PrefBlog

The loonie got smacked today:

Canada’s currency weakened past C$1.30 per U.S. dollar for the first time since 2009 amid speculation the nation’s central bank will cut interest rates again to fight the economic damage from lower oil prices.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell to as weak as C$1.3008. It traded at C$1.2965 at 9:26 a.m. in Toronto, and is poised to decline for a fourth week.
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Monetary easing in Canada contrasts with the U.S. Federal Reserve, which is contemplating its first interest-rate increase in almost a decade.

“For the Canadian dollar, the policy-divergence theme got a strong boost with the Bank of Canada cutting rates, while leaving the door open to more,” Matt Derr, a foreign-exchange strategist at Credit Suisse Group AG in New York, said by e-mail. Declining crude prices may put further pressure on the currency, he said.

Canada’s dollar has fallen 3.3 percent in the last three months, making it the second-worst performer among 10 developed-nation peers, according to data compiled by Bloomberg.

Canadian headline inflation is not an impediment to loose money:

Canada’s annual inflation rate quickened to 1 percent in June as food and shelter costs increased and energy provided less of a drag, providing no impetus for the central bank to change course on loose monetary policy.

Consumer prices accelerated from a 0.9 percent pace in May, Statistics Canada said Friday in Ottawa, as meat, dairy and bakery products and fresh fruit grew dearer.

Bank of Canada policy makers cut interest rates this week, saying a weak economy threatened to keep inflation from returning to its 2 percent target. The currency depreciated to the lowest since 2009 on speculation price gains aren’t enough to eliminate the chance of another central-bank rate cut.
…
The core rate, which excludes eight volatile products such as energy, accelerated to 2.3 percent, close to the March reading of 2.4 percent that was the fastest since 2008.

Canada’s dollar dropped to C$1.3008 per U.S. dollar today. Two-year bond yields rose 1 basis point to 0.43 percent and 30-year securities fell to 2.25 percent from 2.27 percent.

The plunge in crude oil prices has driven down inflation and also triggered four straight monthly declines in output. At the same time, core prices have remained elevated on higher costs for meat and telecommunications products.

Economists surveyed by Bloomberg forecast Friday’s report would show overall inflation at 1 percent and the core rate remaining at 2.2 percent.

Energy costs fell 9 percent in June from 12 months earlier, less than May’s 11.8 percent rate of decline. Excluding energy the inflation rate slowed to 2.1 percent from 2.2 percent.

While the reported core inflation rate is above 2.0%, the July Monetary Policy Report states:

In contrast, core inflation as measured by CPIX has been slightly above 2 per cent, boosted by the pass-through effects of the past depreciation of the Canadian dollar and some sector-specific factors, which have offset the disinflationary force from slack in the economy (Chart 15). Although the impact of pass-through is difficult to gauge precisely, the Bank estimates that it is currently raising CPIX inflation by about 0.4 to 0.6 percentage points (Box 1).2 The underlying trend in inflation is assessed to be 1.5 to 1.7 per cent, a bit lower than in the April Report, consistent with material and increased slack in the Canadian economy.

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In an interesting twist, Freddie Mac is selling structured notes:

Freddie Mac is expanding its risk-sharing efforts meant to protect taxpayers and potentially prepare the $9.4 trillion U.S. home-loan market for its future.

In a planned $300 million offering of mortgage-backed securities being managed by Credit Suisse Group AG, the government-backed company will sell $22.5 million of junior-ranking bonds without its guarantees, a person with knowledge of the deal said.
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The bonds reflect directions that Freddie Mac and rival Fannie Mae have received from their overseer, the Federal Housing Finance Agency, to experiment with different ways of pushing their losses from homeowner defaults to bond buyers and insurers. The FHFA has also pushed them to increase the amount of the risk-sharing.

It will be interesting to see what the ultimate effect of all this is … how much will investors be willing to pay for the company guarantee when they’ve already got the first-loss protection afforded by the Junior Notes?

BCIMC has posted some good returns:

A tactical decision to shift investments into global stock markets paid off last year for British Columbia Investment Management Corp., which earned a 14.2-per-cent return for the year and boosted its total assets to $124-billion.

BCIMC reported it moved more assets into global equities during the fiscal year ended March 31, 2015, while reducing its weighting in fixed income holdings and mortgages, responding to volatility in Canadian stock markets as oil prices declined.

The fund ended the fiscal year with 49.5 per cent of its assets invested in public stock markets, up from 47.6 per cent a year earlier. BCIMC had 21.5 per cent of its holdings in fixed-income securities such as bonds, down slightly from 22 per cent last year, while 14.6 per cent of the portfolio is in real estate, a decline from 17.4 per cent at the end of fiscal 2014.

The fund said its Canadian public equity holdings earned a 7.5-per-cent return last year, while global public equities earned a far higher 23 per cent and emerging markets equities posted 21.4-per-cent gains, illustrating the value of shifting out of Canada’s volatile stock market.
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BCIMC said investing in passive benchmarks last year would have earned a 12.6-per-cent return, so its active investment strategy added $1.4-billion in additional returns. Over the past 10 years, BCIMC earned an average 8.1-per-cent annualized return, exceeding its benchmark of 7.3 per cent.

But, we all ask, what are the cool kids doing now?:

Options on indexes made up of credit default swaps (CDS) have been a sleeper hit over the past few years.

While trading indexes comprising CDS tied to a basket of corporate names can give investors a cheap and easy way to trade corporate credit at a time when the cash market is said to be illiquid, options written on those same indexes can do one better. The options give investors the right to buy or sell CDS indexes, such as Markit’s CDX or iTraxx series.
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In 2005, Citigroup estimated that about $2 billion worth of credit index options were trading per month, or roughly $24 billion over the course of the year. Last December, the same Citi analysts figured that about $1.4 trillion of the instruments had exchanged hands in all of 2014, compared with $573 billion worth in 2013. If correct, that would be more than a 5,000 percent jump in activity over the course of a decade.
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The risk is that the popularity of options on CDS indexes, combined with a big move in one of the indexes, could spark a flurry of hedging activity by the big dealer-banks as they struggle to get their positions back to neutral. That in turn could end up amplifying the move in the underlying index.

Here’s Barclays:

The relative growth of option volumes will likely make it increasingly more common to have option hedging (by dealers) exerting a meaningful influence on index dynamics—ie, we can expect to see the “option tail wagging the index dog” … This is particularly relevant because anecdotal evidence suggests that the majority of trades executed by investors are without delta as pure directional positions, and if anything, this proportion has been increasing over time. As such, in response to spread moves, the majority of delta-hedging will take place on the dealer side, with limited “natural” offset by investors delta-hedging in the opposite direction. Should the trend of rising relative option volumes continue, we are likely to see more cases of “pin risk” (delta-hedging of options bought by dealers making it more likely that spreads will stay around the strike) or “negative gamma” (delta-hedging of options sold by dealers, leading to amplifications of spread moves wider and tighter).

PDV.PR.A was confirmed at Pfd-3(high) by DBRS:

On July 18, 2014, DBRS upgraded the rating of the Preferred Shares to Pfd-3 (high) mainly based on a significant increase in downside protection to holders of the Preferred Shares. Over the last few months, the NAV of the Company has been declining as a result of high levels of uncertainty in the markets, resulting in a reduction in downside protection to 43% average compared with 45% a year ago. The dividend coverage ratio stands at approximately 0.7 times. Current performance metrics are still commensurate with the rating assigned, and as a result, the rating of the Preferred Shares has been confirmed at Pfd-3 (high).

After all the horror of the past six weeks-odd (not to mention the past six damn months!) the preferred share market has found a better place.

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If this keeps up for the rest of the month, we might even break-even year-to-date!

It was a superb day for the Canadian preferred share market, with PerpetualDiscounts up 51bp, FixedResets winning an incredible 138bp and DeemedRetractibles gaining 45bp. The Performance Highlights table is … well, the Performance Highlights table is much as you’d expect, OK? Volume was very high.

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:

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TRP.PR.E, which resets 2019-10-30 at +128, is bid at 22.00 to be $0.37 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.59 cheap at its bid price of 15.70.

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An extremely good fit today!

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.30 to be $0.31 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 22.48 to be $0.24 cheap.

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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 20.76 to be $0.68 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 16.79 and appears to be $0.68 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.60, looks $0.80 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.87 and is $0.32 cheap.

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There is only one outlier; one of the junk pairs is below -1.00%.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.05% (which seems a little extreme!).

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

The treasury curve flattened today:

Enough distractions! Treasury investors are turning their attention back to the business of when U.S. interest rates go up.

The yield curve has flattened the most in four months in a week when Greece signed a deal to secure more bailout aid and a bear-market rout in Chinese stocks stabilized, allaying concern that turmoil abroad would delay the Federal Reserve’s first rate increase since 2006. Fed Chair Janet Yellen made it plain over two days of testimony before Congress this week that she believes the central bank can raise interest rates in 2015.
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The difference between yields on two- and 30-year government debt has narrowed 9.4 percentage points this week to 246 basis points. It reached 244 basis points Thursday, the least since July 9.

Yellen’s testimony preached restraint:

Speaking Thursday before the Senate Banking Committee, Yellen said that raising rates prematurely could derail the recovery. Waiting too long, on the other hand, might force the Fed to tighten at a faster pace to keep the economy from overheating.

“My own preference would be to be able proceed to tighten in a prudent and gradual manner,” she said.

Yellen’s comments this week were consistent with her often-stated advice to investors: the date of liftoff matters less than the subsequent pace of increases. And she has assured them that those increases would be measured.

The concern that tightening prematurely could throw the recovery off track is one reason why the federal funds rate has been kept near zero as long it has, Yellen said.

“We also want to be careful not to tighten too late because, if we do that, arguably we could overshoot both of our goals and be faced with this situation where we would then need to tighten monetary policy in a very sharp way that could be disruptive,” she told lawmakers.
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Yellen offered other reasons for an upbeat assessment of the economy in her testimony Thursday. She said the job market is returning to a “more normal state,” even though the 5.3 percent unemployment rate understates the degree of slack. And she expects to see further gains in wages.

Fed officials say they will let the latest data on employment and inflation guide their decision on when to raise rates. To drive the point home, the San Francisco Fed has printed T-shirts with the message: “Monetary Policy — It’s Data Dependent.”

Only in America would the central bank print t-shirts!

By way of context, here’s the historical 2-year and 30-year Treasury yields from FRED:

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and the spread between the two:

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Note that there’s a gap in the 30-year series during the period in which they didn’t exist. That was the peace dividend.

And there’s more squabbling over the ORPP:

Ottawa is putting Queen’s Park on notice that it will not help set up a provincial pension plan.

Finance Minister Joe Oliver wrote to his provincial counterpart on Thursday afternoon saying that Ottawa would not help collect contributions or make the legislative changes the province would likely require.

“The Ontario Government’s proposed [plan] would take money from workers and their families, kill jobs, and damage the economy,” Mr. Oliver wrote in the letter, which was obtained by The Globe and Mail.

“Furthermore, it would impose a one-size-fits-all scheme on Ontarians and their families, without consideration for their age, family situation or financial circumstance.”
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According to Mr. Oliver’s letter, Ontario officials have approached federal civil servants in recent months to discuss the possibility of having the federal government involved in the administration of the new provincial plan.

“We will not assist the Ontario government in the implementation of the ORPP,” Mr. Oliver wrote to Ontario Finance Minister Charles Sousa.

“This includes any legislative changes to allow the ORPP to be treated like the Canada Pension Plan for tax purposes, or to integrate the ORPP within the [registered retirement savings plan] contribution limits. Administration of the ORPP will be the sole responsibility of the Ontario Government, including the collection of contributions and any required information. We will be pleased to discuss with the Ontario Government the potential for voluntary contributions to the CPP, which we believe would better serve the interests of Ontarians and all Canadians.”

DBRS kept the ratings of the Big-6 banks’ senior debt on Trend-Negative today, confirming their conclusion reported in May:

• BMO
• BNS
• CM
• NA
• RY
• TD

Preferred share ratings and trends are unaffected.

It was a different sort of day for preferreds than it has been lately. In fact…

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It was a superb day for the Canadian preferred share market, with PerpetualDiscounts gaining 43bp, FixedResets up 86bp and DeemedRetractibles off 7bp. The Performance Highlights table was fairly lengthy, but shorter than I expected given the overall index numbers. Volume was very high.

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:

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TRP.PR.B, which resets 2020-6-30 at +128, is bid at 14.65 to be $0.55 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.77 cheap at its bid price of 15.20.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 17.10 to be $0.82 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 21.43 to be $0.57 cheap.

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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 20.15 to be $0.77 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.20 and appears to be $0.79 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.14, looks $0.44 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.85 and is $0.25 cheap.

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There is only one outlier; one of the junk pairs is below -1.00%.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.01% (which seems a little extreme!).

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

The rate cut has caused increased concern over housing prices:

The move overrides concerns from real estate executives and some economists that lower rates will lead to increased borrowing, skyrocketing prices and put housing markets in Toronto and Vancouver at risk of a correction.

“The risks are growing. We get more of a speculative run-up in prices, especially in Vancouver and Toronto,” Robert Kavcic, senior economist at Bank of Montreal, said by phone after the rate announcement. “In the last six months, price activity has gotten heated, especially in those two markets. This would only reinforce that.”
…
“It’s going to put more fuel on the fire for potentially people who may not really have the ability to buy real estate,” Ross McCredie, CEO of Sotheby’s International Realty Canada said in an interview July 8. “When they’re buying, the baseline is that interest rates are going to stay this low for a very long period of time. It’s a scary place to be a buyer.’

Toronto and Vancouver home prices have defied expectations. The average cost of purchasing a condo, townhouse or low-rise property in Toronto, Canada’s largest city, has jumped 38 percent in the five years to June, according to the Canadian Real Estate Association. Toronto sales reached a record in each of the last three months. In Vancouver, single-family home prices rallied 35 percent to C$1.1 million in June from June 2010.

… and there was an immediate effect on the dollar:

Commodity currencies slumped amid speculation an interest-rate cut from the Bank of Canada may augur more monetary stimulus by resource-producing nations.

The Canadian dollar fell to its lowest since 2009 as policy makers lowered borrowing costs to stimulate an economy struggling with the declining price of oil, its major export. The New Zealand and Australian currencies also tumbled to multi-year lows.
…
Canada’s dollar, known as the loonie for the image of aquatic bird on the C$1 coin, slid as much as 1.8 percent.

The New Zealand dollar slumped as much as 1.7 percent while Australia’s currency lost as much as 1.3. South Africa’s rand, the Norwegian krone and Mexico’s peso also slid.

However, there is some encouraging news from the cult of the start-up:

It seems barely a week goes by without news of another Canadian startup scoring a huge venture capital financing deal. Preliminary data published today by Thomson Reuters backs that up: The venture capital scene is enjoying its biggest financing boom in over a decade.

Thomson Reuters said Tuesday the second quarter of 2015 was the best three-month period for VC investments in Canadian companies in 10 years. In fact, the last 12 months through June 30 rank as the best one-year period for VC investments into Canadian companies since 2002, when the country was at the dawn of a long, bleak stretch of relative quiet on the startup financing scene in Canada. Venture capital-backed companies raised $2.6-billion during the past 12 months, compared to $2.4-billion in calendar 2014 and less than $1.6-billion in each of 2011 and 2012.

Greater Toronto Area companies dominated the top five list of biggest disclosed VC deals in the first half of 2015, led by financial software firm Real Matters ($60-million raised), pharma company Northern Biologics ($36-million) and ex-Montreal e-commerce firm VarageSale ($34-million).

Assiduous Readers will remember that I attribute a great deal of the increase in Treasury volatility to the increased transparency that has come about with electronic trading and an increase in the use of exchange-traded futures contracts. So naturally, since the problem has been caused by increased transparency, the regulators want to solve the problem with increased transparency, but there is some pushback:

“It’s the market for U.S. government debt — how is there not more transparency in the trading and pricing we have today?” said Kevin McPartland, head of research for market structure and technology at Greenwich Associates, a Stamford, Connecticut-based financial-services consulting firm. “Of course, the next conversation that starts is about what impact that has on liquidity.”
…
Michael Spencer, chief executive officer of interdealer broker ICAP Plc, warned this week about the potential for more volatility in Treasuries. He attributed the price swings to the scaling back of trading by Wall Street banks known as primary dealers and an increase in electronic trading.
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Some of the largest investors in company debt say too much transparency can hinder their ability to trade large blocks. AllianceBernstein Holding LP, BlackRock Inc. and Pacific Investment Management Co. urged regulators in a May letter to consider loosening time requirements for disclosing large transactions because the information could tip off rivals.

Turnover of interest-rate-linked securities in other markets that publicly report trades has surged. Trading in interest-rate futures has climbed 81 percent in the past 10 years. This year, a record $335 billion of the contracts has changed hands on average each day, according to CME Group Inc. data. The comparable figure for Treasuries is $430 billion.

One idea that keeps coming up is GDP-linked bonds:

This study proposes that the Government of Canada issue a new debt security, the “Trill,” which would essentially offer Canadian investors an equity stake in the Canadian economy. The Trill is so-named because its coupon payment would be one-trillionth of Canada’s GDP. Similar to shares issued by corporations paying a fraction of corporate earnings in dividends, the Trill would pay a fraction of the “earnings” of Canada. Coupon payments would rise and fall with the GDP.

For average investors, the Trill would be a useful new source of income, offering both exposure to income growth and protection against inflation. This security would also appeal to large institutional investors. Pension funds have a need to match their long-term liabilities with assets that can provide stable, long-term cash flows. Currently, a large part of fund assets are held in nominal fixed-coupon Government of Canada securities. These securities do not provide protection from inflation and the limited numbers of real return bonds the government issues do not provide exposure to income growth.

The BoC has published a discussion paper by Martin Brooke, Rhys Mendes, Alex Pienkowski and Eric Santor titled Sovereign Default and State-Contingent Debt:

The sovereign debt restructuring in Greece and the events surrounding the IMF-EU support packages for Ireland, Portugal and Cyprus have exposed fault lines in the existing practices for sovereign debt crisis resolution – perhaps most importantly, an overreliance on official sector liquidity support. This paper argues that the current approach is suboptimal for five main reasons: i) it increases the risk of moral hazard; ii) it incentivises short-term lending, which can increase the risk of liquidity crises; iii) it puts an inequitable amount of taxpayer resources at risk; iv) substantial official sector holdings of an insolvent sovereign’s debt can complicate negotiated debt writedowns; and, v) it can delay necessary reforms, thereby requiring larger policy adjustments to be implemented when action is eventually taken.
In response to these deficiencies, this paper argues that, for reasons of equity and efficiency, private creditors should play a greater role in risk-sharing and helping to resolve sovereign debt crises. We propose the introduction of two complementary types of state-contingent bonds – ‘sovereign cocos’ and ‘GDP-linked bonds’.

Sovereign cocos are bonds that would automatically extend in repayment maturity when a country receives official sector emergency liquidity assistance. This predictable and transparent means of bailing-in creditors would increase market discipline on sovereigns to prudently manage their debt, ex ante, thus reducing the incidence of crises. And, it would reduce the size of official sector support packages once a crisis has hit, as amortising debt would no longer need to be covered by program financing.

GDP-linked bonds are debt instruments that directly link principal and interest payments to the level of a country’s nominal GDP. They provide a natural complement to sovereign cocos. While sovereign cocos are primarily designed to tackle liquidity crises, GDP-linked bonds help reduce the likelihood of solvency crises. This is because GDP-linked bonds provide a form of ‘recession insurance’ that reduces principal and interest payments when a country is hit by a negative growth shock. This helps to both stabilise the debt-to-GDP ratio and increase a sovereign’s capacity to borrow at sustainable interest rates. While all countries might experience some benefit from the use of GDP-linked debt, economies with higher GDP growth volatility (such as emerging market economies) or countries where monetary policy is constrained (such as those in a monetary union) are likely to benefit most.

Should ‘sovereign Cocos’ ever be issued in the UK, it will be interesting to see whether UK investors would be permitted to buy them! But this is all by way of introduction, since there may be a new example of GDP-linkers:

As debt talks intensify between Ukraine and its creditors, securities that pay out if economic growth exceeds expectations will probably be on the agenda, echoing deals done by Argentina and Greece in the past decade.

Ukraine’s restructuring proposal includes a “value-recovery instrument,” the Finance Ministry said last month, while a person familiar with a bondholder plan submitted in May said it has a debt-for-equity swap element. Both securities feature interest payments linked to gross domestic product and are also referred to as GDP-linked warrants.

For most of the day it was looking as if the preferred share market was taking the rate cut in stride; then 2pm happened.

CPD

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ZPR

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It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 13bp, FixedResets down 47bp and DeemedRetractibles gaining 5bp. Floaters got whacked again. The Performance Highlights table is enormous again, stuffed full of FixedReset losers. Volume was average.

PerpetualDiscounts now yield 5.39%, equivalent to 7.01% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.1%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 290bp, a bit of a bounce-back from the 305bp reported July 8.

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 21.98 to be $0.51 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.77 cheap at its bid price of 15.30.

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Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 17.00 to be $1.02 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 20.59 to be $0.83 cheap.

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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 19.85 to be $0.78 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.17 and appears to be $1.02 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.19, looks $0.44 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.86 and is $0.28 cheap.

There is only one outlier; one of the junk pairs is below -1.00%.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.01% (which seems a little extreme!).

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

Many will have heard of the recent attempt to justify the existence of the Senate, a report titledCountering the Terrorist Threat in Canada. This report has attracted some attention for its disgraceful recommendation that “The federal government work with the provinces and the Muslim communities to investigate the options that are available for the training and certification of imams in Canada”, but there was one point of great interest in the report that should be of interest to PrefBlog readers:

The Committee is concerned about the lack of prosecutions in the area of terrorist financing. The Committee learned that between 2009 and 2014, the Financial Transactions and Reports Analysis Centre of Canada identified 683 terrorist financing incidences and we have yet to have any prosecutions under the relevant sections of the criminal code.

Not surprising, really, since the purpose of the terrorist financing laws is to create the illusion of government oversight and create jobs for the otherwise unemployable.

Speaking of job creation for box-tickers:

The Ontario Ministry of Finance has circulated a new consultation document that proposes to overhaul the province’s system of oversight for financial advisers and planners as investors and people saving for retirement trade in a more risky, complex financial system.
…
There is no general legal framework regulating the titles and designations of people offering financial planning, advice and services, leading to many professionals calling themselves planners or advisers. The Ontario finance ministry’s consultation document, released this month, said the absence of a framework raises questions about “proficiency, quality standards and potential conflicts of interest.”

Ontario is looking at a range of possible changes, including a new legal standard governing conflicts of interest, licensing and registration requirements, the regulation of titles, the possibility of a new oversight body, and a central registry of financial planners and advisers.

The SEC continues to protect the incompetent:

The U.S. Securities and Exchange Commission is looking into possible market manipulation over a fake news article that led to a brief spike in Twitter Inc. shares, said a person familiar with the matter.

Twitter rose more than 8 percent in the late morning after the appearance of the article, which claimed the company had received a takeover offer, before losing most of those gains within 20 minutes.

The report, which imitated the form of a Bloomberg News article, appeared on a site called bloomberg.market.

I was taken aback today by a report that Royal LePage is lobbying against a policy rate cut. Royal LePage?:

One of Canada’s major real estate firms is urging the Bank of Canada not to cut interest rates tomorrow.

Royal LePage says it’s worried that a cut in the central bank’s benchmark rate could “over-stimulate” already high-flying markets such as Toronto and Vancouver.

Those are the two Canadian cities deemed the most frothy, with prices running up sharply as consumers add to already swollen debt levels in a low-rate environment.

“While the oil shock has been a troublesome drag on our economy this year, it seems premature to ring the recession alarm bells now, injecting further monetary stimulus,” said LePage chief executive officer Phil Soper.

SEC Commissioner Luis A. Aguilar sees an opportunity to hire more regulators:

Yesterday, staff members of the federal agencies that comprise the Interagency Working Group for Treasury Market Surveillance (“Working Group”)[3] issued a joint report concerning the so-called “flash crash” that occurred in the U.S. Treasury market on October 15, 2014 (the “Report”).
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First, the Commission should consider revising Regulation ATS to make it applicable to alternative trading systems that trade Treasuries exclusively.[54] In addition, the Commission should consider how Regulation ATS may need to be tailored to the activities of alternative trading systems that handle Treasuries. Currently, BrokerTec and eSpeed are the two electronic platforms that handle the majority of the dealer-to-dealer trade flow in on-the-run Treasuries.[55] I note that BrokerTec, which trades securities in addition to Treasuries, has filed a Form ATS with the Commission.[56]
• Second, in addition to expanding Reg ATS, the Commission should consider revising Regulation Systems Compliance and Integrity (Reg SCI) to make it applicable to trading platforms that handle Treasuries exclusively.[57] As the Report makes clear, the majority of dealer-to-dealer trading in the Treasury market is now driven by computer algorithms. In light of this new environment, it is appropriate for the Commission to examine whether additional safeguards are warranted to ensure that the technology used by these entities has sufficient integrity, capacity, safety, and resiliency.
• Third, the Report and other sources indicate that regulators presently lack a comprehensive source of trade data for the Treasury market.[58]
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• Fifth, the Commission, as well as the Working Group, should consider ways to enhance oversight of market participants in the Treasury market.[64] For example, some of the most active participants in the Treasury cash market are not registered with the Commission.[65] This hinders the Commission’s ability to monitor and regulate this market effectively. In the context of equity market reform, the Chair called last year for the staff to prepare a rule clarifying that high frequency traders are dealers, and must therefore register with the Commission.[66] In preparing that rule, the staff should consider how it can be made applicable to Treasury market participants, as well.

Meanwhile, in Chinese equities:

China’s stocks fell for a second day after better-than-expected economic data failed to boost investor confidence in the world’s worst-performing equity market over the past month.

The Shanghai Composite Index tumbled 4.2 percent to 3,758.50 at 1:36 p.m. local time. With 689 stocks halted on mainland exchanges and another 790 falling by the 10 percent daily limit, sellers were locked out of about 50 percent of the the Chinese market. The two-day losses pared the gauge’s rebound from its July 8 low to 7.7 percent.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets gaining 2bp and DeemedRetractibles off 20bp. Floaters were smacked. The Performance Highlights table is as lengthy as we have come to expect. Volume was on the high side of average.

Regrettably, charts of Implied Volatility and Break-Even rates are not prepared today due to problems with the downloading of prices – a separate system from the download used for HIMIPref™ and I don’t have time to input the prices manually.

Looks like there’s another politicized white-washing on the way:

U.S. officials have concluded that high-frequency trading contributed to the Treasury market’s wild ride last October, a finding that will probably add to regulatory scrutiny of the industry.

While a soon-to-be-published government report won’t point to just one cause, it will cite speed traders as playing a key role, according to a person with direct knowledge of the study. Treasury yields plunged the most in five years on Oct. 15, 2014, before recovering, fueling a months-long debate over whether something has fundamentally changed in a $12.7 trillion market that most investors consider a safe haven.

One alteration is that almost half the trading in Treasuries is now electronic, according to a 2014 survey from financial research firm Greenwich Associates. Treasury Secretary Jacob J. Lew is among U.S. officials who’ve drawn a link between traders using computers to buy and sell securities at lightning-fast speeds, and changes in volatility and liquidity.

And yes, the report came out today and guess who’s being scapegoated?:

High-frequency trading firms are among the factors “driving markets toward smaller trade sizes,” according to Treasury official Antonio Weiss, a counselor to Lew. These firms are playing a much bigger role as market intermediaries, replacing banks and brokers that pulled back after suffering losses during the crisis, Weiss wrote Monday in a Wall Street Journal opinion piece.

The report details potential hazards from an increase in automated trading, such as risks to operations, liquidity, transmission and clearing activities. It said speed trading accounted for much of the imbalance in aggressive flows on Oct. 15. Automation can also give traders new tools to engage in unlawful conduct such as spoofing, the practice of placing and then canceling orders to give a misleading impression of the market.

The spike in trading volume and volatility coincided with bank-dealers exiting from the offer side of the cash market for brief periods, according to the report.

The report itself is titled Joint Staff Report: The U.S. Treasury Market on October 15, 2014. It’s very clearly biased against automated trading, skimming over the notion that a thin, brittle market is the logical and frequent consequence of increased transparency, but there was one thing I found interesting:

Around 9:39 ET, the sudden visibility of certain sell limit orders in the futures market seemed to have coincided with the reversal in prices. Recall that only 10 levels of order prices above and below the best bid and ask price are visible to futures market participants. Around 9:39 ET, with prices still moving higher, a number of previously posted large sell orders suddenly became visible in the order book above the current 30-year futures price (as well as in smaller size in 10-year futures). The sudden visibility of these sell orders significantly shifted the visible order imbalance in that contract, and it coincided with the beginning of the reversal of its price (the top of the price spike). Most of these limit orders were not executed, as the price did not rise to their levels.

Meanwhile, HFT traders are eagerly wooed by exchanges:

Despite the often explosive debate over this kind of trading in the U.S., bourses in Mexico, Turkey, South Africa and beyond are trying to lure HFT types to boost business.

The message is clear: whatever the perceived risks, algorithmic robot traders — algobots — are marching steadily across the globe.

“We are welcoming foreign investors, and that includes HFT firms,” says Muammer Cakir, managing director at Borsa Istanbul.
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The Tokyo Stock Exchange is taking similar steps. TSE officials last month visited New York to let the HFT industry know about upgrades due in September to its Arrowhead trading engine. Arrowhead already matches orders more than 1,000 times faster than was possible five years ago.
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In Mexico, the bourse is trying to attract more high-frequency traders to boost volumes, said Luis Carballo, the top information technology official at the Bolsa Mexicana de Valores SAB, which operates the exchange.
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JSE Ltd., the company that operates the Johannesburg Stock Exchange, opened a co-location facility in May 2014 that cut the time it takes for data to travel from a trader to its servers and back to 150 microseconds, from 2,550 microseconds. Stock transactions rose 19 percent last year at the exchange and in October it had a record month, with daily average volume close to 400,000, about a third higher than its previous best.
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Perhaps the last big obstacle to high-frequency trading achieving global dominance is China, where tight government rules, a stamp duty on stock trades and market inefficiency have so far kept out the algobots. There may be signs of opening up, though: Doug Cifu, CEO of Virtu Financial Inc., one of the world’s biggest computer trading firms, said on an earnings call in May that Virtu was having “very significant preliminary discussions” about entering the Chinese markets.

It proved to be a quiet day overall for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets off 7bp and DeemedRetractibles down 16bp, but the Performance Highlights table demonstrates that volatility on the issue level remains very high. Volume was 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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 21.76 to be $0.27 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.39 cheap at its bid price of 15.80.

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Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 17.02 to be $0.95 rich, while MFC.PR.L, resetting at +216bp on 2019-6-19, is bid at 20.61 to be $0.59 cheap.

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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 20.03 to be $0.84 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.26 and appears to be $0.88 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.21, looks $0.38 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.66 and is $0.31 cheap.

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The change of scale on the chart means there are no outliers today!

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of exactly 0.00% (which seems a little extreme!).

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