PrefBlog

There’s an interesting piece on Bloomberg about a guy who exploits death-spiral financing:

What Sason discovered is a way to get shares in desperate and broke companies at big discounts by lending them money. Magna has done deals with at least 80 companies. Of those, the stocks of 71 have gone down since the investment. He can still turn a profit, because the terms of the deals allow him to turn debt into equity at a fixed discount. No matter where the stock is trading, he gets it for less.

Magna functions as a pawnshop for penny stocks—shares of obscure ventures that change hands far from the rules of the New York Stock Exchange. His customers have included a would-be Chilean copper miner, an inventor of thought-controlled phones, and at least two executives later busted for fraud. They come to Sason to trade a lot of their stock for a little bit of money. Often they’re aware the deal is likely to be bad for their shareholders.

If the share price goes lower before Magna can unload its investment, the companies have to give up even more stock, all but eliminating the risk for Sason. Critics call it “death-spiral financing” because it drives stocks into the ground. Others in the field say they sometimes make double, triple, or even 10 times their investment in just a few months.

The business is legal, but the loopholes in securities law it exploits are too sketchy for most of the Ivy League types at banks and hedge funds. At least six other lenders of last resort to penny-stock companies have been sued by the Securities and Exchange Commission for breaking the rules around dumping shares or other violations. One was arrested by the FBI. It’s worked out better for Sason, who hasn’t had any issues with the authorities. He’s using death-spiral profits to diversify Magna and turn himself into an entertainment mogul.

Kevin Carmichael of the Centre for International Governance Innovation (last mentioned on PrefBlog on December 30, 2014) writes a piece in the Globe titled The most alarming thing about Canada’s housing market is routinely ignored:

So Royal Bank of Canada chief executive David McKay thinks Canada’s housing market is just fine. That’s reassuring, to a point. It would be more so if Canada had a public authority in place to verify Mr. McKay’s confidence. The fact there is no such entity undermines Ottawa’s belief that it has something to teach the world about financial regulation.
…
But the bigger moral hazard is Canada’s housing policy. Most Canadian mortgages are insured, and that insurance is backed by the federal government. There is little reason for a banker to worry much about warning lights in a system like that. In fact, it is a selling point. “What we keep trying to educate is our first loss is covered by government guaranteed insurance,” Mr. McKay said.

In other words, if you are thinking about buying RBC stock, no need to assume the bank would suffer big losses in the event of a housing crash: it will be taxpayers who take the hit. Mr. McKay and the leaders of Canada’s other big banks can make bets on the positive indicators – and play down the bad stuff – because they have relatively little to lose. They have every incentive to go all in on housing – and they have. The chartered banks are holding almost $1-trillion in outstanding residential credit, according to Bank of Canada data.

So there are two problems with this. First, there is no ‘moral hazard associated with CMHC insurance. Moral hazard is the assumption that you’ll be rescued if things go wrong. With CMHC insurance this opprobrious term does not apply because it’s not an assumption. It’s a business transaction. The banks – or their clients – have paid for insurance and are entitled to the benefits of that insurance. Now, one may argue that the insurance is priced too low, or shouldn’t be made so freely available, or anything else you please, but to claim that this is an example of “moral hazard” is to misuse the term.

But the big problem is Mr. Carmichael’s belief that we need a fresh new batch of expensive regulators to tell us when houses are expensive.

There is no single entity that is in charge of deflating the asset-price bubbles that turn into busts if left unchecked. The Bank of Canada has no regulatory power. It could adjust interest rates, but that is a blunt response to a potential bubble in housing, farmland or some other asset. The priority of the Office of the Superintendent of Financial Institutions is making sure none of the big banks fail, not keeping an eye for other weak spots in the broader financial system. That job technically falls to the Finance Department, which, until Canada starts appointing technocrats to run its ministries, will inevitably be controlled by a politician. And a politician always will have an incentive to avoid unpopular decisions such as making it more difficult to buy a home.

The big assumption here is that wise bureaucrats can identify asset bubbles better than anybody else, since mystic infallibility is a perquisite of government employees. This assumption has been discussed in the States, where (in contrast to Canada) public discussion of actual issues by those who might be expected to have some kind of clue is encouraged … for instance, by Ben Bernanke in 2002, when he was a mere Fed governor and not the chair:

My talk today will address a contentious issue, summarized by the following pair of questions: Can the Federal Reserve (or any central bank) reliably identify “bubbles” in the prices of some classes of assets, such as equities and real estate? And, if it can, what if anything should it do about them?
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As I will argue today, I think for the Fed to be an “arbiter of security speculation or values” is neither desirable nor feasible.1 Of course, to do its job the Fed must monitor financial markets intensively and continuously. The financial markets are vital components of the economic machinery. Moreover, asset prices contain an enormous amount of useful and timely information about developments in the broader economy, information that should certainly be taken into account in the setting of monetary policy. For example, to the extent that a stock-market boom causes, or simply forecasts, sharply higher spending on consumer goods and new capital, it may indicate incipient inflationary pressures. Policy tightening might therefore be called for–but to contain the incipient inflation not to arrest the stock-market boom per se.2

The second part of my prescription is for the Fed to use its regulatory, supervisory, and lender-of-last-resort powers to protect and defend the financial system. In particular, alone and in concert with other agencies, the Fed should ensure that financial institutions and markets are well prepared for the contingency of a large shock to asset prices. The Fed and other regulators should insist that banks be well capitalized and well diversified and that they stress-test their portfolios against a wide range of scenarios. The Fed can also contribute to reducing the probability of boom-and-bust cycles occurring in the first place, by supporting such objectives as more-transparent accounting and disclosure practices and working to improve the financial literacy and competence of investors.3 Finally, if a sudden correction in asset prices does occur, the Fed’s first responsibility is to do its part to ensure the integrity of the financial infrastructure–in particular, the payments system and the systems for settling trades of securities and other financial instruments. If necessary, the Fed should provide ample liquidity until the immediate crisis has passed. The Fed’s response to the 1987 stock market break is a good example of what I have in mind.4
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If we could accurately and painlessly rid asset markets of bubbles, of course we would want to do so. But as a practical matter, this is easier said than done, particularly if we intend to use monetary policy as the instrument, for two main reasons. First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them.

Wise words indeed! We cannot identify asset bubbles with any more reliability than we can indulge in any other form of market timing, but what we can do is perform stress tests and explore what-if scenarios to examine risks to the financial system.

Next up is Fed Governor Frederic S. Mishkin in a 2008 speech titled How Should We Respond to Asset Price Bubbles?:

At some point, however, the bubble bursts. The collapse in asset prices then leads to a reversal of the feedback loop in which loans go sour, lenders cut back on credit supply, the demand for the assets declines further, and prices drop even more. The resulting loan losses and declines in asset prices erode the balance sheets at financial institutions, further diminishing credit and investment across a broad range of assets. The decline in lending depresses business and household spending, which weakens economic activity and increases macroeconomic risk in credit markets.5 In the extreme, the interaction between asset prices and the health of financial institutions following the collapse of an asset price bubble can endanger the operation of the financial system as a whole.6

To be clear, not all asset price bubbles create these risks to the financial system. For example, the bubble in technology stocks in the late 1990s was not fueled by a feedback loop between bank lending and rising equity values; indeed, the bursting of the tech-stock bubble was not accompanied by a marked deterioration in bank balance sheets. But potential for some asset price bubbles to create larger difficulties for the financial system than others implies that our regulatory framework should be designed to address the potential challenges to the financial system created by these bubbles.
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More generally, our approach to regulation should favor policies that will help prevent future feedback loops between asset price bubbles and credit supply. A few broad principles are helpful in thinking about what such policies should look like. First, regulations should be designed with an eye toward fixing market failures. Second, regulations should be designed so as not to exacerbate the interaction between asset price bubbles and credit provision. For example, research has shown that the rise in asset values that accompanies a boom results in higher capital buffers at financial institutions, supporting further lending in the context of an unchanging benchmark for capital adequacy; in the bust, the value of this capital can drop precipitously, possibly even necessitating a cut in lending.15 It is important for research to continue to analyze the role of bank capital requirements in promoting financial stability, including whether capital requirements should be adjusted over the business cycle or whether other changes in our regulatory structure are necessary to ensure macroeconomic efficiency.16 Finally, in general, regulatory policies are appropriately focused on the soundness of individual institutions. However, during certain periods, risks across institutions become highly correlated, and we need to consider whether such policies might need to take account of these higher-stress environments in assessing the resilience of both individual institutions and the financial system as a whole in the face of potential external shocks.

Again, this is good stuff essentially reiterating the thrust of the Bernanke speech with the benefit of some experience and supporting my contentions.

Under Yellen, however, we seem to be moving at least somewhat in the other direction:

The Federal Reserve has created a committee led by Vice Chairman Stanley Fischer to monitor financial stability, reinforcing its efforts to avoid the emergence of asset-price bubbles.

Joining Fischer on the Committee on Financial Stability are Governors Daniel Tarullo and Lael Brainard, according to the central bank’s latest Board Committee list.

Fed officials want to ensure that six years of near-zero interest rates don’t lead to a repeat of the excessive risk-taking that fanned the U.S. housing boom and subsequent financial crisis.

“They’re putting the varsity team on it, but whether or not they’re going to be able to call bubbles better than anyone else is really is an open question,” Drew Matus, deputy U.S. chief economist at UBS Securities LLC in New York, said in an interview yesterday.

As I have said before, I don’t think any bureaucrat has the ability to determine whether or not housing prices are too high or too low and should not have the ability to target them. To consider the question to bark up the wrong tree. The critical question is (in the context of Mr. Carmichael’s article) ‘what might happen if housing prices give up all their real (inflation adjusted) gains from the past ten years in the next year or two?’ What’s that risk and are the probable consequences of such a bust sufficiently horrific that Something Must Be Done?

I have proposed in the past and will continue to propose that banks’ asset mix be an important input into countercyclical capital requirements. For instance, Canadian banks now have about 40% of their assets in mortgages compared to a long term average of 30%. While I have no idea what the “proper” proportion might be (maybe 60% is the magic number!) I do know that this represents a change and that change may be good and may be bad but is always risky. So, I say, it should be OSFI who, in such a situation, tells the banks … ‘OK. For the first 30% of your assets that are mortgages, capital requirements are the same as they always have been. But on the next 5% of mortgage assets, capital requirements are surcharged by 50%. On any amount over 35%, surcharged 100%’. Such a regime allows the banks to conduct business according to profitability, while making ‘excess’ business a little less profitable because it needs more capital.

And, of course, the big villain here is not the inability of the federal government to appoint a House Price Approval Commission, but their fuelling of the fire with massively expanded CMHC guarantees. And, I will note, I discussed on December 27, 2012 the response of David Dodge (the last independent Bank of Canada governor) to the reckless expansion of the CMHC, as quoted by the Globe and Mail in a piece titled Ottawa’s $800-billion housing problem:

It was a sweltering afternoon in July, 2006, and David Dodge was meeting with executives at Canada Mortgage and Housing Corp. in Ottawa, in search of the answer to a pressing question: Why were they lowering their standards in such a reckless fashion?
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Now CMHC was abandoning its old ways. It was starting to allow more exotic kinds of mortgages, similar to what lenders were offering in the United States – 35-year loans, and loans on which the buyers had to pay only the interest at first, giving them low monthly payments at first but saddling them with more debt down the road.

To Mr. Dodge, these were irresponsible moves that would encourage some people to borrow too much or jump into the market before they were ready, creating new risks for the economy. “This is a mistake,” he told CMHC brass bluntly.

Lower mortgage standards were going to cause already-frothy house prices to inflate even more – an “excessive exuberance,” the governor called it – as buyers rushed in, borrowing greater amounts of money and purchasing bigger homes than they could otherwise afford.

“This is absolutely not the appropriate thing to do,” a frustrated Mr. Dodge told the meeting.

Yep, Mr. Dodge knew his business all right. Last of a dying breed.

However … say what you like about financial industry regulation, there’s no denying it’s an effective form of foreign aid:

It’s noon inside the offices of ForexChile in Santiago, and dozens of salespeople are working the phones, talking up investments linked to everything from Facebook stock to copper futures. They hold out tantalizing prospects to those on the other end of the line: potential returns of 20 percent, 30 percent, even 40 percent.

Familiar, yes — and illegal if this were the U.S. Because what these people are selling are neither stocks nor bonds nor futures nor funds. They are offering contracts for difference, financial derivatives that are off-limits to retail investors in the U.S. and highly regulated elsewhere.

The scene unfolds daily inside one of the most fashionable business addresses in Chile, where the contracts are perfectly legal and trading in them has exploded. BEFX, another brokerage that sells them, estimates that as much as $14 billion in leveraged trades are made every month. That’s about six times the turnover in the nation’s stocks.

It was a violently mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 41bp, FixedResets up 21bp and DeemedRetractibles gaining 7bp. The Performance Highlights table is dominated by winning FixedResets. Volume was only average – somewhat surprisingly, since I would have expected four new issue settlements in four days to have caused a lot of churn. Well – we’ll see what tomorrow will bring, with the settlement of the new Royal Bank FixedReset, 3.60%+262.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.12 to be $1.12 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.98 cheap at its bid price of 24.80.

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.05 to be $0.44 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.90 to be $0.51 cheap.

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.30 to be $0.65 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.90 and appears to be $0.46 rich.

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.60, looks $1.49 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.72 and is $1.03 rich.

The cancellation of the previously announced deflationary environment had an immediate effect on the implied three month bill rate, with investment-grade pairs predicting an average over the next five years of between 0.00% and 0.10%

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.1487 %	2,382.2
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.1487 %	4,165.2
Floater	3.18 %	3.19 %	70,741	19.28	3	-0.1487 %	2,532.5
OpRet	4.07 %	1.29 %	103,877	0.27	1	-0.0794 %	2,762.6
SplitShare	4.47 %	4.43 %	54,218	4.44	5	-0.0637 %	3,209.4
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0794 %	2,526.1
Perpetual-Premium	5.30 %	1.48 %	57,411	0.08	25	-0.1049 %	2,517.9
Perpetual-Discount	5.02 %	4.99 %	154,888	15.44	9	-0.4078 %	2,784.4
FixedReset	4.40 %	3.61 %	242,117	16.54	84	0.2058 %	2,427.9
Deemed-Retractible	4.91 %	0.79 %	108,651	0.13	37	0.0748 %	2,654.6
FloatingReset	2.54 %	2.97 %	83,226	6.32	8	-0.0962 %	2,333.9

Performance Highlights
Issue	Index	Change	Notes
FTS.PR.J	Perpetual-Premium	-1.61 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 24.08 Evaluated at bid price : 24.50 Bid-YTW : 4.86 %
BAM.PR.N	Perpetual-Discount	-1.36 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 22.00 Evaluated at bid price : 22.44 Bid-YTW : 5.28 %
BAM.PF.C	Perpetual-Discount	-1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 22.50 Evaluated at bid price : 22.90 Bid-YTW : 5.29 %
BAM.PF.D	Perpetual-Discount	-1.19 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 22.95 Evaluated at bid price : 23.25 Bid-YTW : 5.27 %
MFC.PR.B	Deemed-Retractible	-1.07 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.02 Bid-YTW : 5.18 %
MFC.PR.M	FixedReset	1.02 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.73 Bid-YTW : 3.74 %
SLF.PR.I	FixedReset	1.04 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2016-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.34 Bid-YTW : 3.35 %
BAM.PF.G	FixedReset	1.05 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 23.17 Evaluated at bid price : 25.07 Bid-YTW : 3.82 %
SLF.PR.H	FixedReset	1.12 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.60 Bid-YTW : 4.43 %
TRP.PR.C	FixedReset	1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 17.26 Evaluated at bid price : 17.26 Bid-YTW : 3.74 %
IAG.PR.G	FixedReset	1.35 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.25 Bid-YTW : 1.97 %
TRP.PR.B	FixedReset	1.40 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 15.21 Evaluated at bid price : 15.21 Bid-YTW : 3.65 %
ENB.PR.Y	FixedReset	1.42 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 20.04 Evaluated at bid price : 20.04 Bid-YTW : 4.36 %
CIU.PR.C	FixedReset	2.80 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 16.90 Evaluated at bid price : 16.90 Bid-YTW : 3.53 %

Volume Highlights
Issue	Index	Shares Traded	Notes
HSE.PR.E	FixedReset	609,364	New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 23.14 Evaluated at bid price : 24.95 Bid-YTW : 4.42 %
BIP.PR.A	FixedReset	388,980	New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 22.97 Evaluated at bid price : 24.51 Bid-YTW : 4.51 %
CM.PR.Q	FixedReset	236,325	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 23.05 Evaluated at bid price : 24.75 Bid-YTW : 3.62 %
TRP.PR.G	FixedReset	111,431	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 23.05 Evaluated at bid price : 24.80 Bid-YTW : 3.79 %
TD.PF.D	FixedReset	57,850	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 23.12 Evaluated at bid price : 24.95 Bid-YTW : 3.58 %
GWO.PR.R	Deemed-Retractible	51,273	RBC crossed 33,200 at 25.30. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.30 Bid-YTW : 4.64 %
There were 31 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
GWO.PR.G	Deemed-Retractible	Quote: 25.35 – 25.88 Spot Rate : 0.5300 Average : 0.3230 YTW SCENARIO Maturity Type : Call Maturity Date : 2015-04-11 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : -14.63 %
FTS.PR.J	Perpetual-Premium	Quote: 24.50 – 25.09 Spot Rate : 0.5900 Average : 0.3994 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 24.08 Evaluated at bid price : 24.50 Bid-YTW : 4.86 %
MFC.PR.B	Deemed-Retractible	Quote: 24.02 – 24.50 Spot Rate : 0.4800 Average : 0.3052 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.02 Bid-YTW : 5.18 %
MFC.PR.H	FixedReset	Quote: 25.90 – 26.25 Spot Rate : 0.3500 Average : 0.2422 YTW SCENARIO Maturity Type : Call Maturity Date : 2017-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.90 Bid-YTW : 2.72 %
FTS.PR.G	FixedReset	Quote: 23.80 – 24.14 Spot Rate : 0.3400 Average : 0.2379 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 22.82 Evaluated at bid price : 23.80 Bid-YTW : 3.29 %
BAM.PF.F	FixedReset	Quote: 25.11 – 25.42 Spot Rate : 0.3100 Average : 0.2080 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-12 Maturity Price : 23.23 Evaluated at bid price : 25.11 Bid-YTW : 3.80 %

Matthew Katke has pleaded guilty to being a bond trader:

A former Nomura Holdings Inc. and Royal Bank of Scotland Group Plc trader pleaded guilty in a securities-fraud case and agreed to cooperate with U.S. prosecutors.

Matthew Katke pleaded guilty Wednesday to conspiracy to commit securities fraud for participating in a multimillion-dollar scheme to cheat customers who bought and sold bonds, U.S. Attorney Deirdre Daly in Connecticut said in a statement. A lawyer for Katke, Richard Albert, declined to comment on the plea.
…
As part of the scheme, Katke and his co-conspirators made misrepresentations to induce buying customers to pay inflated prices and sellers who were customers to accept deflated prices for bonds, prosecutors said.

It’s basically similar to the Litvak case, last discussed on PrefBlog on March 7, 2014, which is currently being appealed:

But the government failed to prove that Litvak acted with the fraudulent intent necessary for a securities fraud conviction, his attorneys told the Second Circuit Wednesday, adding that the court failed to instruct the jury that they couldn’t convict him without that element.

“The government prosecuted Mr. Litvak for conduct that was not a crime,” attorneys for Litvak wrote in the brief. “The district court’s deficient jury instructions, and its exclusion of evidence central to Mr. Litvak’s defenses of immateriality and good faith, exacerbated the flaws inherent in the government’s theory of the case and enabled the jury to reach a verdict that does not comply with the law.”
…
But Litvak’s attorneys countered Wednesday that under the government’s theory, “garden-variety statements” made in the course of any negotiation could be used to support felony charges.

“Every car salesman who tells a customer that he cannot lower his price any further because he would earn only a miniscule profit on the sale as it is would be guilty of fraud,” they said in the brief.

Although Litvak was sentenced in July, the Second Circuit in October granted his bail request while he awaits the outcome of his appeal, saying there’s a substantial chance Litvak’s conviction will be overturned.

But the war on markets is being led by weenies who’ve never traded a bond:

Investigators have been finding signs that dealers are lying to clients and striking improper deals such as parking debt, Michael Osnato, head of the complex financial instruments group in the Securities and Exchange Commission’s enforcement division, said in an interview earlier this year. He called bad behavior in the market “more pervasive than we would like.”

So we must all be regulators (until the objective of making everything exchange-traded has been reached):

Regulators have been trying to change behavior on Wall Street after the worst financial crisis since the Great Depression, extracting tens of billions of dollars in settlements for probes ranging from sales of mortgage bonds to the setting of benchmark interest rates.

Banks placed at least eight traders on leave last year amid investigations of activities after the financial crisis in the markets for bonds backed by loans and leases, where trades aren’t executed on exchanges and prices generally aren’t disclosed publicly, people with knowledge of the decisions said at the time.

“People in the industry are scared of making a mistake or even asking a question,” said Andrew J. Frisch, a lawyer who’s represented people against whom enforcement actions have been brought. The heightened scrutiny and sense that it can lead to arbitrary regulatory actions is putting traders on a “knife’s edge,” he said.

The government’s case against former Jefferies Group LLC trader Jesse Litvak raised the specter that certain types of alleged dishonesty can be treated as criminal even though they’re regarded as commonplace by traders and investors. The Litvak case is one model for future potential action by investigators, people with knowledge of the matter said in November.
…
The agency is using technology to further its policing of markets, combing repositories of data such as Finra’s Trace system to look for red flags instead of waiting for complaints, he said. Employers as well as individuals may be held accountable, he said.

And adult behaviour will no longer be required:

Canter testified for the prosecution saying the spreadsheet showed that Litvak had misled him about how much Jefferies had paid for bonds, including one instance when Canter agreed to raise a bid, yet the firm still paid the original price.

Canter, then AllianceBernstein’s portfolio manager responsible for its public-private investment fund, said Litvak apologized after being confronted following a long weekend. Litvak said it was a “hard year” and that “guys were doing whatever they needed” to make money, according to Canter. Canter said he was “very angry” and yelled at Litvak.

Canter told the jury that he put Jefferies in “the penalty box” after confronting Litvak in November 2011, stopped doing business with the firm for about a month and hadn’t done much with Jefferies since.

Because regulation is wonderful:

David Sutton is looking for the worst possible news about Uber Technologies. An accident in San Francisco, an assault in Boston: Such bad tidings for Uber are ammunition for Sutton, a 48-year-old publicist. “Uber is a creep magnet,” Sutton says in a news release sent to U.S. local and national media outlets in February.

Sutton is a hired gun in the dirty war that’s broken out between old-line taxi companies and Uber, the ride-share phenom. His client, a powerful trade association, represents 1,000 taxi and limousine firms worldwide. These firms want to kill the young juggernaut—or at least buy themselves enough time to develop rival car-hailing apps.
…
Behind the scenes, one of the world’s largest private transportation companies—a firm few people have probably ever heard of—is exerting pressure through operators like Sutton. The company, Transdev, is Uber’s single biggest competitor. It has 10,000 vehicles in more than 100 cities worldwide, including Denver, London, and Paris, as well as shuttle services to 50 airports in North America. Transdev is co-owned by two French companies—Veolia Environnement, a public utility company, and Caisse des Dépôts et Consignations, a state-owned bank. And it’s lobbying hard to contain the disruption to the $11 billion global taxi market.
…
Joseph says Transdev subsidiaries have prompted investigations into Uber by sending letters to regulators in core markets like Colorado, Maryland, and Pennsylvania. Transdev was also among the companies that took the battle to a commercial court in Paris, which last year resulted in a 100,000-euro ($107,000) fine for Uber’s UberPop ride-sharing service, Europe’s equivalent of UberX.

On another note, there is push to make American universities more expensive members of the Junior Justice League:

Three U.S. senators introduced a new bill on Wednesday, March 11, that would require all colleges receiving federal funding to appoint an independent advocate to help sexual assault victims.

The revamped Survivor Outreach and Support on Campus Act, also known as the S.O.S. Campus Act, is sponsored by Democratic Senators Barbara Boxer of California, Kirsten Gillibrand of New York, and Tim Kaine of Virginia. It hits the Senate floor weeks after a dozen senators introduced a bipartisan sexual assault bill that would steepen penalties for colleges that fail to report attacks.

If passed, the legislation would require colleges receiving federal funding to appoint a confidential, independent advocate to guide students who’ve reported being sexually assaulted through the disciplinary process. The advocate would help students access medical care and forensic exams, if necessary; make sure students are aware of their options for reporting sexual assault to law enforcement; and help students get counseling and crisis intervention services. They would not require students to report the sexual assault to police or to university officials.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 7bp, FixedResets up 8bp and DeemedRetractibles off 10bp. Despite this apparent calm, the Performance Highlights table shows a lot of churn, dominated by winning FixedResets. Volume was above average.

PerpetualDiscounts now yield 5.01%, equivalent to 6.51% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.8%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 270bp, a narrowing from the 280bp reported March 4.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.12 to be $1.15 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.16 cheap at its bid price of 24.71.

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.05 to be $0.47 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.89 to be $0.42 cheap.

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.21 to be $0.61 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.80 and appears to be $0.42 rich.

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.60, looks $1.51 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $1.01 rich.

The cancellation of the previously announced deflationary environment had an immediate effect on the implied three month bill rate, with investment-grade pairs predicting an average over the next five years of a whopping 0.10%

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	2.6243 %	2,385.8
FixedFloater	0.00 %	0.00 %	0	0.00	0	2.6243 %	4,171.4
Floater	3.18 %	3.16 %	71,256	19.35	3	2.6243 %	2,536.2
OpRet	4.07 %	0.99 %	105,146	0.27	1	0.0000 %	2,764.8
SplitShare	4.47 %	4.42 %	54,365	4.45	5	0.1556 %	3,211.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,528.1
Perpetual-Premium	5.29 %	0.35 %	56,366	0.08	25	0.0250 %	2,520.6
Perpetual-Discount	5.00 %	5.01 %	157,285	15.40	9	0.0714 %	2,795.8
FixedReset	4.40 %	3.62 %	236,637	16.69	82	0.0751 %	2,422.9
Deemed-Retractible	4.91 %	-0.50 %	106,129	0.14	37	-0.0970 %	2,652.6
FloatingReset	2.53 %	2.97 %	84,528	6.32	8	0.2679 %	2,336.1

Performance Highlights
Issue	Index	Change	Notes
TRP.PR.C	FixedReset	-3.56 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 17.05 Evaluated at bid price : 17.05 Bid-YTW : 3.78 %
BAM.PR.R	FixedReset	-1.56 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 21.21 Evaluated at bid price : 21.21 Bid-YTW : 3.96 %
IAG.PR.A	Deemed-Retractible	-1.43 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.15 Bid-YTW : 5.03 %
CIU.PR.C	FixedReset	-1.26 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 16.44 Evaluated at bid price : 16.44 Bid-YTW : 3.63 %
BMO.PR.R	FloatingReset	1.01 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 2.83 %
BAM.PR.B	Floater	1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 15.85 Evaluated at bid price : 15.85 Bid-YTW : 3.14 %
BAM.PF.F	FixedReset	1.12 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 23.24 Evaluated at bid price : 25.12 Bid-YTW : 3.80 %
MFC.PR.M	FixedReset	1.16 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.48 Bid-YTW : 3.86 %
BAM.PR.C	Floater	1.35 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 15.73 Evaluated at bid price : 15.73 Bid-YTW : 3.16 %
FTS.PR.H	FixedReset	1.47 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 16.60 Evaluated at bid price : 16.60 Bid-YTW : 3.61 %
IFC.PR.A	FixedReset	1.86 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.39 Bid-YTW : 5.14 %
TRP.PR.A	FixedReset	2.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 20.17 Evaluated at bid price : 20.17 Bid-YTW : 3.66 %
BAM.PR.K	Floater	5.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 15.49 Evaluated at bid price : 15.49 Bid-YTW : 3.21 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.Q	FixedReset	898,300	New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 23.07 Evaluated at bid price : 24.80 Bid-YTW : 3.60 %
TD.PF.D	FixedReset	212,820	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 23.12 Evaluated at bid price : 24.94 Bid-YTW : 3.58 %
TD.PF.B	FixedReset	45,881	Nesbitt crossed 40,000 at 24.60. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 23.07 Evaluated at bid price : 24.60 Bid-YTW : 3.29 %
ENB.PF.A	FixedReset	31,759	Desjardins bought 15,800 from Nesbitt at 22.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 21.65 Evaluated at bid price : 22.00 Bid-YTW : 4.31 %
ENB.PF.C	FixedReset	30,493	Nesbitt crossed 20,000 at 21.95. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 21.59 Evaluated at bid price : 21.93 Bid-YTW : 4.31 %
CM.PR.G	Perpetual-Premium	26,357	Called for redemption effective 2015-4-30. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-04-10 Maturity Price : 25.00 Evaluated at bid price : 25.29 Bid-YTW : -1.50 %
There were 38 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
IAG.PR.A	Deemed-Retractible	Quote: 24.15 – 24.58 Spot Rate : 0.4300 Average : 0.2784 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.15 Bid-YTW : 5.03 %
PWF.PR.T	FixedReset	Quote: 25.01 – 25.40 Spot Rate : 0.3900 Average : 0.2536 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 23.26 Evaluated at bid price : 25.01 Bid-YTW : 3.37 %
SLF.PR.E	Deemed-Retractible	Quote: 23.71 – 24.08 Spot Rate : 0.3700 Average : 0.2389 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.71 Bid-YTW : 5.17 %
GWO.PR.S	Deemed-Retractible	Quote: 26.27 – 26.61 Spot Rate : 0.3400 Average : 0.2193 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.27 Bid-YTW : 4.60 %
ENB.PR.Y	FixedReset	Quote: 19.76 – 20.13 Spot Rate : 0.3700 Average : 0.2668 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-11 Maturity Price : 19.76 Evaluated at bid price : 19.76 Bid-YTW : 4.42 %
GWO.PR.I	Deemed-Retractible	Quote: 23.84 – 24.40 Spot Rate : 0.5600 Average : 0.4618 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.84 Bid-YTW : 5.10 %

The feds’ buddies at the IMF have proposed a new Canadian civil service expansion plan:

Two key steps are worth considering.

First, providing a mandate for macroprudential oversight of the financial system as a whole to a single entity would strengthen accountability and reinforce policymakers’ ability to identify and respond to future potential crises. Such a body should have participation broad enough to “connect the dots” and form a complete and integrated view of systemic risks with powers to collect the required data.

Second, putting in place a coordination framework to support timely decision-making and test the capacity of both federal and provincial authorities to respond to crisis scenarios would benefit crisis preparedness. Extending the institutional arrangements and frameworks along these lines can help support both the capacity and willingness to act, especially at times of financial stress, and strengthen Canada’s financial system and economy.

The loonie had a rough ride today:

The loonie has touched a high point of 79.37 cents (U.S.) and a low of 78.85 cents today, edging closer to its most recent low of 78.22 cents and, arguably, to the 75-cent level that [chief currency strategist of Bank of Nova Scotia] Ms. [Camilla] Sutton and others expect later this year.

By late afternoon, it stood at 78.87 cents.

The U.S. dollar, in turn, is on a roll, spurred on by stronger economic readings that suggest the Federal Reserve will launch its first interest rate hike soon, possibly in June.

Feeding into that were the uncertainties of Europe, specifically the fears over whether Greece could default on its hefty debts or even leave the euro zone.

And equities got hit:

A looming rate hike from the U.S. Federal Reserve is taking its toll on stocks, currencies and commodities. Markets were a sea of red on Tuesday as the Dow Jones industrial average shed more than 333 points, or 1.8 per cent, the S&P 500 fell 1.7 per cent and the S&P/TSX Composite index gave back more than 200 points, or 1.4 per cent.

The U.S. dollar index rose to its highest level since September, 2003, as the euro continued to crumble and the Canadian dollar retreated below 79 cents (U.S.). The U.S. dollar is soaring as investors anticipate the Fed will begin hiking rates some time this year amid consistently strong readings on the country’s labour market.

But the greenback’s surge is raising concerns about the bottom line for corporate America. A strong U.S. dollar poses a headwind for major U.S. multinational companies that generate a substantial portion of their revenues overseas.

My new favourite SEC Commissioner Daniel M. Gallagher really screwed up when talking about the bond markets today:

With a record notional amount of outstanding corporate debt and dealers unable to commit capital and hold significant inventories, there is a real liquidity crisis brewing. The significant risk is that when the Fed starts to hike interest rates, which some tea leaves tell us could happen as early as this June[13] — investors may rush to exit their positions in high yielding and less liquid debt and may have severe difficulty in doing so.

Interestingly, while the biggest banks have cut back on their positions in more risky debt, insurance companies and mutual funds have increased their positions in those assets.[14] These firms have boosted their holdings of corporate and foreign bonds to $5.1 trillion, a 65% increase since the end of 2008.[15] This has offset the $800 billion decline in holdings at banks and securities firms in the same period.[16] Rather than banks holding the inventory, there are now “ballooning bond funds that own more and more risky debt,” and it is unclear how institutional asset managers and their clients will react when interest rates rise.[17]

Although the SEC may not have a silver bullet to address these issues, there are some discrete steps the agency can take to address the liquidity risks that plague the debt markets. For example, the Commission should be looking at all options for facilitating electronic and on-exchange transactions of these products.

Electronic and on-exchange transactions of these products will harm liquidity, not help it; how many times does this need to be pointed out? Exchange trading leads to thinner, more brittle markets; if Gallagher is seeking to find ways in which a 1994-style bond bear market can be experienced in an orderly fashion, he needs to think more about how to encourage bond salesmen, dark markets and deep pools of opportunistic capital.

While this potential liquidity crisis is a serious risk that warrants serious attention, there is a more discrete and addressable issue in the fixed income markets, an issue that disproportionately impacts retail investors. That issue is the lack of transparency. Retail participation in the municipal and corporate bond market is very high: over 70% in the municipal markets and 40% in the corporate markets.[21] And yet, these markets are incredibly opaque to retail investors.

Footnote [21] See Fed Flow of Funds.

It’s not entirely clear where he gets his 40% figure from. If we examine Table L.212 in the Fed Flow of Funds, December 2014 we see that the Fed estimates there are $11,441.4-billion in Corporate and Foreign Bonds outstanding at the end of 14Q3. Classes of holder that might reasonably be classified as retail are:

• Household, 919.2
• Money market mutual funds, 71.1
• Mutual funds, 2,232.3
• Closed-end funds, 77.8
• Exchange-traded funds, 194.4

The total is $3,494.8-billion, which is 30.5% of the total. Maybe he’s also counting

• Private pension funds, 582.5
• State and local govt. retirement funds, 433.4
• Federal government retirement funds, 6.9

This would bring the total to $4,517.6-billion, or 39.5%, which agrees well with his figure.

Regrettably, if he is getting to his 40% figure like that and weeping hysterically over the poor sweet innocent retail investor ravaged by the evil secretive dealers, his argument isn’t even internally consistent. Only the Household holdings, of 919.2-billion, less than 10% of the total outstanding, are being traded by retail; all the rest enjoys the (sometimes dubious!) benefits of professional management and it really doesn’t matter whether or not the finer details of the market are opaque to retail.

I will also point out that share of holdings is by no means equivalent to share of trading. My guess is that retail turnover is lower than institutional turnover, but we’ll leave that question for another day.

If we repeat the exercise for Table L.211, Municipal Securities and Loans, we get a total of $3,631.1-billion, of which:

• Household, 1,557.6
• Money market mutual funds, 278.7
• Mutual funds, 645.4
• Closed-end funds, 84.2
• Exchange-traded funds, 13.4
• Private pension funds, 0
• State and local govt. retirement funds, 0
• Federal government retirement funds, 0

Total $2,579.3-billion, or 71.0%, against his claim of “over 70%”, so I suspect I’ve been able to reproduce his calculation.

Well, fine. Maybe the purpose of the corporate and municipal bond markets is, in fact, not the transfer of investment capital from savers to investors, as I have always (perhaps naively) thought. Maybe the purpose of these markets is “to be fair to Granny”. If this is the case, then the idea of exchange trading makes more sense – but let’s be explicit about this in advance of any rule-making, and let us continually bear in mind that changing the system to favour one group will act to the disadvantage of another group. The loss of liquidity and greater volatility that will result from a greater emphasis on exchange trading will result in increased yields; these increased yields will knock some issuers out of the market by rendering marginally profitable investment opportunities economically unfeasible.

Can we please think about what we’re doing, why we’re doing it, what we want to accomplish and just plain think things through a bit?

He redeems himself somewhat with a jab against FSOC, the Financial Stability Oversight Council:

The SEC is also bringing cases against state and local entities — San Diego, New Jersey, Illinois, and most recently Kansas — for making misleading disclosures about the funding of their pension plans. The failure by municipal issuers to provide adequate disclosures of underfunded pension plans is an unpardonable sin. Politically-powerful state workers’ unions, and state constitutional protections for benefits, make the reduction of these liabilities extremely difficult. The failure to set aside adequate funds to cover these liabilities creates a material risk that future payments to bondholders would need to be sacrificed. This risk is not merely theoretical; we have seen it play out already in Detroit’s bankruptcy.[30] Pension liabilities are a true systemic risk, but don’t hold your breath waiting for FSOC to address it. They are probably too busy with Stage 3 assessments of lemonade stands anyway![31]

Footnote [31] I’ll spare you the suspense. Lemonade stands will be designated as systemically important. Expert forecasts of global warming’s effects on summer temperatures create a risk that the sudden withdrawal of sweet, tangy liquid relief from the U.S. financial system could cause a sudden collapse. If you doubt me, this is at least as plausible as FSOC’s designation of insurance companies.

TransAlta Corporation, proud issuer of TA.PR.D, TA.PR.F, TA.PR.H and TA.PR.J, was confirmed at Pfd-3 by DBRS today:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debt/Medium-Term Notes rating of TransAlta Corporation (TAC or the Company) at BBB and the Preferred Shares rating at Pfd-3, all with Stable trends. The confirmations are based on DBRS’s expectation that TAC will further improve its relatively constrained key credit metrics over the near term to be more in line with the current rating category. Moreover, DBRS notes that TAC’s ratings reflect its high level of contracted output, strong position in the Alberta (the Province) market and reasonable level of geographic and fuel diversification, while also factoring in unplanned outage risks, the challenging wholesale market conditions over the next several years and TAC’s merchant exposure (including post-2020 power purchase agreement expiries in Alberta).

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 38bp, FixedResets down 12bp and DeemedRetractibles off 5bp. The Performance Highlights table is relatively short (by recent standards), with losing Floaters being prominent. Volume was above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.05 to be $0.50 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.75 to be $0.51 cheap.

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.89 to be $0.36 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.20 and appears to be $0.49 rich.

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.36, looks $1.68 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $1.13 rich.

The cancellation of the previously announced deflationary environment had an immediate effect on the implied three month bill rate, with investment-grade pairs predicting an average over the next five years of a whopping 0.10%

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-3.4850 %	2,324.8
FixedFloater	0.00 %	0.00 %	0	0.00	0	-3.4850 %	4,064.7
Floater	3.24 %	3.22 %	72,163	19.11	3	-3.4850 %	2,471.4
OpRet	4.07 %	0.98 %	106,820	0.28	1	-0.0397 %	2,764.8
SplitShare	4.48 %	4.62 %	56,197	4.45	5	-0.0359 %	3,206.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0397 %	2,528.1
Perpetual-Premium	5.29 %	0.84 %	56,545	0.08	25	-0.0391 %	2,519.9
Perpetual-Discount	4.98 %	5.02 %	154,748	15.40	9	-0.3764 %	2,793.8
FixedReset	4.41 %	3.65 %	233,337	16.51	81	-0.1167 %	2,421.1
Deemed-Retractible	4.91 %	0.14 %	106,338	0.14	37	-0.0491 %	2,655.2
FloatingReset	2.54 %	2.98 %	85,831	6.32	8	-0.2352 %	2,329.9

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.K	Floater	-6.75 %	Not real. The closing bid was 14.79, compared to a day’s range of 15.56-03, so the reported bid is about 5% below the day’s low. It is not clear whether this is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 14.79 Evaluated at bid price : 14.79 Bid-YTW : 3.41 %
BAM.PR.C	Floater	-1.88 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 15.65 Evaluated at bid price : 15.65 Bid-YTW : 3.22 %
BAM.PR.B	Floater	-1.86 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 15.81 Evaluated at bid price : 15.81 Bid-YTW : 3.19 %
FTS.PR.H	FixedReset	-1.80 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 16.36 Evaluated at bid price : 16.36 Bid-YTW : 3.66 %
BAM.PR.N	Perpetual-Discount	-1.25 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 22.66 Evaluated at bid price : 23.00 Bid-YTW : 5.24 %
BAM.PF.A	FixedReset	-1.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 23.41 Evaluated at bid price : 25.34 Bid-YTW : 3.82 %
BAM.PR.R	FixedReset	-1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 21.53 Evaluated at bid price : 21.89 Bid-YTW : 3.90 %
CIU.PR.C	FixedReset	5.78 %	A rebound from yesterday’s poor reported performance. There was also a problem on March 2 / March 3. This nonsense is brought to you courtesy of the Toronto Stock Exchange. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 16.65 Evaluated at bid price : 16.65 Bid-YTW : 3.58 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PF.D	FixedReset	777,595	New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 23.12 Evaluated at bid price : 24.95 Bid-YTW : 3.57 %
BMO.PR.S	FixedReset	93,075	TD crossed 30,000 at 24.97; RBC crossed 49,200 at 24.95. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 23.19 Evaluated at bid price : 24.89 Bid-YTW : 3.31 %
RY.PR.Z	FixedReset	59,122	Scotia crossed 50,000 at 24.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 23.14 Evaluated at bid price : 24.75 Bid-YTW : 3.23 %
ENB.PR.P	FixedReset	53,541	TD crossed 25,000 at 20.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 20.68 Evaluated at bid price : 20.68 Bid-YTW : 4.32 %
CM.PR.P	FixedReset	47,505	TD crossed 35,000 at 24.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 23.01 Evaluated at bid price : 24.55 Bid-YTW : 3.23 %
BMO.PR.T	FixedReset	47,178	TD crossed 30,000 at 24.67. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 23.07 Evaluated at bid price : 24.63 Bid-YTW : 3.27 %
There were 39 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PR.K	Floater	Quote: 14.79 – 15.90 Spot Rate : 1.1100 Average : 0.6382 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 14.79 Evaluated at bid price : 14.79 Bid-YTW : 3.41 %
TRP.PR.F	FloatingReset	Quote: 18.65 – 19.39 Spot Rate : 0.7400 Average : 0.5073 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 18.65 Evaluated at bid price : 18.65 Bid-YTW : 3.33 %
MFC.PR.M	FixedReset	Quote: 24.20 – 24.60 Spot Rate : 0.4000 Average : 0.2528 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.20 Bid-YTW : 4.00 %
GWO.PR.I	Deemed-Retractible	Quote: 24.00 – 24.50 Spot Rate : 0.5000 Average : 0.3542 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 5.01 %
BAM.PR.N	Perpetual-Discount	Quote: 23.00 – 23.34 Spot Rate : 0.3400 Average : 0.2297 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-03-10 Maturity Price : 22.66 Evaluated at bid price : 23.00 Bid-YTW : 5.24 %
MFC.PR.H	FixedReset	Quote: 25.75 – 26.05 Spot Rate : 0.3000 Average : 0.2051 YTW SCENARIO Maturity Type : Call Maturity Date : 2017-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.75 Bid-YTW : 3.01 %