New Issue: HSE FixedReset, 4.60%+352

June 9th, 2015

Husky Energy has announced that it:

has agreed to issue to a syndicate of underwriters led by RBC Capital Markets, BMO Capital Markets and Scotia Capital Inc. for distribution to the public 6,000,000 Cumulative Redeemable Preferred Shares, Series 7 (the “Series 7 Shares”).

The Series 7 Shares will be issued at a price of $25.00 per Series 7 Share, for aggregate gross proceeds of $150 million. Holders of the Series 7 Shares will be entitled to receive a cumulative quarterly fixed dividend yielding 4.60 percent annually for the initial period ending June 30, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 3.52 percent.

Holders of Series 7 Shares will have the right, at their option, to convert their shares into Cumulative Redeemable Preferred Shares, Series 8 (the “Series 8 Shares”), subject to certain conditions, on June 30, 2020 and on June 30 every five years thereafter. Holders of the Series 8 Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill rate plus 3.52 percent.

Husky has granted the underwriters an option, exercisable in whole or in part prior to closing, to purchase up to an additional 2,000,000 Series 7 Shares at the same offering price. The Series 7 Shares will be offered by way of prospectus supplement to the short form base shelf prospectus of Husky Energy dated February 23, 2015.

The prospectus supplement will be filed with securities regulatory authorities in all provinces of Canada.

The net proceeds of the offering will be used for general corporate purposes which may include, among other things, the partial repayment of bank debt incurred by the Company to further advance its near-term heavy oil thermal projects.

The offering is expected to close on or about June 17, 2015 subject to customary closing conditions and receipt of required regulatory approvals.

The chart of Implied Volatility for the series of HSE FixedResets indicates that the new issue can be thought of as being a little cheap … not just because it’s above the theoretical yield for the series, but because the Implied Volatility seems a little high, indicating that there is, perhaps, a little bit more downside protection with the higher-spread issues than with the lower-spread issues.

impVol_HSE_150609
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L.PR.B Firm On Decent Volume

June 9th, 2015

Loblaw Companies Limited has announced:

the completion today of the sale of 9 million cumulative Second Preferred Shares, Series B (the “Preferred Shares Series B”), to yield 5.30% per annum, to a syndicate of underwriters co-led by RBC Capital Markets, Scotiabank and TD Securities Inc. The aggregate gross proceeds of the sale were $225 million. The Preferred Shares Series B have been listed and posted to trade on the Toronto Stock Exchange under the symbol “L.PR.B”.

L.PR.B is a 5.30% Straight Perpetual announced June 2. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The issue traded 765,451 shares today (consolidated exchanges) in a range of 24.87-97 before closing at 24.92-95. Vital statistics are:

L.PR.B Perpetual-Discount YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-09
Maturity Price : 24.53
Evaluated at bid price : 24.92
Bid-YTW : 5.33 %

HSB.PR.C, HSB.PR.D No Longer On Watch-Negative By S&P

June 9th, 2015

Standard & Poor’s has announced:

  • •We now consider the prospect that the U.K. and German governments would provide extraordinary support to their banking systems to be uncertain, meaning that we now include no such uplift in the ratings on systemic commercial banking groups domiciled in these countries.
  • •However, we recognize that these countries’ bank resolution frameworks are now well advanced, and we now include notches of uplift for systemic banks that we expect will hold or build sizeable volumes of bail-in capital in the coming years.
  • •At the same time, we have recognized the strengthening intrinsic creditworthiness of a few banks that have, for example, materially strengthened their capitalization and lowered their exposure to unexpected losses.
  • •We have resolved the CreditWatch placements on all these banks, lowering the long-term, and in some cases short-term, ratings on some, and affirming the ratings on others.
  • •The outlook on most of these banks is now stable, but we have assigned negative outlooks where, for example, we see a risk that their building of core or bail-in capital may fall short.
  • •Finally, we maintain the developing outlook on Germany-based Deutsche Pfandbriefbank AG (PBB), reflecting our view that the outcome of its reprivatization process is still uncertain.


•We affirmed our ratings on the hybrid capital instruments issued by, or guaranteed by, HSBC, Santander UK, and SCB, but raised by one notch the issue credit ratings on hybrids issued by Lloyds (and its banking affiliates) and Nationwide. We also raised by one notch the long-term issuer credit ratings on Lloyds Banking Group PLC and HBOS PLC.

However, to summarise, these actions reflect our view that these countries’ implementation of the comprehensive resolution framework set out in the EU’s Bank Recovery & Resolution Directive, including bail-in powers and requirements, mean that the prospect for extraordinary government support now appears uncertain, even for systemically important bank operating companies, and even while these banks remain in a transitional phase of building buffers of loss-absorbing debt instruments. However, we expect that regulators will (in most cases) require these banks within the next few years to build those buffers to a level that offers a material level of protection to senior unsecured creditors on a nonviability (or “gone concern”) basis.

For two reasons, our review primarily focused on the implications of the above for the issuer credit ratings on these banks’ operating companies and the issue credit ratings on their senior unsecured debt issue instruments:

  • •Our ratings on European banks’ subordinated debt instruments and U.K. bank holding companies already excluded any uplift for government
    support; and

  • •We saw no prospect of uplift under our additional loss absorbing capacity (ALAC) criteria for the instruments cited in the bullet above because regulators intend them to act as a source of bail-in capital to support the systemic functions provided by bank operating companies, including the servicing of certain senior obligations.

The now-resolved Credit-Watch-Negative on HSBC was reported in February.

June 8, 2015

June 8th, 2015

Nothing happened today … well, equities got banged up.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets losing 25bp and DeemedRetractibles down 11bp. The lengthy Performance Highlights table is dominated by losing FixedResets. 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:

impVol_TRP_150608
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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.50 to be $1.14 rich, while TRP.PR.B, which will reset June 30 at 2.152% (+128), is $0.62 cheap at its bid price of 14.77

impVol_MFC_150608
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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. 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). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.75 to be $0.94 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.00 to be $0.70 cheap.

impVol_BAM_150608
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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.75 to be $0.40 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.77 and appears to be $0.50 rich.

impVol_FTS_150608
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FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $1.03 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.81 and is $0.56 rich.

pairs_FF_150608
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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.45%, including FTS.PR.H / FTS.PR.I at 0.91%. On the junk side, five out of the six pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -1.22%; AIM.PR.A / AIM.PR.B at -0.35%; BRF.PR.A / BRF.PR.B at -1.05%; DC.PR.B / DC.PR.D at -0.61%; and FFH.PR.C / FFH.PR.D at +1.24%.

pairs_FFA_150608
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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.5381 % 2,204.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.5381 % 3,853.8
Floater 3.48 % 3.52 % 62,049 18.39 3 0.5381 % 2,343.1
OpRet 4.45 % -10.51 % 28,215 0.08 2 0.0198 % 2,780.2
SplitShare 4.59 % 4.71 % 70,391 3.31 3 0.2012 % 3,251.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0198 % 2,542.2
Perpetual-Premium 5.47 % 4.86 % 63,976 3.19 19 -0.2671 % 2,510.3
Perpetual-Discount 5.07 % 5.08 % 113,951 15.36 15 -0.0310 % 2,761.3
FixedReset 4.46 % 3.87 % 259,834 15.87 87 -0.2472 % 2,376.3
Deemed-Retractible 5.00 % 3.36 % 109,184 0.70 34 -0.1059 % 2,625.7
FloatingReset 2.51 % 2.91 % 56,279 6.13 9 -0.1917 % 2,333.3
Performance Highlights
Issue Index Change Notes
GWO.PR.N FixedReset -1.98 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.86
Bid-YTW : 7.15 %
MFC.PR.F FixedReset -1.82 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.77
Bid-YTW : 6.77 %
POW.PR.G Perpetual-Premium -1.80 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-04-15
Maturity Price : 25.25
Evaluated at bid price : 25.57
Bid-YTW : 5.47 %
HSE.PR.A FixedReset -1.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 16.26
Evaluated at bid price : 16.26
Bid-YTW : 4.36 %
IFC.PR.A FixedReset -1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.75
Bid-YTW : 5.66 %
TD.PF.A FixedReset -1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 22.53
Evaluated at bid price : 23.40
Bid-YTW : 3.61 %
GWO.PR.I Deemed-Retractible -1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.11
Bid-YTW : 5.51 %
TD.PF.B FixedReset -1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 22.57
Evaluated at bid price : 23.44
Bid-YTW : 3.59 %
TD.PF.C FixedReset -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 22.41
Evaluated at bid price : 23.20
Bid-YTW : 3.62 %
BAM.PF.A FixedReset -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 23.14
Evaluated at bid price : 24.49
Bid-YTW : 4.08 %
CM.PR.P FixedReset -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 22.46
Evaluated at bid price : 23.30
Bid-YTW : 3.59 %
GWO.PR.H Deemed-Retractible -1.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.85
Bid-YTW : 5.46 %
BAM.PF.F FixedReset -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 23.03
Evaluated at bid price : 24.50
Bid-YTW : 4.06 %
PWF.PR.P FixedReset 1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 18.55
Evaluated at bid price : 18.55
Bid-YTW : 3.67 %
SLF.PR.G FixedReset 1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.35
Bid-YTW : 7.56 %
BAM.PR.K Floater 1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 14.31
Evaluated at bid price : 14.31
Bid-YTW : 3.52 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.Y FixedReset 187,430 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 23.02
Evaluated at bid price : 24.65
Bid-YTW : 3.70 %
RY.PR.N Perpetual-Discount 121,736 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 24.42
Evaluated at bid price : 24.80
Bid-YTW : 4.95 %
RY.PR.C Deemed-Retractible 53,530 Scotia crossed 33,500 at 25.25; TD crossed 20,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-11-24
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 2.82 %
MFC.PR.A OpRet 50,585 Called for redemption effective June 19.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-19
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 3.38 %
BAM.PF.G FixedReset 36,202 RBC crossed 25,000 at 24.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 23.08
Evaluated at bid price : 24.77
Bid-YTW : 4.01 %
CU.PR.G Perpetual-Discount 31,960 Scotia crossed 30,000 at 22.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 22.26
Evaluated at bid price : 22.60
Bid-YTW : 4.99 %
There were 19 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
POW.PR.G Perpetual-Premium Quote: 25.57 – 26.31
Spot Rate : 0.7400
Average : 0.5109

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-04-15
Maturity Price : 25.25
Evaluated at bid price : 25.57
Bid-YTW : 5.47 %

GWO.PR.N FixedReset Quote: 16.86 – 17.57
Spot Rate : 0.7100
Average : 0.5030

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.86
Bid-YTW : 7.15 %

IFC.PR.A FixedReset Quote: 20.75 – 21.26
Spot Rate : 0.5100
Average : 0.3345

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.75
Bid-YTW : 5.66 %

ELF.PR.G Perpetual-Discount Quote: 23.17 – 23.72
Spot Rate : 0.5500
Average : 0.3884

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-08
Maturity Price : 22.87
Evaluated at bid price : 23.17
Bid-YTW : 5.19 %

GWO.PR.R Deemed-Retractible Quote: 24.40 – 24.89
Spot Rate : 0.4900
Average : 0.3322

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 5.11 %

GWO.PR.S Deemed-Retractible Quote: 26.05 – 26.50
Spot Rate : 0.4500
Average : 0.3033

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 4.69 %

June 5, 2015

June 6th, 2015

Jobs, jobs, jobs!

The American jobs machine has produced a spring spurt to banish the winter weakness.

Employers added 280,000 jobs in May, the most in five months, further dispelling fears that a first-quarter slowdown would take hold, figures from the Labor Department showed Friday. That followed a revised 221,000 April advance.

Hourly earnings climbed from a year ago by the most since August 2013, while an increase in the number of people entering the labor force caused the unemployment rate to creep up to 5.5 percent from 5.4 percent

The Bloomberg Dollar Spot Index added 0.8 percent, with the greenback rising to 125.64 yen at 4:03 p.m. in New York. The yield on the 10-year Treasury note climbed to 2.40 percent from 2.31 percent late Thursday. The Standard & Poor’s 500 Index fell 0.1 percent at the close.

The world’s largest economy shrank at a 0.7 percent annualized rate in the first quarter, according to the Commerce Department’s latest report on gross domestic product.

The Labor Department said average hourly earnings increased 0.3 percent in May from the prior month, the biggest gain since January. They were up 2.3 percent from May 2014, exceeding the 2 percent gain on average since the current expansion began six years ago.

The agency’s survey of households, used to derive the unemployment figure, showed the participation rate, which indicates the share of working-age people in the labor force, increased to a four-month high of 62.9 percent from 62.8 percent in April.

There were jobs in Canada, too:

The Canadian economy saw a burst in hiring last month as private-sector firms, such as factories, added to head count.

Employers created a stronger-than-expected 58,900 jobs in May, the most in seven months. The country’s jobless rate stayed at 6.8 per cent, Statistics Canada said Friday, as more people entered the labour market in search of work.

Average hourly wage growth accelerated to 3.1 per cent, year over year, from less 2 per cent as recently as March, BMO noted – well above the rate of inflation.

Productivity was a soft spot for Canada. Labour productivity fell in the first quarter, Statscan said in a separate release, the first drop in a year as output declined for the first time since 2011.

So the US derivatives market incorporated higher expectations of a 2015 hike:

U.S. bond traders had a very clear message for Christine Lagarde on Friday morning: Your advice to the Federal Reserve is wrong.

Lagarde, managing director of the International Monetary Fund, advised the Fed on Thursday to wait until 2016 before hiking interest rates.

Bond traders don’t think the U.S. central bank will heed that recommendation. On Friday, they quickly pulled forward their expectations for a rate increase — assigning better than even odds of a move in September after a jobs report showed American payrolls climbed the most in May in five months. That’s up from a 46 percent probability on Thursday, according to Bloomberg calculations.

Naturally, this caused great excitement among the Fed and its watchers:

The 280,000 rise in payrolls in May suggests that the central bank is making progress toward its goal of maximum employment, William C. Dudley, president of the Federal Reserve Bank of New York, said on Friday. The gains were widespread and were accompanied by a bit higher wages, he added.

“It is likely that conditions will be appropriate to begin monetary policy normalization later this year,” Dudley, who is vice chairman of the central bank’s policy-making Federal Open Market Committee, said in a speech in Minneapolis.

While Dudley hedged his forecast by saying a move wasn’t certain, his assertion was more definitive than comments earlier in the week by some other officials who voiced doubts about the strength of the economy. Fed watchers consider Dudley a confidant of Chair Janet Yellen and thus see his views as more indicative of where the central bank is heading.

Traders of money-market derivatives lifted the chance of the Fed raising rates this year following the jobs data. Futures show a 50 percent chance the Fed will increase interest rates by its October meeting, up from 43 percent Thursday, according to CME Group data.

So Treasuries got whacked:

Yields on 10-year notes climbed 10 basis points to 2.41 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.43 percent, the highest since Oct. 6. The low yield for the year was 1.64 percent on Jan. 30.

“It’s sell, sell, sell,” said Thomas Simons, a government-debt economist at Jefferies Group LLC, a primary dealer. “This alleviates a lot of the concern that the economy was not going to bounce back in the second half.”

Matt Levine writes an interesting column on activist investor communication:

If corporate America thinks that activist investors have too much power to affect corporate policies and cause short-term thinking and other bad results, and if the SEC agrees, then it might want to just make it harder and riskier for activists to discuss companies with each other, and to solicit support from other investors. Here’s Phil Goldstein of Bulldog Investors, one of the targets of the SEC’s inquiries:

Scrutiny from the SEC could chill legal discussions between investors, he said, adding that it isn’t surprising that underperforming companies would draw interest from several activists.

“If you go to a Grateful Dead concert, you’re going to find a lot of Grateful Dead fans,” he said. “They’re not a group. They just like the same music.”

Activists make their living by being persuasive, and the less they can talk to other investors, the less opportunity they have to persuade. Cutting down on those opportunities is a little weird for corporate democracy: Shareholders can vote, but they’re afraid to talk to each other about how they’ll vote. But if you worry that activists have too much influence, this is a pretty direct way to fix that.

Meanwhile, the war on banks is having an effect:

Britain’s largest banks are urging the U.K. Treasury to start a formal review of taxes on the industry, amid concern HSBC Holdings Plc and Standard Chartered Plc could move overseas to avoid a levy on balance sheets.

A review of taxation could persuade HSBC CEO Stuart Gulliver to keep Europe’s largest bank based in London, after it started a formal evaluation of its domicile in response to a rising U.K. levy and tougher regulation. The tax on balance sheets, imposed after the financial crisis and which applies to banks’ assets globally, cost HSBC 750 million pounds ($1.1 billion) last year, more than any other bank.

Standard Chartered, which like HSBC makes most of its earnings in Asia, has said it’s also keeping its London headquarters under review and it’s one of the first issues shareholders have said they want new CEO Bill Winters to examine after he starts next week.

Matt Levine has a nice column on communication between activist investors:

If corporate America thinks that activist investors have too much power to affect corporate policies and cause short-term thinking and other bad results, and if the SEC agrees, then it might want to just make it harder and riskier for activists to discuss companies with each other, and to solicit support from other investors. Here’s Phil Goldstein of Bulldog Investors, one of the targets of the SEC’s inquiries:

Scrutiny from the SEC could chill legal discussions between investors, he said, adding that it isn’t surprising that underperforming companies would draw interest from several activists.

“If you go to a Grateful Dead concert, you’re going to find a lot of Grateful Dead fans,” he said. “They’re not a group. They just like the same music.”

Activists make their living by being persuasive, and the less they can talk to other investors, the less opportunity they have to persuade. Cutting down on those opportunities is a little weird for corporate democracy: Shareholders can vote, but they’re afraid to talk to each other about how they’ll vote. But if you worry that activists have too much influence, this is a pretty direct way to fix that.

TransCanada Corporation, proud issuer of TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F and TRP.PR.G, was confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the ratings of TransCanada Corporation (TCC or the Company) and its wholly owned subsidiary, TransCanada PipeLines Limited (TCPL), both with Stable trends. The preferred share rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the strength of TCPL and the expectation that no debt will be issued at TCC. The ratings primarily reflect (1) expected improvement in TCC’s overall business risk profile over the medium term, (2) potential medium-term pressure on its credit metrics and (3) environmental, regulatory and political risks with respect to its natural gas and liquids pipelines segments.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 27bp, FixedResets gaining 12bp and DeemedRetractibles off 16bp. TRP FixedResets are notable winners on the Performance Highlights table. Volume was very 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:

impVol_TRP_150605
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.70 to be $1.28 rich, while TRP.PR.G, which resets 2020-11-30 at +296, is $0.60 cheap at its bid price of 24.77.

impVol_MFC_150605
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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. 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). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.75 to be $0.84 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.08 to be $0.60 cheap.

impVol_BAM_150605
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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.86 to be $0.46 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.94 and appears to be $0.53 rich.

impVol_FTS_150605
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FTS.PR.H, with a spread of +145bp, and bid at 16.07, looks $0.96 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.65 and is $0.50 rich.

pairs_FR_150605
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.50%, including FTS.PR.H / FTS.PR.I at 1.00%. On the junk side, four pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -1.03%; AIM.PR.A / AIM.PR.B at -0.35%; BRF.PR.A / BRF.PR.B at -0.80%; and DC.PR.B / DC.PR.D at -1.64%.

pairs_FF_150605
Click for Big

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

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 1.7377 % 2,192.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.7377 % 3,833.2
Floater 3.50 % 3.55 % 62,857 18.33 3 1.7377 % 2,330.6
OpRet 4.45 % -10.96 % 27,597 0.08 2 -0.1185 % 2,779.7
SplitShare 4.59 % 4.78 % 71,422 3.32 3 -0.0670 % 3,245.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1185 % 2,541.7
Perpetual-Premium 5.45 % 4.22 % 64,066 0.40 19 0.0539 % 2,517.0
Perpetual-Discount 5.07 % 5.05 % 115,119 15.38 15 -0.2747 % 2,762.2
FixedReset 4.45 % 3.74 % 263,166 16.65 87 0.1163 % 2,382.2
Deemed-Retractible 4.99 % 3.32 % 110,127 0.71 34 -0.1556 % 2,628.4
FloatingReset 2.48 % 2.85 % 55,433 6.15 9 -0.1962 % 2,337.7
Performance Highlights
Issue Index Change Notes
SLF.PR.G FixedReset -2.36 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.12
Bid-YTW : 7.58 %
FTS.PR.I FloatingReset -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 16.02
Evaluated at bid price : 16.02
Bid-YTW : 3.18 %
GWO.PR.N FixedReset -1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.20
Bid-YTW : 6.77 %
BNS.PR.Y FixedReset -1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.11
Bid-YTW : 3.14 %
MFC.PR.F FixedReset 1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.10
Bid-YTW : 6.41 %
MFC.PR.H FixedReset 1.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 2.66 %
TD.PF.B FixedReset 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 22.73
Evaluated at bid price : 23.75
Bid-YTW : 3.44 %
TRP.PR.A FixedReset 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 19.60
Evaluated at bid price : 19.60
Bid-YTW : 3.74 %
TD.PF.C FixedReset 1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 22.56
Evaluated at bid price : 23.50
Bid-YTW : 3.47 %
TRP.PR.C FixedReset 1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 16.75
Evaluated at bid price : 16.75
Bid-YTW : 3.78 %
BAM.PR.C Floater 1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 14.20
Evaluated at bid price : 14.20
Bid-YTW : 3.55 %
TRP.PR.B FixedReset 1.92 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 14.88
Evaluated at bid price : 14.88
Bid-YTW : 3.69 %
BAM.PR.B Floater 2.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 14.49
Evaluated at bid price : 14.49
Bid-YTW : 3.48 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.N Perpetual-Discount 497,115 New issue settled today.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 24.37
Evaluated at bid price : 24.75
Bid-YTW : 4.96 %
BMO.PR.Y FixedReset 472,715 New issue settled today.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 23.02
Evaluated at bid price : 24.65
Bid-YTW : 3.61 %
ENB.PR.D FixedReset 320,984 Desjardins crossed 312,700 at 18.55.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 18.41
Evaluated at bid price : 18.41
Bid-YTW : 4.62 %
ENB.PF.C FixedReset 307,450 Desjardins crossed 300,000 at 20.55.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 20.41
Evaluated at bid price : 20.41
Bid-YTW : 4.64 %
BNS.PR.L Deemed-Retractible 110,300 TD crossed two blocks of 50,000 each, both at 25.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-04-27
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 3.32 %
PWF.PR.T FixedReset 100,206 Nesbitt crossed 100,000 at 25.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 23.34
Evaluated at bid price : 25.15
Bid-YTW : 3.32 %
There were 17 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRP.PR.C FixedReset Quote: 16.75 – 17.50
Spot Rate : 0.7500
Average : 0.5029

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 16.75
Evaluated at bid price : 16.75
Bid-YTW : 3.78 %

TRP.PR.B FixedReset Quote: 14.88 – 15.38
Spot Rate : 0.5000
Average : 0.3598

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 14.88
Evaluated at bid price : 14.88
Bid-YTW : 3.69 %

CU.PR.G Perpetual-Discount Quote: 22.51 – 22.94
Spot Rate : 0.4300
Average : 0.3119

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 22.18
Evaluated at bid price : 22.51
Bid-YTW : 5.01 %

PVS.PR.C SplitShare Quote: 25.05 – 25.40
Spot Rate : 0.3500
Average : 0.2478

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 4.78 %

GWO.PR.H Deemed-Retractible Quote: 24.10 – 24.34
Spot Rate : 0.2400
Average : 0.1550

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 5.32 %

ENB.PR.F FixedReset Quote: 18.91 – 19.15
Spot Rate : 0.2400
Average : 0.1614

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 18.91
Evaluated at bid price : 18.91
Bid-YTW : 4.67 %

BMO.PR.Y Weak On Middling Volume

June 5th, 2015

Bank of Montreal has announced:

it has closed its domestic public offering of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 33 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 33”). The offering was underwritten on a bought deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 8 million Preferred Shares Series 33 at a price of $25 per share to raise gross proceeds of $200 million.

The Preferred Shares Series 33 were issued under a prospectus supplement dated May 29, 2015, to the Bank’s short form base shelf prospectus dated March 13, 2014. Such shares will commence trading on the Toronto Stock Exchange today under the ticker symbol BMO.PR.Y.

BMO.PR.Y is a FixedReset, 3.80%+271, announced May 27. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 651,560 shares today (consolidated exchanges) in a range of 24.46-65 before closing at 24.65-73. Vital statistics are:

BMO.PR.Y FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 23.02
Evaluated at bid price : 24.65
Bid-YTW : 3.61 %

This issue looks reasonably good according to Implied Volatility theory:

impVol_BMO_150605
Click for Big

Note that the very high level of Implied Volatility is also calculated when only the NVCC-compliant issues are considered – for these issues alone, I get a spread of 99bp and Implied Volatility of 40%. This level of Implied Volatility is silly and will generally arise when the issues concerned are trading with an expectation of directionality in prices; I suggest that there are a lot of investors who figure that anything with the BMO brand name on it will trade somewhere near par forever.

This has the effect of making the lower spread issues vulnerable to a decline in credit quality and/or an increase in spreads; in other words, the higher-spread issues (such as this new issue) are getting a boatload of downside protection for free (when compared to other BMO issues ONLY!).

RY.PR.N Soft On Middling Volume

June 5th, 2015

Royal Bank of Canada has announced:

it has closed its domestic public offering of Non-Cumulative, Preferred Shares Series BH. Royal Bank of Canada issued 6 million Preferred Shares Series BH at a price of $25 per share to raise gross proceeds of $150 million.

The offering was underwritten by a syndicate led by RBC Capital Markets. The Preferred Shares Series BH will commence trading on the Toronto Stock Exchange today under the ticker symbol RY.PR.N.

The Preferred Shares Series BH were issued under a prospectus supplement dated May 29, 2015 to the bank’s short form base shelf prospectus dated December 20, 2013.

RY.PR.N is a 4.90% Straight Perpetual announced May 28. It will be tracked by HIMIPref™ an is assigned to the PerpetualDiscounts subindex.

The issue traded 659,315 shares today (consolidated exchanges) in a wide range of 24.57-90 before closing at 24.75-85. Vital statistics are:

RY.PR.N Perpetual-Discount YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 24.37
Evaluated at bid price : 24.75
Bid-YTW : 4.96 %

June 4, 2015

June 4th, 2015

I have reiterated to the point of boredom (some might say past it) that exchange trading will give you tight spreads, sure, but thin brittle markets. And yet people keep trying:

The $7.8 trillion U.S. corporate bond market has yet to figure out how to trade large chunks of debt electronically, according to industry executives.

Alerting other investors that you want to buy or sell a certain security is the problem, said Robert Douglass, chief operating officer of U.S. corporate debt trading at Barclays Plc. Once that’s done, your competitors can steal a potentially profitable trade by executing an order ahead of yours.

“There is so much sensitivity about information leakage,” Douglass said Wednesday during a panel discussion at a Sandler O’Neill & Partners LP conference in New York. Being able to show the market a desire to buy or sell a large amount of an illiquid bond without the price immediately moving against you “would be a great market for everyone,” he said.

I mentioned the ding-dong Avon investors on May 14 … profits from their hair-trigger idiocy have been frozen:

The Securities and Exchange Commission today announced an emergency asset freeze of two U.S. brokerage accounts connected to schemes to manipulate Avon and other stocks, thwarting any ability to cash in on ill-gotten proceeds.

According to an SEC complaint filed in federal court in Manhattan, the agency has tracked a filing on its EDGAR system last month about a false Avon tender offer to a foreign entity using an IP address located in Sofia, Bulgaria. A Bulgarian trader named Nedko Nedev controlled at least one of the two now-frozen brokerage accounts, and his account held a substantial position in Avon contracts-for-difference (CFDs) that were losing value in recent months. The SEC alleges that Nedev generated approximately $5,000 in excess profits by selling almost half of the account’s Avon CFDs at inflated prices after the EDGAR filing led to a 20-percent increase in the value of Avon stock on May 14.

The court issued an order at the SEC’s request freezing the two accounts, which contain approximately $2 million in assets.

Can there possibly be a misprint there? “$5,000 in excess profits”? Really?

David Parkinson of the Globe passes on some poor Canadian economic news:

The merchandise trade report released by Statistics Canada on Wednesday was, in a word, grim. The April trade deficit of $2.97-billion was the second-biggest on record – trailing only the March deficit, which was revised to $3.85-billion from the originally reported $3.02-billion. That’s a $6.8-billion trade hole in just two months; for the year to date, the cumulative trade deficit is nearly $11-billion.

Yes, exports to the U.S. rose 1.6 per cent in April, but that comes after eight consecutive months of declines. Over the past 12 months, exports to the U.S. are down 4.3 per cent. While April’s upturn in U.S. shipments may provide a glimmer of hope, it appears largely driven by a rebound, from great depths, of the energy sector.

Several key non-energy sectors that were supposed to benefit from an accelerating U.S. economy this year have gone AWOL. Exports of metal ores fell 5.8 per cent in April; metal products fell 1.4 per cent. Building and packaging materials dropped 5.8 per cent. Consumer goods slumped 6 per cent. Industrial machinery and equipment flatlined in the month, after slipping 1.2 per cent in March.

There’s little question that the elements in trade for an economic recovery remain missing in action. Bank of Canada Governor Stephen Poloz has remained optimistic about a brighter second quarter and a strong second half, but with each new economic release, the doubts creep in. Maybe the cavalry won’t arrive on time; maybe reinforcements, in the form of another interest rate cut, might need to be called in.

And the IMF’s Lagarde has appointed herself a Fed governor, but it remains to be seen whether anybody’s listening:

The Federal Reserve should delay raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time this year.

The lender also said that the dollar was “moderately overvalued” and a further marked appreciation would be “harmful,” in a statement released in Washington on Thursday on its annual checkup of the U.S. economy.

“We still believe that the underpinnings for continued expansion are in place,” IMF Managing Director Christine Lagarde said at a press briefing in Washington. “The inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months.”

That means the Fed should wait until early 2016, even if there’s a risk of “slight overinflation” relative to the central bank’s 2 percent target, Lagarde said.

The fund’s latest U.S. monetary-policy advice is among its most explicit on record. In 2012, for instance, IMF staff suggested that further easing might be warranted if the outlook worsened, while in the crisis of 2008 they said rates “should stay on hold” until a recovery is established.

“The IMF is making a pronouncement on the Fed because the U.S. economy is still so important to the globe,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who expects a September rate increase. “The question is: Will the Fed listen and does it have any bearing on monetary policy decision-making? And my guess is no.”

And there’s more chatter about the global bond rout:

It all started with German government bonds. Yields on 10-year bunds, which move inversely to price, jumped as much as 51 basis points over the week to touch the highest in more than eight months on Thursday as investors reacted to signs of inflation in the eurozone. Mario Draghi, President of the European Central Bank, helped fuel the sell-off by saying investors should “get used” to bond market volatility thanks to very low interest rates that can exacerbate price swings on the debt.

Yields on U.S. 10-year Treasuries followed suit, rising about 30 basis points to the highest since October. With the rout spreading, traders cancelled meetings and rushed back to the office to deal with the swings.

“Traders” in the last sentence was a misnomer. Clearly, from the fact that these guys had meetings as a matter of routine and had to rush back to the office, they are “salesmen”. Salesmen with authority to trade, to be sure, but basically salesmen.

However, Lisa Abramowicz of Bloomberg mocks the idea that this decline can be called a rout:

Yes, German and U.S. bond yields have soared to their highest levels this year. And, yes, more than $626 billion of value has simply evaporated from an index of global sovereign bonds since the end of March.

But all bond owners aren’t racing to the exits just yet. Investors have actually poured almost $1 billion into fixed-income exchange-traded funds over the past week, just one proxy showing sustained demand for debt, according to data compiled by Bloomberg. While trading volumes are somewhat higher than average in Treasuries this year, they’re pretty typical for corporate bonds and not what you’d expect in the case of a wholesale exodus.

“Volume has been significant but not frenetic given the move in yields,” wrote Jim Vogel, an interest-rate strategist at FTN Financial, in a note Thursday. “It is still not clear to most market participants what is driving the intense sale” of European bonds.

Without a significant change in the fundamental backdrop of central-bank stimulus and relatively slow growth worldwide, big investors are showing they’re not quite ready to part ways with their bonds. When they are, that’s when the drama will really ensue.

That was a very good article, that was, and introduced me to the paper Investor Flows and Fragility in Corporate Bond Funds.

Brian Milner of the Globe comments:

The Canadian market has so far avoided the worst of the upheaval experienced in Europe and the U.S. But RBC sees longer-term yields climbing another 50 basis points in both Canada and the U.S. by the end of the year.

“We won’t quickly get back to yields of 4 to 5 per cent,” [head of Canadian fixed income and currency strategy at RBC Dominion Securities Inc.] Mr. [Mark] Chandler said. “But to expect us to rewind what we saw in the last six to eight weeks is wrong.”

Central banks have been “complicit” in the selloff, he said, because several took advantage of lower world oil prices and higher headline inflation to cut interest rates.

“For them to have piled on as they did exacerbated the rally that we saw in the first couple of months this year. Now that oil has sort of stabilized and turned the other way, they’re almost living by the sword and dying by the sword.”

Assiduous Readers will remember that Bernanke took some shots at the Wall Street Journal regarding fiscal and monetary policy, as reported April 30. Kevin Carmichael blames fiscal policy for the current woes:

The recovery from the financial crisis has been painfully slow for two reasons. One is private debt, which has weighed on households’ propensity to spend. The other is that governments have contributed almost nothing to gross domestic product since before the crisis.

Remember the 2010 Toronto G20 Summit? Canadian Prime Minister Stephen Harper used his influence as chairman to get the Group of 20 to endorse a pledge to quickly reduce budget deficits and pay debt. In retrospect, it was a bad idea. Mr. Harper and the G20 mistakenly assumed that the passing of the storm meant things would get back to normal. But the sun refused to shine. Private demand remained weak, forcing central banks to get ever more creative. Most governments carried on as if nothing was the matter. They restrained spending, exacerbating the situation.

Back to Canada. The country’s politicians accept no blame for the poor state of the economy. For many, this spring was a moment of triumph, for – in the face of that devastating oil shock – the federal government and some provincial ones were able to keep their budgets in check.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 12bp, FixedResets flat and DeemedRetractibles off 8bp. The Performance Highlights table is quite short, by this year’s standards. Volume was 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:

impVol_TRP_150604
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.50 to be $1.23 rich, while TRP.PR.G, which resets 2020-11-30 at +296, is $0.76 cheap at its bid price of 24.56.

impVol_MFC_150604
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. 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). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.75 to be $0.88 rich, while MFC.PR.F, resetting at +141bp on 2016-6-19, is bid at 17.90 to be $0.75 cheap.

impVol_BAM_150604
Click for Big

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 24.54 to be $0.36 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.93 and appears to be $0.62 rich.

impVol_FTS_150604
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $0.90 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.61 and is $0.42 rich.

pairs_FR_150604
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.55%, including FTS.PR.H / FTS.PR.I at 1.34%. On the junk side, three pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -0.78%; AIM.PR.A / AIM.PR.B at -0.89%; and BRF.PR.A / BRF.PR.B at -1.27%.

pairs_FF_150604
Click for Big

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

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -1.4081 % 2,154.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -1.4081 % 3,767.7
Floater 3.56 % 3.61 % 62,517 18.20 3 -1.4081 % 2,290.8
OpRet 4.44 % -13.79 % 26,594 0.09 2 0.0000 % 2,782.9
SplitShare 4.59 % 4.85 % 72,091 3.32 3 -0.5201 % 3,247.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,544.7
Perpetual-Premium 5.46 % 4.72 % 64,303 4.96 19 -0.1159 % 2,515.6
Perpetual-Discount 5.07 % 5.05 % 115,225 15.38 14 -0.1176 % 2,769.8
FixedReset 4.46 % 3.78 % 256,541 16.62 86 0.0047 % 2,379.4
Deemed-Retractible 4.99 % 3.36 % 109,308 0.71 34 -0.0760 % 2,632.5
FloatingReset 2.48 % 2.86 % 54,549 6.15 9 -0.0686 % 2,342.3
Performance Highlights
Issue Index Change Notes
TRP.PR.F FloatingReset -1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 18.75
Evaluated at bid price : 18.75
Bid-YTW : 3.32 %
BAM.PR.K Floater -1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 13.96
Evaluated at bid price : 13.96
Bid-YTW : 3.61 %
BAM.PR.B Floater -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 3.58 %
PVS.PR.C SplitShare -1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.89 %
BMO.PR.T FixedReset -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 22.63
Evaluated at bid price : 23.57
Bid-YTW : 3.44 %
BAM.PR.C Floater -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 13.95
Evaluated at bid price : 13.95
Bid-YTW : 3.61 %
ENB.PR.H FixedReset -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 17.56
Evaluated at bid price : 17.56
Bid-YTW : 4.58 %
BNS.PR.Y FixedReset 1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.38
Bid-YTW : 2.95 %
ENB.PR.T FixedReset 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 19.40
Evaluated at bid price : 19.40
Bid-YTW : 4.58 %
GWO.PR.N FixedReset 2.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.45
Bid-YTW : 6.59 %
Volume Highlights
Issue Index Shares
Traded
Notes
HSE.PR.C FixedReset 129,952 TD crossed blocks of 80,600 and 19,000, both at 25.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 23.07
Evaluated at bid price : 24.65
Bid-YTW : 4.10 %
ENB.PR.F FixedReset 67,412 Scotia bought blocks of 10,000 and 10,400 at 19.00, then another 10,000 at 18.95, all from National.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 18.95
Evaluated at bid price : 18.95
Bid-YTW : 4.66 %
ENB.PR.Y FixedReset 63,177 TD crossed 40,000 at 18.54.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 18.52
Evaluated at bid price : 18.52
Bid-YTW : 4.69 %
MFC.PR.B Deemed-Retractible 33,665 RBC crossed 30,000 at 23.23.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.12
Bid-YTW : 5.68 %
BMO.PR.M FixedReset 31,600 Scotia crossed 30,000 at 25.12.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 2.92 %
ENB.PF.A FixedReset 29,383 Scotia crossed 20,000 at 20.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 20.59
Evaluated at bid price : 20.59
Bid-YTW : 4.60 %
There were 24 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
RY.PR.K FloatingReset Quote: 24.40 – 25.00
Spot Rate : 0.6000
Average : 0.4111

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 2.86 %

BMO.PR.T FixedReset Quote: 23.57 – 23.95
Spot Rate : 0.3800
Average : 0.2530

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 22.63
Evaluated at bid price : 23.57
Bid-YTW : 3.44 %

TRP.PR.G FixedReset Quote: 24.56 – 24.90
Spot Rate : 0.3400
Average : 0.2343

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 22.98
Evaluated at bid price : 24.56
Bid-YTW : 3.83 %

CU.PR.F Perpetual-Discount Quote: 22.57 – 22.99
Spot Rate : 0.4200
Average : 0.3166

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 22.22
Evaluated at bid price : 22.57
Bid-YTW : 4.99 %

TRP.PR.F FloatingReset Quote: 18.75 – 19.12
Spot Rate : 0.3700
Average : 0.2707

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 18.75
Evaluated at bid price : 18.75
Bid-YTW : 3.32 %

RY.PR.H FixedReset Quote: 23.85 – 24.19
Spot Rate : 0.3400
Average : 0.2546

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-04
Maturity Price : 22.77
Evaluated at bid price : 23.85
Bid-YTW : 3.41 %

Investor Flows and Fragility in Corporate Bond Funds

June 4th, 2015

Itay Goldstein, Hao Jiang and David T. Ng have released a preliminary paper titled Investor Flows and Fragility in Corporate Bond Funds:

Investment in bond mutual funds has grown rapidly in recent years. With it, there is a growing concern that they are a new source of potential fragility. While there is a vast literature on flows in equity mutual funds, relatively little research has been done on bond mutual funds. In this paper, we explore flow patterns in corporate-bond mutual funds. We show that their flows behave very differently than those of equity mutual funds. While we confirm the well-known convex shape for equity funds’ flow-to-performance over the period of our study (1992-2014), we show that during the same time, corporate bond funds exhibit a very clear concave shape: their outflows are sensitive to bad performance much more than their inflows are sensitive to good performance. Funds have more concave flow-performance relationships when they have more illiquid assets and when the overall market illiquidity is high. Overall, our empirical results suggest that corporate bond funds are prone to fragility. The illiquidity of their assets seems to create strategic complementarities that amplify the response of investors to bad performance or other bad news.

So that’s interesting, and echoes the old stockbroker adage that people hate losing money on bonds. In fact, the “concave shape” they refer to in the abstract suggests that the market might be imposing a sort of ‘negative convexity’ on bond yields.

Observing this trend [of increasing flows to bond funds], several commentators have argued that bond funds pose a new threat to financial stability. What will happen when the current trend of loose monetary policy changes? Will massive flows out of bond funds and massive sales of assets by these funds destabilize debt markets with potential adverse consequences for the real economy? Feroli, Kashyap, Schoenholtz, and Shin (2014) use evidence from the dynamics of bond funds to show that flows into and out of funds seem to aggravate and be aggravated by changes in bond prices. They conclude that this suggests the potential for instability to come out of this industry. They analyze the market “tantrum” around the announcement of the possible tightening of monetary policy in 2013, and suggest that events like this can put the bond market under stress due to amplification coming from bond mutual funds.

Further, the nature of funds can cause bad returns to accelerate:

Indeed, corporate bond funds are in many cases illiquid. Unlike equity, which typically trades many times throughout the day, corporate bonds may not trade for weeks and trading costs in them can be very large. Despite the illiquidity of their holdings, corporate bond funds quote their net asset values and prices to investors on a daily basis. As a result, there is a mismatch between the illiquidity of the fund’s holdings and the liquidity that investors holding the fund get: they are able to redeem their shares at any moment and get the quoted net asset value. This implies that investors’ outflows may lead to costly liquidation by the funds, where the costs could be borne by remaining investors. This creates a ‘run’ dynamic which amplifies the reaction of outflows to bad performance, suggesting that the potential for fragility indeed exists in bond funds.

So does this self-destructive behaviour apply to retail or institutional investors, or both?

Third, following the model and empirical results in Chen, Goldstein, and Jiang (2010), we expect that strategic complementarities will be less important in determining fund outflows if the fund ownership is mostly composed of institutional investors. This is because institutional investors are large and so are more likely to internalize the negative externalities generated by their outflows. Indeed, consistent with this hypothesis, we find that the effect of illiquidity on the sensitivity of outflow to bad performance diminishes when the fund is held mostly by institutional investors.

My first thought on reading the above was ‘so what about the run on Money Market Funds following the Lehman bankruptcy?’ They’ve thought about it too:

These ‘run’ dynamics are very familiar from the banking context, and recently were on display in the run on money market mutual funds following the collapse of Lehmann Brothers.[Footnote] Attempts to prevent such runs are at the core of long-standing government intervention and regulation in the banking sector and now also in the money-market funds industry. It is likely that the surge in activity in corporate bond funds is a response to the restrictions in these sectors, and so the run problem can shift into the corporate bond funds arena. Hence, regulators should be on the alert and consider steps to achieve the value from intermediation by corporate bond funds while minimizing the damage from fragility.

[Footnote reads:]For an empirical study of the run on money market funds, see Schmidt, Timmerman, and Wermers (2014).

The hint that regulators should ‘consider steps’ scares me, since in general investors need protection from regulators!

But, bless their hearts, they acknowledge the argument that MMFs require a capital buffer:

Indeed, many argue that imposing a floating net asset value is not a perfect fix to the problems in money market funds, but other solutions such as holding a capital buffer or putting restrictions on redemptions are likely more appropriate.[Footnote]

[Footnote reads]See, for example, Hanson, Scharfstein, and Sunderam (2014).

In discussing their hypotheses, they make an interesting claim:

As Moneta (2015) documents, the average turnover rate of corporate bond funds is much higher than that of equity funds. For instance, from 1996 to 2007 the average turnover rate of general corporate bond funds is approximately twice as large as that of equity funds, which suggests more active trading and relatively shorter investment horizons of corporate bond funds. Considering the relatively low liquidity in corporate bond markets, the high trading activities of corporate bond funds are likely to generate substantial market impact.

I’ll have to look at that Moneta paper! In a world of long-term value investors who have no particular need to tell a story to potential investors, one would expect higher turnover in a bond fund, since income receipts will generally be higher and the portfolio is directly affected by the passage of time; but I confess I would have thought that turnover would be higher with the equity cowboys.

They also make a more serious charge:

Indeed, Cici, Gibson and Merrick (2011) document substantial dispersions of month-end valuations placed on identical corporate bonds by different mutual funds. Their tests reveal that such dispersion of valuations is consistent with returns smoothing behavior by managers, which involves marking positions such that the net asset value is set above or below the true value of fund shares, resulting in wealth transfers across existing, new, and redeeming fund investors. They find that the returns smoothing is particularly serious for corporate bond funds with hard-to-mark assets and not as much for Treasury bond funds; furthermore, when a fund’s return is low, the fund is more likely to mark the bond positions higher than the true value. Under this situation, existing shareholders would have particularly high incentives to withdraw their money while the mark is good.

Naughty, naughty! This usually becomes known only when such behaviour is egregious – see the market post of June 22, 2011 for one example.

The authors are clearly not fans of behavioural economics!

Why do bond funds experience much higher outflows during negative performance compared to stock funds? Our leading explanation is the presence of strategic complementarities. Corporate bond funds invest in more illiquid assets. Investors’ outflows may lead to costly liquidation by bond funds, where the costs would be borne by the remaining investors. This creates a ‘run’ dynamic which amplifies the reaction of outflows to bad performance. Under this explanation, outflows should be much more sensitive to bad performance among bond funds that are more illiquid.

I think this hypothesis is simply too sophisticated for the market to bear. I would be more interested in an explanation based on risk aversion of the investors, where “risk” is defined as “absolute performance over the past M months”, which refers back to the ‘investors hate losing money on bonds’ adage noted above. This would apply to funds, rather than direct bond holdings by retail, since there is also a persistent belief that a portfolio of bonds held directly is somehow fundamentally different from a fund since direct holdings can be held until they mature at par.

After disaggregating their data to distinguish institutional from retail behaviour, they conclude:

From a policy perspective, it is good news that institutional-oriented funds face less runlike behavior at low performance times. Such funds tend to be larger; and weaker run tendency implies more stability during low performance periods. The retail-oriented funds can still create big problems, as retail investors engage in run-like behavior.

Sadly, their concluding paragraph is a plea for increased employment of box-tickers:

This suggests that bond funds are prone to fragility. Bad events may lead to amplified outflows and these may have adverse consequences for bond prices and ultimately for firms’ financing and real activities. These issues have to be taken into account in the broad scheme of regulation of the financial sector. While it is well understood that banks, and now money-market funds, are prone to such run dynamics, these usually are not associated with bond funds, but our empirical results show that similar forces operate for them as well.

Hat tip for bringing this paper to my attention: Lisa Abramowicz, Bloomberg, You call this a bond rout? Wait until the real selling starts.

June 3, 2015

June 4th, 2015

SEC Commissioner Daniel M. Gallagher has updated his Crazy Quilt Chart of Regulation:

quilt
Click for Full Version

SEC Chair Mary Jo White touts efforts to open up the market to smaller IPOs … but instead of simplifying the rules, they’re trying to create a web of exceptions:

Indeed, more than 20 states have enacted some form of intrastate crowdfunding legislation or rules, and a number of others are considering similar initiatives. As states are seeking to expand the avenues in which issuers may conduct intrastate offerings, we have focused on the fact that some of our laws and rules were put into place years ago prior to widespread use of the internet and may present challenges to the states’ efforts.

For example, Securities Act Rule 147, which you will be discussing today, created a safe harbor that issuers often rely on for intrastate offerings. Rule 147 was adopted in 1974, and how an issuer might conduct an intrastate offering using the internet was not contemplated at that time. The staff in the Division of Corporation Finance is currently considering ways to improve the rule, by looking at, among other things, the conditions included in the rule for an offering to be considered intrastate. Securities Act Rule 504, an exemption that could be used to facilitate regional crowdfunding offerings for up to $1 million that are registered in one or more states, is another rule that may benefit from modernization and the staff is considering ways to do that. We look forward to having your input on these topics and to hearing your thoughts on whether there are aspects of these or other rules that could be usefully updated or changed.

The global bond rout is becoming a headline standard:

The global bond rout gathered pace, with Japanese notes slipping a fourth day after Mario Draghi forecast faster euro-area inflation and continued market volatility. Australia’s dollar dropped as most Asian shares rose and oil held losses.

Yields on 10-year Japanese government bonds climbed 3 basis points to 0.49 percent by 11:51 a.m. in Tokyo, the highest level since November, while Australian yields increased for a third day. The Aussie declined 0.8 percent after data showed the nation’s exports slid in April. A measure of Chinese shares in Hong Kong and Japanese stocks advanced while U.S. index futures fell 0.1 percent. U.S. oil held below $60 a barrel before Friday’s OPEC meeting.

This year’s gains in global bonds evaporated as the European Central Bank chief inflamed a selloff in German bunds, saying price growth in the region would pick up further. Greece’s premier claimed to be near agreement with creditors, adding there was no need to worry about an International Monetary Fund payment due Friday.

Meanwhile – and related to the discussion on liquidity, below – there are dark mutterings about taper tantrum redux:

Prices on U.S. investment-grade bonds have fallen 1.1 percent in the first two days of June, a pace so fast it’s reminiscent of the notes’ 5 percent selloff in two months in 2013 when speculation emerged that the Federal Reserve was poised to scale back its bond buying. Bank of America Corp. strategists see the pain deepening from here.

The reason? Investors who like these bonds tend to prize safety and reliable returns above all. They plowed into corporate bonds, often instead of more-creditworthy notes such as U.S. Treasuries, for higher yields as the Fed purchased debt and held interest rates at record lows to ignite growth.

These buyers, in particular, don’t like to see losses on their monthly mutual-fund statements. When the prospects for their debt look shaky, they’ve often responded by yanking their money. And that’s what they’ll likely do now, according to Bank of America analysts.

“We expect high-grade fund flows to turn generally negative in line with the initial experience during the Taper Tantrum,” Hans Mikkelsen, a strategist in New York, wrote in a June 2 report. “Corporate bond prices are declining at a pace eerily similar to what we saw” during that selloff of 2013.

That year, U.S. bond funds reported record withdrawals as investors girded for a period of steadily rising debt yields — or, in other words, losses. Investors pulled more than $70 billion from bond mutual funds in 2013, according to TrimTabs Investment Research.

Matt Levine is one of my favourite columnists, if for no other reason than disproving the idea that PrefBlog hates everybody. He’s written a great column on bond market liquidity:

People are worried about bond market liquidity, is the point I’m trying to make here.

Should they be? I don’t know. I don’t even entirely know what the question means; it is really an assortment of interrelated questions. (What even is the “bond market”? Corporates? Treasuries? Loan ETFs?) Still I figured I would make a series of disconnected observations here, since this stuff keeps coming up.

The risk, it seems to me, can’t be located in the dealers (i.e. the banks). Volcker, capital requirements, etc., drive up the cost of immediacy, but they don’t increase the risk of a crash, because bond dealers were never in the business of buying all the bonds all the way down. If there’s a bond crash, the banks won’t be buying bonds, but they would never have been buying bonds in a crash. That was never their job.

People are also really worried about liquidity in the Treasury market, in ways that seem to me to be mostly unrelated to the worries about the corporate market. One obvious thing here is: Treasuries look much more like stocks than corporates do. Treasuries trade a lot on electronic exchanges, and banks are relatively unimportant in intermediating Treasury trades. “For Treasuries, the share of transactions by primary dealers has dwindled by more than half to 4 percent since the end of 2008,” with electronic traders like Citadel expanding their role as dealers, and the complaints about the Treasury market sound a lot like the complaints in the equity markets about human market makers being replaced by algorithmic traders.

The worries about the Treasury market seem to be largely microstructural; Pimco uses words like “flash crashes” and “air pockets,” not “crises” or “crashes.” The latest Treasury-market news is from ICAP, which “is studying the possibility of temporarily halting Treasurys trading following large price moves,” a classic idea imported from the equity markets. The idea is that sometimes algorithms lose their cool, and rather than letting markets chase the algorithms all the way down, you turn off the whole market for five minutes until human investors can get to their desks and realize that Treasuries are going for bargain prices. People hate flash crashes, and obviously they cause some people to lose money, but they have always struck me as sort of non-systemic, a technical glitch rather than a major fear. A sharp permanent drop in asset prices is scary. A sharp temporary drop in asset prices is kind of funny, honestly.

His first point, distinguishing the role of dealers in terms of liquidity provision vs. crash prevention, echoes the point I made yesterday when I mocked Nouriel Roubini.

Bloomberg published another illustration of the shift in holdings:

bondHoldings
Click For Big

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets off 24bp and DeemedRetractibles gaining 4bp. The Performance Highlights table is dominated by losing FixedResets. Volume was slightly below average.

PerpetualDiscounts now yield 5.07%, equivalent to 6.59% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 255bp, a meaningful narrowing from the 265bp reported May 27.

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:

impVol_TRP_150603
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.50 to be $1.23 rich, while TRP.PR.B, which will reset June 30 at 2.152% (GOC5 + 128bp), is $0.64 cheap at its bid price of 14.57.

impVol_MFC_150603
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. 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). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.75 to be $0.88 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.42 to be $0.85 cheap.

impVol_BAM_150603
Click for Big

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 24.50 to be $0.40 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.91 and appears to be $0.59 rich.

impVol_FTS_150603
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.10, looks $0.89 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.62 and is $0.45 rich.

pairs_FR_150603
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.65%, including TRP.PR.A / TRP.PR.F at 1.12% and FTS.PR.H / FTS.PR.I at 1.43%. On the junk side, four pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -1.01%; AIM.PR.A / AIM.PR.B at -1.38%; BRF.PR.A / BRF.PR.B at -1.26%; and DC.PR.B / DC.PR.D at -1.75%.

pairs_FF_150603
Click for Big

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

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.9476 % 2,185.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.9476 % 3,821.5
Floater 3.51 % 3.55 % 61,508 18.34 3 0.9476 % 2,323.5
OpRet 4.44 % -13.94 % 27,689 0.09 2 0.0000 % 2,782.9
SplitShare 4.57 % 4.36 % 72,102 3.32 3 0.6847 % 3,264.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,544.7
Perpetual-Premium 5.45 % 4.72 % 64,310 1.50 19 0.0538 % 2,518.5
Perpetual-Discount 5.07 % 5.07 % 116,220 15.37 14 0.0694 % 2,773.0
FixedReset 4.46 % 3.75 % 257,019 16.63 86 -0.2377 % 2,379.3
Deemed-Retractible 4.98 % 3.30 % 110,465 0.71 34 0.0404 % 2,634.5
FloatingReset 2.48 % 2.89 % 54,135 6.15 9 0.4976 % 2,343.9
Performance Highlights
Issue Index Change Notes
CIU.PR.C FixedReset -3.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 15.75
Evaluated at bid price : 15.75
Bid-YTW : 3.72 %
TD.PF.B FixedReset -2.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 22.52
Evaluated at bid price : 23.35
Bid-YTW : 3.51 %
FTS.PR.M FixedReset -2.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 22.81
Evaluated at bid price : 24.00
Bid-YTW : 3.61 %
GWO.PR.N FixedReset -1.72 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.10
Bid-YTW : 6.84 %
TD.PF.C FixedReset -1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 22.37
Evaluated at bid price : 23.14
Bid-YTW : 3.54 %
VNR.PR.A FixedReset -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 22.95
Evaluated at bid price : 23.74
Bid-YTW : 3.99 %
TRP.PR.A FixedReset -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 19.30
Evaluated at bid price : 19.30
Bid-YTW : 3.80 %
GWO.PR.P Deemed-Retractible -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 5.14 %
TD.PF.A FixedReset -1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 22.60
Evaluated at bid price : 23.53
Bid-YTW : 3.48 %
ENB.PR.B FixedReset -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 18.56
Evaluated at bid price : 18.56
Bid-YTW : 4.58 %
HSE.PR.A FixedReset 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 16.64
Evaluated at bid price : 16.64
Bid-YTW : 4.09 %
BAM.PR.N Perpetual-Discount 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 22.13
Evaluated at bid price : 22.54
Bid-YTW : 5.34 %
PVS.PR.D SplitShare 1.40 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 4.81 %
BAM.PF.D Perpetual-Discount 2.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 23.12
Evaluated at bid price : 23.44
Bid-YTW : 5.30 %
BAM.PR.K Floater 2.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 14.20
Evaluated at bid price : 14.20
Bid-YTW : 3.55 %
FTS.PR.I FloatingReset 5.10 % There was real trading today, with 4,636 shares changing hands, as opposed to yesterday’s quote, which was just a reasonable guess.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 16.50
Evaluated at bid price : 16.50
Bid-YTW : 3.09 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.B FixedReset 227,636 Scotia crossed 205,700 at 18.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 18.56
Evaluated at bid price : 18.56
Bid-YTW : 4.58 %
CM.PR.Q FixedReset 87,491 RBC crossed two blocks of 40,000 each, both at 24.91.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 23.08
Evaluated at bid price : 24.80
Bid-YTW : 3.64 %
BMO.PR.Q FixedReset 62,859 TD Crossed blocks of 22,600 and 30,000, both at 23.50.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 3.44 %
BNS.PR.M Deemed-Retractible 55,025 Nesbitt crossed 15,000 at 25.45; TD crossed 31,300 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-27
Maturity Price : 25.25
Evaluated at bid price : 25.45
Bid-YTW : 1.89 %
TRP.PR.B FixedReset 50,563 Desjardins crossed 35,000 at 14.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 14.57
Evaluated at bid price : 14.57
Bid-YTW : 3.77 %
ENB.PR.Y FixedReset 46,616 Scotia crossed 40,000 at 18.55.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 18.53
Evaluated at bid price : 18.53
Bid-YTW : 4.68 %
There were 28 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.M FixedReset Quote: 24.00 – 24.74
Spot Rate : 0.7400
Average : 0.4625

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 22.81
Evaluated at bid price : 24.00
Bid-YTW : 3.61 %

CIU.PR.C FixedReset Quote: 15.75 – 16.40
Spot Rate : 0.6500
Average : 0.4967

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 15.75
Evaluated at bid price : 15.75
Bid-YTW : 3.72 %

ENB.PR.B FixedReset Quote: 18.56 – 18.99
Spot Rate : 0.4300
Average : 0.2971

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 18.56
Evaluated at bid price : 18.56
Bid-YTW : 4.58 %

RY.PR.M FixedReset Quote: 24.37 – 24.74
Spot Rate : 0.3700
Average : 0.2544

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-03
Maturity Price : 22.90
Evaluated at bid price : 24.37
Bid-YTW : 3.59 %

MFC.PR.K FixedReset Quote: 23.32 – 23.74
Spot Rate : 0.4200
Average : 0.3070

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.32
Bid-YTW : 4.23 %

RY.PR.K FloatingReset Quote: 24.31 – 24.61
Spot Rate : 0.3000
Average : 0.2041

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 2.92 %