251 million after-tax charge related to its securities lending business.
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State Street recorded the charge, which reduced earnings by 50 cents a share, to replenish funds that managed money on behalf of securities lenders. The funds invest cash deposited as collateral by securities borrowers. The injection allows State Street to lift redemption restrictions placed on clients in the fall of 2008 after the funds suffered losses.

Pensions & Investments has some interesting background:

It could be argued that the U.S. pension fund sector had historically engaged proportionately more in leveraged finance — by lending securities to raise cash collateral that can be reinvested for returns — than securities lending over recent years and that pension funds only very recently adopted a profile more in line with the U.S. mutual fund sector. That profile has maturity and liquidity more in line with the underlying loan transaction, that is, short term.

The mean return of the total return to lendable securities in a portfolio generated by the U.S. pension fund sector is almost double than that of the U.S. mutual fund sector over the three-year period under consideration. What should really worry the pension fund sector now is that the difference is at its historic low. The pension fund sector has reined in reinvestment guidelines and reduced its return expectations to reduce risk.

AIG writ small!

It was a good day in the Canadian preferred share market, with PerpetualDiscounts up 16bp and FixedResets gaining 3bp. Volume was moderate.

There’s some doubt about the EU stress tests:

Investors say they don’t know if some banks are hiding bad loans, whether they have enough capital to withstand a debt default by a European state and whether governments can afford to rescue them. The European Union still hasn’t disclosed the tests’ criteria, including if they contain a sovereign default.
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Protecting the senior bonds of 11 U.S. banks from default using credit default swaps costs an average of about 144 basis points, according to data compiled by CMA DataVision. In Europe, the average cost has climbed to about 224 basis points this year, the data show.
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Europe’s largest banks are trading at a discount to their book value while their U.S. counterparts trade at a premium. Europe’s 20 largest lenders are trading at about 10 percent less than the net value of their assets. The 20 biggest U.S. banks trade at a 10 percent premium, Bloomberg data show.
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Some European lenders used accounting-rule changes made in October 2008, about a month after Lehman Brothers Holdings Inc.’s collapse, to allow them to avoid writedowns on assets based on plunging market values, unless a default was deemed likely. Under pressure from EU leaders, the International Accounting Standards Board approved changes letting financial institutions in more than 100 countries that use International Financial Reporting Standards to reclassify some investments so they no longer had to book paper gains and losses as credit markets fluctuated.

Deutsche Bank, for example, used the change to shift about 38 billion euros of assets, including commercial real estate and leveraged finance, into its loan book from the third quarter of 2008 to the first quarter of 2009, saving it a net 3.2 billion euros in markdowns based on valuation gains and losses through the first quarter of 2010. ING Groep NV, the biggest Dutch financial-services company, reclassified 24.4 billion euros and Societe Generale SA shifted 25.3 billion euros in assets, escaping about 2.8 billion euros in losses.

Perhaps in response (yes, OSFI, sometimes regulators respond to investor outcry! How ’bout dat?), C-EBS has released some details:

The macro-economic scenarios include a set of key macro-economic variables (e.g. the evolution of GDP, of unemployment and of the consumer price index), differentiated for EU Member States, the rest of the EEA countries and the US. The exercise also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premia linked to a deterioration in the EU government bond markets.

On aggregate, the adverse scenario assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon. The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010.

Mr Joseph S Tracy, Executive Vice President of the Federal Reserve Bank of New York, spoke at the Westchester County Bankers Association, Tarrytown, New York, 25 June 2010, drawing parallels between the Credit Crunch and the Panic of 1907.

There’s an interesting trend in bond underwriting:

Borrowers are obtaining credit from banks competing for a pool of bond deals that dropped to $1.18 trillion in the first half from $1.92 trillion a year earlier as Europe’s sovereign debt crisis pared sales, according to data compiled by Bloomberg. The number of banks on each high-yield deal has almost tripled since 2000, cutting fees by an average of 57 percent per firm.

“We’ve been very clear with our banking business partners that we’ll take care of those who are good to us,” said Martin of London-based Virgin, which enlisted a record 14 banks to sell debt in January. “If you want to be in the bond, we need you to give us your balance sheet as well.”

Martin included Credit Suisse, Citigroup, Barclays Capital and HSBC Holdings Plc in Virgin Media’s bond offering, along with 10 other managers, after they agreed to join a 1.925 billion-pound ($2.9 billion) credit facility. The four banks, whose spokesmen declined to comment, ultimately weren’t needed on the loan.

There’s a big TIPS sale tomorrow and speculation there will be a big concession:

Barclays Plc’s Michael Pond, the top-rated analyst of Treasury Inflation Protected Securities, said the U.S. may struggle to sell a record-tying $12 billon of the securities tomorrow with the government likely to bolster the size of future auctions and inflation expectations low.

“We are concerned that the market will have difficulty absorbing this much supply given other headwinds and believe a significant concession is needed for the auction to go well,” Pond said in a note to clients dated July 2. “The level of real yields combined with the size presents a high hurdle for a good auction.”
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The $12 billion of 10-year TIPS will match the record amount sold in January 2004. The U.S. will sell $30 billion of the security during the second half of 2010, based on the size of tomorrow’s auction and the Treasury’s plans to reopen the issue twice, Pond wrote. That amount is up from $15 billion worth of sales during the second half of last year and the historical high of $21 billion during the first half of 2004, he wrote.

Real yields, which take into account inflation or deflation, have fallen to 1.218 percent on 10-year Treasuries, from 1.685 percent April 2, according to Bloomberg Data. Current real yield levels, only 30 basis points away from the 91 basis point yield experienced in March of 2008 during the deflation scare, leaves the security with “limited upside,” Pond wrote. “At current levels, this would be the lowest yield at a 10-year TIPS auction.

I was briefly quoted in the Globe, deprecating GICs:

So why would anyone choose a government bond?

“The main thing is liquidity,” says James Hymas, president of Hymas Investment Management in Toronto.

With most GICs (cashable GICs being the major exception), you agree to lock in your money for a certain period. In exchange, you earn a higher return. Bonds can be sold at any time, but you earn a lower return.

“I don’t really recommend GICs at the best of times because of the liquidity issue,” he says.

The semi-annual TXPR index rebalancing should be announced soon – last year’s announcement was on Friday, July 10.

PerpetualDiscounts were flat on the day, while FixedResets rose by 15bp on average volume.

PerpetualDiscounts now show a median-weighted-average yield of 5.99%, equivalent to 8.39% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.50%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 290bp, unchanged from June 30.

There’s some interesting speculation about credit spreads:

Executives who run big companies and big funds expect to be dealing with sovereign debt problems for years to come.

That’s one of the big conclusions from a survey of executives commissioned by Royal Bank of Canada’s capital markets unit.

Some of the most striking findings were a high degree of concern that a Group of Twenty country would default in the coming three years (Italy was voted most likely), skepticism that the euro-zone would survive that period intact, and a belief that high quality corporate bonds might be safer than some government bonds.

A full 40 per cent of respondents said that they expected yields on the highest level of corporate debt to drop below yields on sovereign debt of the countries where they are based, according to the poll of about 440 executives around the world.

Geez … you mean we have to re-write the textbooks again? We haven’t even finished rewriting the sections on monetary policy!

A good day in the Canadian preferred share market, with PerpetualDiscounts up 32bp and FixedResets gaining 7bp, with good volume.

Lobbying against end-user margin requirements for OTC derivatives (mentioned on June 30) appears to have had some effect, according to Jim Hamilton’s World of Securities Regulation in a discussion of a letter from senators Dodd & Lincoln:

The Dodd-Frank Wall Street Reform and Consumer Protection Act does not authorize regulators to impose margin on end users that use derivatives to hedge or mitigate commercial risk, said Senator Chris Dodd and Senator Blanche Lincoln, who have instructed the SEC and CFTC not to make hedging so costly that it becomes prohibitively expensive for end users to manage their risks. In a letter to the Chairs of the House Financial Services and Agriculture Committees, the senators emphasized that Congress does not intend to regulate end users as major swap participants or swap dealers just because they use swaps to hedge or manage the commercial risks associated with their business. Just as Congress has heard the end user community, they said, regulators must carefully consider the impact of regulation and capital and margin on end users.

We’ll see how this works out, but the camel’s got his nose in the tent!

There’s an entertaining scuffle between Themis Trading:

A gift received by a sixth rate player. Now, we didn’t expect to be showered with gifts from the LSE but a simple “thank you” would have been nice. After all, a paper written by “two or three guys” managed to accomplish something that an organization headed by commercial director, Natan Tiefenbrun, couldn’t do by themselves.

So this brings us to the rubbish which was written by that previously mentioned commercial director. If you care to read his piece, here it is: http://tradeturquoise.blogspot.com/

It seems like Natan is tired because he read a piece written by Kate Welling about Themis Trading ([link]). If reading 16 pages gets him tired, maybe he should get some Red Bull. Much of Natan’s rant against Themis Trading sounds like a defense of HFT. Maybe that’s because he also has a very conflicted ownership structure with brokers owning almost half of his MTF.

Natan’s piece is titled Luddites Unite:

One again these self-proclaimed defenders of “fair markets” make dozens of claims about how exchanges, brokers and high-frequency traders are conniving to screw both retail and institutional investors. Here are some of my favourite excerpts:…

By me, the fundamental difference is one of philosophy, explained by Themis principal Sal Arnuk early on in the article that started the spat (which is copy protected, so no quotes for you!). He’s worried about what happened in the Flash Crash to those who panicked and those who had stop-loss orders in place. I suggest that the fact that these people lost money is a good thing. The less stupid money there is in the market, the better.

Much of the hand-wringing regarding securitization revolves around adverse selection – the idea that originators will securitize their worst loans. Credit Sights is alleging an interesting twist on that story:

Spanish savings banks may be hiding losses on home loans by taking non-performing mortgages out of securitized transactions, according to CreditSights Inc.

By carrying the bad loans on their own books the so-called cajas sidestep downgrades to their mortgage-backed securities, the independent bond research firm said in a report.
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CreditSights follows a sample of 143 Spanish residential mortgage-backed securities collateralized by 136 billion euros ($170 billion) of loans, with about 45 percent originated by cajas. While the savings banks give little information about the state of their loan books, investor reports on the performance of the securitized debt suggest asset quality is weaker than at commercial lenders, CreditSights said.

“Caja-originated mortgages are performing much worse than those extended by Spain’s commercial banks,” analysts David Watts, John Raymond and Hana Galetova wrote. By buying mortgages out of the pools “they could have been artificially reducing the level of bad loans in RMBS while simultaneously undermining the quality of the cajas’ own assets,” they wrote.

Over a million people attended the Pride Parade in a stunning rebuke to nasty backstairs whisperers and grandstanding politicians (presumably under the influence of foreign governments). Left to itself, the City of Toronto can’t run a souvlaki cart; I suggest that in future it recognizes its total incompetence and stops interfering with the internal decisions of groups who actually bring money into the city.

Yet another power outage today … and the clowndorks are discussing who should march in somebody else’s parade.

It was a strong day in the Canadian preferred share market, with PerpetualDiscounts gaining 25bp and FixedResets up 23bp, on light volume.

The US jobs number was poor:

Employment at companies rose 83,000, less than the 110,000 gain forecast by economists in a Bloomberg News survey. Including government, payrolls fell for the first time this year because of a drop in federal census workers. The jobless rate dropped to 9.5 percent from 9.7 percent as the labor force shrank, the Labor Department reported today in Washington.

OSFI has published a presentation by Michel Montambeault, Director, to the Canada Institute of Actuaries (CIA) Annual Meeting, on the topic of “Canadian Mortality Experience”, 29 June 2010, Vancouver, British Columbia. In related news, a cluster of longevity genes has been identified:

U.S. scientists say they have discovered the genetic signature of an exceptionally long life, and with nothing more than a DNA sample they can predict – with 77 per cent accuracy – those biologically built to live beyond a century.

They also predict that such a test, based on a set of 150 genetic markers, will be available to the curious by summer’s end.

“It’s really quite revolutionary,” said Thomas Perls, associate professor of medicine at Boston University and senior author of a research paper published online Thursday by the journal Science. “With the accuracy we’ve demonstrated, companies are going to pick this up. We’ll see it on the market in a month.”

Adverse selection just became a bigger risk for the insurance companies!

I sent an eMail to the Toronto Stock Exchange:

On June 30, MFC.PR.B traded 5,792 shares on the TSX in a range of 19.63-80 and closed at 19.01-66, 10×12. The last trade was at 3:58pm, 300 shares at 19.66.

I have a number of questions:
i) Who is the market maker for this issue?
ii) Which firm employs the market maker?
iii) What committments were made regarding spreads by the market maker?
iv) How have these committments been kept over the past year?
v) How have other committments made by this market maker been kept over the past year?
vi) How have other committments made by the market maker’s firm been kept over the past year?

We’ll see what happens with that! (Fearless prediction: Nothing).

On an extremely quiet day in the Canadian preferred share market, PerpetualDiscounts lost 4bp while FixedResets gained 14bp.

Corporations are well placed to weather the next crisis:

Companies from the U.S. to Europe and Asia are selling the fewest bonds since 2004, as rising cash levels allow borrowers to weather a slowing economy.

Debt offerings fell to $1.17 trillion in the first half of the year, 39 percent less than the same period in 2009, according to data compiled by Bloomberg. The decline was led by financial companies, which issued 35 percent less debt.

Issuance is declining as borrowers with 15 percent more cash than a year earlier avoid tapping credit markets amid concern that Europe’s sovereign-debt crisis may slow the global economic recovery. Corporate bonds have returned 4.9 percent in the first half of the year, beating the MSCI World Index of stocks, which is down 8.9 percent, by the most in nine years.
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Cash at investment-grade companies rose to $668 billion at the end of the first quarter from $580 billion a year earlier, while debt fell 2 percent to $2.3 trillion, JPMorgan Chase & Co. analysts led by Eric Beinstein in New York wrote last week.

In the midst of the sovereign debt crisis, the EU is taking firm action:

Bankers in Europe will not be allowed to take home more than a third of their bonuses in cash from the start of next year under planned new rules, a British lawmaker said Tuesday.
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Under the negotiated agreement, cash could only constitute 30 percent of a regular bonus and one-fifth a large bonus. A new watchdog for European banks will define what constitutes a large bonus. There will also be an opportunity for a “clawback” of bonuses if deals made to reach profit targets later fell apart.

In addition, banks that have received government bailouts will have to limit bonuses paid to their managers, while directors will not be eligible to receive any bonus unless it is justified to supervisors. Banks must also set limits on bonuses in relation to salaries to avoid any windfall payouts.

What will happen, I think, is that talent will migrate to hedge funds, which will take over a significant part of the market-making function. Maybe this is a good thing. But I doubt that anybody’s thought about it.

Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European Central Bank, spoke at the US Financial Services Roundtable, Brussels, 28 June 2010, stringing together non-sequiters to reach a politically desirable conclusion (emphasis added):

The first priority relates to the development of financial infrastructures in those markets where they are not yet sufficiently used or available, notably in OTC derivatives markets. The crisis has shown that markets with adequate infrastructures and hence proper risk management and risk provisions have proven to be more resilient than markets without such infrastructures, such as the OTC derivatives markets. Therefore, expanding the use of central counterparties (CCPs) in these increasingly systemically relevant markets is a key measure to reduce counterparty and operational risk. Another important step is the mandatory reporting of all trades to centralised trade registries, so-called trade repositories, in order to enhance market transparency. In my view, if CCPs and trade repositories for credit default swaps had been available before the Lehman default, Lehman’s CDS exposures could have been managed in a much more transparent and resilient way and could have mitigated the negative chain reaction on CDS markets that followed the demise of Lehman.

CCPs and trade repositories for OTC derivatives are ultimately beneficial for all stakeholders. Still, there are the well-known challenges of effective collective action in the context of the provision of public goods. Hence, private sector efforts alone may not suffice to foster sufficient progress towards the use of CCPs and trade repositories for OTC derivatives. It is therefore important to adopt and implement the regulatory requirements for the mandatory central clearing of all eligible products and the reporting of trades to trade repositories in a timely manner. Given, however, the global nature of OTC derivatives markets, it is clear that such regulatory tools will only be successful if they are applied in a coordinated manner around the globe. I strongly support the recently launched work of the Financial Stability Board to develop common approaches to fostering the central clearing of eligible OTC derivatives as well as to expand the range of potentially clearable products through enhanced standardisation.

Quite frankly, I don’t understand her use of the word “therefore”!

The OSC has published a new edition of Perspectives. Articles feature:

• CSA publishes proposed amendments to mutual fund regulations
• CSA publishes frequently asked questions about order protection and locked and crossed markets
• OSC updates registrant section of its website

There’s some more reaction to mandatory margining proposals, this time from ISDA:

A change in the wording of the financial reform bill now being finalized in the US Congress could cost US companies as much as $1 trillion in capital and liquidity requirements, according to research by the International Swaps and Derivatives Association, Inc. (ISDA). About $400 billion would be needed as collateral that corporations could be required to post with their dealer counterparties to cover the current exposure of their OTC derivatives transactions. ISDA estimates that $370 billion represents the additional credit capacity that companies could need to maintain to cover potential future exposure of those transactions. If markets return to levels prevailing at the end of 2008, additional collateral needs would bring the total to $1 trillion.

That will be a nice little profit centre for the banks – setting up credit lines dedicated to collateralization! Now, is this a good thing, or a bad thing? Nobody knows. It hasn’t been discussed.

Naturally, some companies will be affected more than others:

Berkshire [Hathaway Inc.] owns derivatives with a notional value of about $62 billion and has “negligible” collateral requirements, Barclays analyst Jay Gelb said today in a report. [Warren] Buffett’s firm, based in Omaha, Nebraska, may need to post $6 billion to $8 billion in collateral under rules being debated by the U.S. Congress, he said.

The SEC has announced new rules to discourage political corruption in the investment advisory business. Sadly, there are no rules disallowing the hiring of former SEC employees.

CM has issued CHF 500-million in 5-year covered bonds at 1.75%. Bonds OnLine is reporting 5-year Swiss governments at a rather alarming -0.26% (that’s right, negative twenty-six beeps); the only data I can find for 5-years on the Swiss National Bank site is dated May 31. DBRS rates them AAA:

The ratings are based on several factors. First, the Covered Bonds are senior unsecured direct obligations of CIBC, which is the fifth largest bank in Canada and rated AA and R-1 (high) with a Stable trend by DBRS. Second, in addition to a general recourse to CIBC’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien prime residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC) (the Cover Pool). CMHC is an agent of Her Majesty in right of Canada and is rated AAA by DBRS.

MFC.PR.B traded 5,792 shares on the TSX today in a range of 19.63-80 and closed at 19.01-66, 10×12. The last trade was at 3:58pm, 300 shares at 19.66. I can only suppose the market maker decided to get an early start on his weekend.

Much the same thing happened with GWO.PR.J: traded 3,400 shares in a range of 26.62-85 before closing at 25.92-62, 20×7.

BAM.PR.G traded 145 shares, all at 21.40, and closed at 20.91-40, 15×10. I can only imagine that the market maker was overwhelmed by the volume.

These are particularly annoying incidents, because it’s not just month-end, it’s quarter-end.

PerpetualDiscounts squeaked out a win today, gaining 4bp, while FixedResets gained 7bp on light volume and, as we have seen, a surprising and probably spurious amount of volatility.

PerpetualDiscounts now yield 5.97%, equivalent to 8.36% interest at the standard conversion factor of 1.4x. Long corporates now yield an astonishing (to me) 5.45%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at about 290bp, the same level reported on June 23, but a narrowing of 25bp from the 315bp spread reported on May 31.

And that’s a wrap for June, 2010!

The Bank for International Settlements released its annual report with chapters on:

• Beyond the rescue: exiting intensive care and finishing the reforms
• From the emergency room to intensive care: the year in retrospect
• Low interest rates: do the risks outweigh the rewards?
• Post-crisis policy challenges in emerging market economies
• Fiscal sustainability in the industrial countries: risks and challenges
• The future of the financial sector
• Macroprudential policy and addressing procyclicality
• The BIS: mission, activities, governance and financial results

Naturally enough, the sections that dealt with regulation are in complete alignment with the G-20 communique. What a coincidence that is!

There’s a hiccup on the way to the US Bank Bill:

U.S. Representative Barney Frank may reconvene the House-Senate financial-overhaul conference today to address Republican protests over a $19 billion bank fee in the bill, according to a scheduling announcement sent to lawmakers.
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One plan under consideration would instead cover the shortfall in the bill with an increase in the fund that the Federal Deposit Insurance Corp. maintains to repay customers their deposits when a bank fails. Another would save money by closing the Troubled Asset Relief Program two months early, according to the announcement.

Changing the bank fee could end an impasse that threatened to delay the final Senate vote on the bill after the death of Senator Robert Byrd, a West Virginia Democrat. Byrd’s absence left Democrats in need of all four Republicans who previously backed the measure. One of those Republicans, Senator Scott Brown of Massachusetts, withdrew his support earlier today, citing the fee.

PrefBlog has added to its list of interesting things to do while drunk:

Mr Perkins, who worked for City brokers PVM Oil, had gone on a golfing weekend organised by the company.

Then he took the Monday off work and continued to binge drink from midday onwards.

By the evening, Mr Perkins had made his first batch of unauthorised trades.
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In his stupor, he casually notched up thousands of trades worth a total of $520million (£345million).

He drunkenly bought a net 7.13million barrels of oil during the typically quiet overnight period, and at times was personally responsible for 69 per cent of the overall volume of Brent crude being traded globally.

His actions sent prices surging by more than $1.50 to $73.50 for a barrel of Brent crude oil – the highest it had been for eight months.

The deals ended up costing his company £6million and potentially cost companies worldwide more than £100million.

Westcoast did a 10-year bond issue:

Westcoast Energy Inc. raised C$250 million from an issue of 10-year bonds maturing July 2020, pricing the offering at 138.5 basis points over the relevant benchmark for a yield of 4.571%, according to a person familiar with the matter.

The bonds carry a coupon of 4.57%.

Westcoast is owned by Spectra Energy Corp. (SE).

There’s an odd lawsuit against the Greater Toronto Hockey League claiming not that try-outs were rigged, or anything like that, but that everybody should get a chance to play (70-odd players tried out for 17 positions):

“Their direct actions have caused irreparable psychological damage to Daniel Longo’s self esteem as an impressionable teenager and demoralized Daniel as an athlete and team hockey player with his peers,” the Longo statement of claim reads. “The conduct by all defendants destroyed the dignity of my son, whom in good conscience gave his team nothing but his best efforts.”

Valela’s statement of claim states: “When Christopher was advised of his termination by my wife and I, he vowed never to play the game he loved since childhood. And, morevoer, his misguided group of defendants demoralized my wife and I, whom had gone well beyond the call of duty as parents in support of the Toronto Avalanche hockey team for two seasons.”

I know a teenager who quit an activity after finding out he wasn’t good enough. Has it always been this way, or is all the fashionable self-esteem crap raising a nation of quitters?

Tragedy struck the Canadian preferred share market today, as PerpetualDiscounts suffered their first loss since May 20. The PerpetualDiscount index gained on twenty-six consecutive trading days, for a total return of +7.43% as median weighted average yield declined from 6.39% to 6.01%. Over the same period, FixedResets had a total return of +1.68%.

I had been hoping to close the quarter with a full month’s run of gains … but you can’t win them all!

PerpetualDiscounts lost 4bp while FixedResets gained 11bp today. Volume picked up to above-average levels, perhaps related to portfolio shuffling with respect to PWF.PR.P and TRP.PR.C, which both closed today.

The Federal Reserve Bank of Boston has released a Public Policy Brief by Jeffrey C. Fuhrer and Giovanni P. Olivei titled The Role of Expectations and Output in the Inflation Process: An Empirical Assessment:

This brief examines two issues of current interest concerning inflation: (1) whether “well-anchored” expectations will help to restrain inflation’s decline and whether an “un-anchoring” of expectations could lead to undesirably high inflation and (2) to what extent output (or utilization) gaps are useful components of empirical models of inflation and, if they are useful, to what extent current gaps might counterbalance the effect of expectations on inflation. The goals of conducting this examination are to articulate a reasonably coherent framework for the discussion, highlight the key areas of uncertainty, and provide new empirical evidence that sheds some light on these areas.

Nothing much happened in the credit markets, so I’ll discuss Toronto politics. Why not?

I am pleased to see that Queers Against Israeli Apartheid is being readmitted to the Pride Parade:

Pride Toronto has announced that its recent resolution to restrict the use of certain language during the 2010 Parade has been replaced by the requirement that each participating group read, sign and agree to abide by the City of Toronto’s Declaration of a Non-Discrimination Policy, and that all groups that uphold this policy are welcome to participate in the 2010 Pride Parade.

The requirement to “read, sign and agree to abide by the City of Toronto’s Declaration of a Non-Discrimination Policy” is more than just a little bit precious, but if Pride wants to jump through those hoops, that’s their business. To me, it just shows there’s not much point in getting involved with any sponsored civic activity.

Two mayoral hopefuls seem to think this is an issue in which the city should be involved:

“I want to express my disappointment and disgust with Pride Toronto’s decision to allow this hateful group to march,” said mayoral hopeful Rob Ford.

Giorgio Mammoliti, who is also running for mayor, will introduce a motion at council demanding that Pride return all city funding, about $250,000.

Pride’s done a lot more to bring money into the city than either of those two clowns ever have! I think they should concentrate a little more on how to get a souvlaki cart licensed in less than three years.

PerpetualDiscounts gained 14bp today to keep the streak alive – two more days and they will have gone the entire month of June without a loss. FixedResets were flat; volume was moderate; volatility was almost non-existent.