PrefBlog

Europe continues to ease monetary policy:

In the face of a global debate on whether monetary policy has lost its effectiveness and is even planting the seeds of the next crisis, the ECB has delivered a solid defense of the right and power of central banks to boost growth and inflation at will. The best that can be said for euro-area fiscal policy is that it’s not hampering the recovery, so Draghi has underlined that he won’t wait for others to act.
…
The president announced cuts to all three of the ECB’s rates, bringing the deposit rate to minus 0.4 percent, and a 20 billion-euro ($22 billion) expansion of quantitative easing that for the first time opens the door to purchases of corporate bonds. On top of that, he announced a new four-year loan program that potentially allows banks to be remunerated for taking the ECB’s money if they expand credit to the real economy, in a quartet of operations stretching to 2021.

Draghi’s policy arc has been in defiance of warnings by monetary conservatives, including those in Germany’s Bundesbank since the beginning of his term, up to more recent calls by the Group of 20 nations to shift the burden of growth generation away from monetary policy and toward structural policies or more government investment.

Instead, Draghi sounded resigned when asked about euro-area fiscal policy. That domain spans countries including Spain, France and Italy that are close to their legal deficit limits, and nations that can afford to spend more — read Germany — that have promised voters they won’t do so.

Certainly the OSC is working hard to spark inflation:

The Ontario Securities Commission says its revenues will rise almost 14 per cent in its current fiscal year, leaving the regulator with a surplus of $6.6-million for the year.

The commission published details of its financial outlook Thursday for the fiscal year ending March 31, saying revenue has climbed due to fee changes introduced last year. Those fee adjustments, as well as fee increases introduced in 2013, have returned the commission to strong profitability after it recorded deficits from 2009 to 2013.

The OSC said it expects to take in revenue of $115.8-million in fiscal 2016, a 14-per-cent increase from $101.6-million in fiscal 2015. Expenses are expected to climb sharply to $109-million in the current year from $96.9-million in fiscal 2015, leaving the OSC with an anticipated surplus of $6.6-million this year, up from $4.7-million last year.

Market participants – including listed companies, investment firms and other registrants – pay participation and activity fees to the OSC, which account for more than 99 per cent of its revenue. The OSC adjusted its fee structure last year to base its participation fees on a firm’s most recent annual financial results so they closely track current market conditions.

Perhaps they now have enough to cut another cheque to their good buddies at FAIR Canada!

Canada is now a net creditor of the US – but I would really like to see some currency-adjusted figures!:

Canada is now a creditor to the U.S. for the first time on record, government data show, reflecting the northern nation’s love affair with assets south of the border.

The stock of U.S. assets held by Canadians in the fourth quarter of 2015 — everything from corporate acquisitions to portfolio investments — exceeded assets held by Americans in Canada for the first time since at least 1990, according to quarterly data published Thursday by Statistics Canada.

Easy credit, strong balance sheets, and lack of investing opportunities at home have been the main factors driving Canadian money managers and companies on a shopping spree south of the border. The value of those investments has jumped over the last couple of years as the U.S. dollar has strengthened. U.S. investors, meanwhile, haven’t been reciprocating.
…
Canada’s total net asset position with all countries rose to C$472 billion in the fourth quarter. That’s good news from a creditworthiness point of view. The more indebted a country is to foreigners the more vulnerable it is to financial shocks and Canada’s creditor status helps in times like this when financial markets are volatile, commodity prices are falling and the country is running large current account deficits.

The US is moving to get some more work out of its foreign graduates:

The federal government will publish the rule on Friday, saying that international students earning degrees in science, technology, engineering and mathematics fields in the United States will now be eligible to stay for three years of on-the-job training. This is seven months longer than under the 2008 rule it replaces for the STEM Optional Practical Training program, known as OPT. The new rule will take effect on May 10.
…
This rule is yet another flash point in the controversy over immigration reform. Industry leaders who say they are desperate for skilled talent and those defending the rights of American workers see the training program’s extension as an end-around to stalled reform. But that is all they agree upon.

“It’s an ongoing assault on American workers,” said John Miano, a lawyer for a technology workers’ union in Washington State, whose lawsuit last summer was what forced the government to vacate the previous rule and create a new one, this time for public comment.

There is speculation that TransCanada is contemplating a large acquisition:

TransCanada Corp. would snap up a big chunk of the natural gas business that’s given it the most troublesome competition if it completes a speculated U.S. takeover worth more than $9-billion (U.S.).

TransCanada said on Thursday that it was in talks with a third party, but did not name it or provide any guarantees that it would clinch a deal.

The company is in talks with Houston-based Columbia Pipeline Group Inc., according to the Wall Street Journal, which cited anonymous sources. Columbia is best known for its extensive pipeline network in the Marcellus and Utica natural gas regions in the U.S. Northeast.

Merrill Lynch has come up with some interesting figures on Canadian housing turnover:

Here are three key numbers to keep in mind when you’re talking about Canada’s housing markets: 24, 17 and 10.

Those, according to research from Bank of America Merrill Lynch, highlight the frothy nature of real estate in British Columbia and Ontario, compared with the rest of the country.

They’re the number of existing home sales per 1,000 people.

In B.C., home to Canada’s hottest market, the ratio is 24 per 1,000 in Vancouver. In Ontario, where Toronto is also a hotbed, it’s 17. And in the rest of Canada, it’s just 10, according to the bank’s North America economist, Emanuella Enenajor.

“Although Canada’s housing market may not be in a bubble, the B.C. (British Columbia) market likely is,” Ms. Enenajor said in her report.

It was an off day for the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles both off 21bp and FixedResets down 39bp. The Performance Highlights table continues to show a lot of churn. Volume was well below 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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.25 to be $1.27 rich, while TRP.PR.C, resetting 2021-1-30 at +296, is $0.84 cheap at its bid price of 11.06.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.50 to be 1.01 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.78 to be 1.11 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.94 to be $1.11 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.35 and appears to be $1.06 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.12 looks $0.52 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 11.09 and is $0.39 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.73%, with three outliers below -1.50% and one above +0.50%. Note that the range of the y-axis has changed today. There are two junk outliers below -1.50%.

Click for Big

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

Today’s big news was the BoC announcement:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

The global economy is progressing largely as the Bank anticipated in its January Monetary Policy Report (MPR). Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating. Although downside risks remain, the Bank still expects global growth to strengthen this year and next. Recent data indicate that the U.S. expansion remains broadly on track. At the same time, the low level of oil prices will continue to dampen growth in Canada and other energy-producing countries.

Prices of oil and other commodities have rebounded in recent weeks. In this context, and in light of shifting expectations for monetary policy in Canada and the United States, the Canadian dollar has appreciated from its recent lows. With these movements, both the price of oil and the exchange rate have averaged close to levels assumed in the January MPR.

Canada’s GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January. National employment has held up despite job losses in resource-intensive regions, and household spending continues to underpin domestic demand. Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements. However, overall business investment remains very weak due to retrenchment in the resource sector.

Inflation in Canada is evolving broadly as anticipated. The factors that pushed total CPI inflation up to 2 per cent will likely unwind in the months ahead. Measures of core inflation are at or just below 2 per cent, boosted by the temporary effects of past exchange rate depreciation. Material excess capacity in the Canadian economy will continue to dampen inflation.

An assessment of the impact of the upcoming federal budget’s fiscal measures will be incorporated into the Bank’s April projection. All things considered, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Meanwhile, there is a larger than usual international influence on Fed policy:

Investors are betting that the Fed will hold interest rates steady at its March 15-16 meeting as it assess the impact of a shaky global economy and jittery financial markets. A rise in the dollar triggered by easier policy from the ECB and perhaps the BOJ would support a go-slow strategy to raising rates in the U.S.

Asked how the U.S. central bank would respond if the ECB pushed rates further into negative territory, Fed Governor Lael Brainard told CNBC television on March 7 that she was focused on developments in the U.S. She quickly added though that the economy was being buffeted by “powerful cross currents” from abroad and that a further rise in the dollar would hit manufacturing-industry exports.
…
Fed Vice Chairman Stanley Fischer alluded to the central bank’s dollar dilemma when he spoke to the American Economic Association’s annual meeting in San Francisco on Jan. 3.

While policy makers in general recognize the benefits of floating currency rates in redistributing demand throughout the world economy, “they’re not so happy” when they’re the ones “giving up some growth, for instance, by having their exchange rate appreciate,” he said.

And New Zealand has cut its policy rate:

New Zealand’s central bank unexpectedly cut interest rates to a fresh record low and signaled further easing may be needed, saying it’s concerned by a slump in inflation expectations. The kiwi plunged by more than one U.S. cent.

Reserve Bank Governor Graeme Wheeler lowered the official cash rate by a quarter point to 2.25 percent, a move predicted by just two of 17 economists surveyed by Bloomberg. The remainder tipped no change. “Further policy easing may be required to ensure that future average inflation settles near the middle of the target range,” Wheeler said Thursday in Wellington.

Wheeler has resumed easing monetary policy as a stubbornly firm New Zealand dollar, weaker commodity prices and falling price expectations keep inflation beneath his 1-3 percent target. The central bank’s forecasts suggest one further reduction in borrowing costs this year to underpin economic growth and return inflation to its 2 percent target midpoint by early 2018.
…
The New Zealand dollar plunged after the statement, buying 66.58 U.S. cents at 9:38 a.m. in Wellington from 67.80 before the decision. The currency has climbed since late January, muting price pressures, and “a decline would be appropriate given the weakness in export prices,” Wheeler said today.

CalPers, the $284.56-billion dollar pension fund that doesn’t do its own credit analysis, has managed to shake down Moody’s:

Moody’s Investors Service Inc. agreed to pay $130 million to settle claims by the California Public Employee Retirement System over allegedly inflated ratings on residential-mortgage bond deals.

The largest U.S. state pension fund’s accord with Moody’s follows the February 2015 announcement that McGraw Hill Financial Inc.’s Standard & Poor’s would pay $125 million to settle claims by Calpers over grades on subprime mortgages during the run-up to the 2008 financial crisis.
…
McGraw Hill’s pact with Calpers was part of a $1.5 billion settlement to resolve similar allegations from the U.S. Justice Department and more than a dozen states.

Calpers sued the companies along with Fitch Ratings Ltd. in 2009 alleging it sustained losses of as much as $1 billion from “wildly inaccurate” risk assessments. Calpers said it put $1.3 billion into three investment vehicles backed by subprime mortgages in 2006 and 2007. The investments crumbled amid the housing crisis. The pension fund claimed the ratings companies helped fuel the investments and bent rules to give them the highest ratings to boost their profits from issuers, Calpers alleged.

They’d be better off checking their assumptions:

The economic assumptions include an assumed inflation assumption of 2.75 percent compounded annually. The inflation assumption is a component of assumed investment return, assumed wage growth, and assumed future post-retirement cost-of-living increases.

Based upon the asset allocation of the Public Employees’ Retirement Fund (PERF), the assumed investment return (net of administrative and investment expenses) is 7.5 percent per year, compounded annually.

On a positive note, the settlement will provide funds for senior management to give to their buddies, similarly to the scam discussed on April 23, 2012.

The Saudis are looking for a bank loan:

Saudi Arabia is seeking a bank loan of between $6-billion (U.S.) and $8-billion, sources familiar with the matter told Reuters, in what would be the first significant foreign borrowing by the kingdom’s government for over a decade.

Riyadh has asked lenders to submit proposals to extend it a five-year U.S. dollar loan of that size, with an option to increase it, the sources said, to help plug a record budget deficit caused by low oil prices.
…
The kingdom’s budget deficit reached nearly $100-billion last year. The government is currently bridging the gap by drawing down its massive store of foreign assets and issuing domestic bonds. But the assets will only last a few more years at their current rate of decline, while the bond issues have started to strain liquidity in the banking system.

Comic book fans and supporters of civil forfeiture will be pleased to learn that the Junior Justice League has another member:

The NHL ruled that an off-season rape allegation made against Patrick Kane was unfounded in determining that the Chicago Blackhawks star forward will not face any league disciplinary action.

The decision was issued on Wednesday, when the league issued a one-paragraph statement announcing it had completed its independent review of the allegations against Kane. The final step of the investigation occurred on Monday, when Kane met with NHL Commissioner Gary Bettman in New York.

Barry Critchley has enthusiastically endorsed the quixotic bid to get RON.PR.A taken out at par. I have updated the PrefBlog report on this week’s development.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets up 37bp and DeemedRetractibles off 26bp. The Performance Highlights table is lengthy, with numerous TRP and HSE issues at the top of the list. Volume was below average.

PerpetualDiscounts now yield 5.76%, equivalent to 7.49% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 325bp, equal to the spread reported on March 2.

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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.30 to be $0.99 rich, while TRP.PR.C, resetting 2021-1-30 at +296, is $0.69 cheap at its bid price of 11.40.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.50 to be 1.08 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.55 to be 1.32 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.77 to be $1.29 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.55 and appears to be $1.15 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.40 looks $0.53 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.05 and is $0.24 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.95%, with one outlier below -2.00%. There is one junk outlier above 0.00%.

Click for Big

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

Assiduous Readers will remember covered bonds – issues that are guaranteed both by the issuing bank and by a mortgage pool. This results in high ratings – for instance Royal Bank’s covered bonds are rated AAA by DBRS. So … having sovereign-style credit ratings leads to sovereign-style prices:

The first non-government issuer just got paid to borrow in euros.

Berlin Hyp AG sold 500 million euros ($550 million) of three-year covered bonds priced to yield minus 0.162 percent on Tuesday, according to data compiled by Bloomberg. The sale followed the euro area’s first zero-coupon covered bond, sold last month by another German issuer, Landesbank Hessen-Thueringen Girozentrale.
…
In the secondary market, almost 70 percent of German covered bonds have yields of less than zero, according to HSBC data tracking issues of at least 500 million euros. Issuers have extended maturities in the last month to avoid selling bonds with negative yields, said Matthias Melms, an analyst at NordLB.

“There seems too little concern that the market has become more and more distorted or even impaired,” said Bernd Volk, head of European covered and agency bond research at Deutsche Bank AG.

Berlin Hyp is majority-owned by Germany’s savings banks, which are supported by the nation’s states and municipalities.

Assiduous Reader AP writes in with a link to a piece about robot (and drone!) law:

OK, let’s say there’s no hack, but a self-driving car still crashes. What’s the driver’s responsibility?

On the self-driving cars that are being tested right now, the carmakers want the driver paying attention—and right now, they’re not doing it. They’re playing cards. That’s a little scary. And even if driver is well-intentioned, sitting there alert, it’s hard to stay alert for a long drive if you have nothing to do. This is the problem of “unintentional inattention,” and it goes well beyond cars.

Imagine you’ve got robot mall cops. There’s eight of them running around the mall and one guy in a room someplace looking at eight TV screens. He’s bored out of his mind, falling asleep. Then something happens, and it’s his fault because he’s asleep at the switch. Sometimes this is called the “human in the loop” problem. Autonomy seems dangerous, so you put a human in the loop. But that person’s job is very passive. It’s tough to do, and it may be a low-wage, low-status job. Then you blame the person who fails to monitor, even though the system sets them up for the fall. That’s not a good design, but I don’t know what the answer is.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts off 25bp, FixedResets losing 101bp and DeemedRetractibles down 80b. The Performance Highlights table is predictably lengthy. Volume was well 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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.00 to be $1.54 rich, while TRP.PR.C, resetting 2021-1-30 at +296, is $1.11 cheap at its bid price of 11.07.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.50 to be 1.14 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.49 to be 1.33 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.77 to be $1.29 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.75 and appears to be $1.41 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.32 looks $0.58 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 11.20 and is $0.31 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.02%, with one outlier below -2.00% and two above 0.00%. There are no junk outliers.

Click for Big

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