PrefBlog

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:

Click for Big

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.

Click for Big

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.

Click for Big

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.

Click for Big

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.

Click for Big

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%

Click for Big

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

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:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.05 to be $1.12 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.11 cheap at its bid price of 24.72.

Click for Big

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.

Click for Big

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.

Click for Big

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.

Click for Big

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%

Click for Big

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

There’s a bit more colour about the effect of the US jobs number, discussed March 6 on the treasury long bond:

Since hitting an all-time low of 2.22 percent on Jan. 30, Treasury 30-year bond yields have posted the biggest five-week jump in six years as better-than-forecast employment growth led investors to pull forward wagers for the Federal Reserve to raise interest rates.
…
The 30-year bond yield rose 25 basis points, or 0.25 percentage point, this week to 2.84 percent, according to Bloomberg Bond Trader prices.

That pushed the yield increase to 62 basis points since January. The move is the biggest since a 1 percentage point rise in the five weeks ended Jan. 30, 2009, after the Fed said it was considering buying Treasuries to help stimulate economic growth.
…
Yields soared March 6 after the Labor Department reported the U.S. added 295,000 jobs last month, compared with a forecast for a 235,000 gain in a Bloomberg survey. The unemployment rate fell to 5.5 percent, an almost seven-year low, from 5.7 percent.

It was 12th straight month payrolls have increased by at least 200,000, the best run since March 1995. Payrolls rose 3.1 million in 2014, the most in 15 years.

And some colour on the effect of the suspension of Canadian forward guidance:

Pacific Investment Management Co.’s Ed Devlin is getting out of Canadian government bonds, and Bank of Canada Governor Stephen Poloz is the reason why.

Mr. Devlin, who oversees about $17-billion (U.S.), including the Canadian portfolios for the world’s biggest manager of bond funds, said higher yields are needed to compensate for the risk of buying debt whipsawed by Mr. Poloz’s policy pronouncements.

“Investors should require a bigger risk premium to invest in these bonds,” Mr. Devlin said by phone from Los Angeles on Friday. “If you don’t know what they’re going to do, you should get paid more money to invest in them than if they were fairly predictable.”

And there are the usual arguments about this:

Gluskin-Sheff chief economist David Rosenberg said last week the confusion was putting the Bank of Canada’s credibility at risk.

“The fact that they decided to stop offering guidance and start serving up confusion makes me gun-shy about making a call,” Rosenberg told Bloomberg. “If you’re trying to promote economic growth, you probably don’t want to generate too much volatility in the financial markets to achieve that goal.”

But [Dominion Lending Centres Chief Economist Sherry] Cooper says Bay Street should spend more time watching the data, instead of obsessing about what the bank will do.

“What caused this hissy fit on Bay Street was the economists were wrong,” Cooper wrote in a note. “No one expected the rate cut, so caught with their proverbial pants down, the pundits dumped on Poloz for having misled them.”

Cooper said not only was Poloz right to cut rates, but she also sees no reason why the central bank should “telegraph rate moves in advance.”

“The lamentation over the loss of ‘forward guidance’ is pathetic .… Everyone knows that central bank action is data dependent. When the data surprise, all bets are off,” she wrote.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 15bp, FixedResets down 21bp and DeemedRetractibles gaining 3bp. Volatility was down from the levels we’ve generally seen for the past three months. Volume was low.

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 24.14 to be $1.20 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.07 cheap at its bid price of 24.75.

Click for Big

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 23.91 to be $0.34 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.91 to be $0.38 cheap.

Click for Big

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.Z, resetting at +296bp on 2017-12-31, bid at 25.26 to be $0.45 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.42 and appears to be $0.61 rich.

Click for Big

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 16.66, looks $1.56 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.77 and is $1.04 rich.

Click for Big

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%.

Not shown is the DC.PR.B / DC.PR.D pair, which implies an average rate of negative 1.77% until its exchange date 2019-9-30.

Click for Big

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

Jobs, jobs, jobs!

The U.S. job-creation machine kept exceeding expectations in February. Wages continued to disappoint.

Employers added 295,000 workers to payrolls last month, more than forecast, and the unemployment rate dropped to 5.5 percent, the lowest in almost seven years, figures from the Labor Department showed Friday in Washington. Hourly earnings rose less than forecast.

A lingering appetite to boost headcounts comes as increased purchasing power from cheaper fuel helps drive consumer spending. The jobless rate has now reached the Federal Reserve’s range for what it considers full employment, keeping policy makers on course to raise interest rates this year as persistent job growth sets the stage for a pickup in wages.
…
The median forecast in a Bloomberg survey of economists called for a 235,000 advance in February payrolls. Estimates ranged from 150,000 to 370,000. Employment in January climbed 239,000. The drop in the unemployment rate was also bigger than projected, and down from 5.7 percent in January.

Average hourly earnings rose 0.1 percent from the prior month after advancing 0.5 percent in January, which was the most since November 2008. The median forecast called for a 0.2 percent gain. Earnings were up 2 percent over the past year, also less than projected and matching the increase on average since the expansion began in mid-2009.

So the previously scheduled deflation has been cancelled:

U.S. stocks fell, with the Standard & Poor’s 500 Index tumbling the most in two months, as better-than-forecast jobs data fueled speculation the Federal Reserve is moving closer to raising interest rates.
…
The S&P 500 fell 1.4 percent, the most since Jan. 5, to 2,071.26 at 4 p.m. in New York. The equity gauge lost 1.6 percent for the week. The Dow retreated 278.94 points, or 1.5 percent, to 17,856.78 for its worst drop in five weeks. The Nasdaq Composite Index slipped 1.1 percent. More than 7.4 billion shares changed hands on U.S. exchanges, 7.2 percent above the 30-day average.
…
Utility companies in the S&P 500 tumbled 3.1 percent. Selling picked up in the industry as the rate on 10-year Treasury notes spiked 13 basis points to 2.25 percent, the highest this year. The group’s dividend yield of 3.7 percent is the second-highest in the index.

AllBanc Split Corp., proud issuer of ABK.PR.C, was confirmed at Pfd-2 by DBRS:

Since the last rating action in March 2014, the net asset value of the Company has been slightly volatile, mirroring the performance of Canadian banks over the past year. However, downside protection rose from 60.1% on February 20, 2014, to 62.6% as of February 26, 2015. As a result, the rating of the Class C Preferred Shares has been confirmed at Pfd-2.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 9bp, FixedResets gaining 26bp and DeemedRetractibles down 15bp. The Performance Highlights table is its usual lengthy self. Volume was 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 +235, is bid at 24.14 to be $1.18 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.10 cheap at its bid price of 24.71.

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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 24.91 to be $0.30 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.88 to be $0.47 cheap.

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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.PF.X, resetting at +188bp on 2017-6-30, bid at 18.68 to be $0.17 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.45 and appears to be $0.68 rich.

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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 16.70, 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 23.80 and is $1.13 rich.

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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%.

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