PrefBlog

The Bank of Canada published the Bank of Canada Review – Spring 2015, which is a bust as far as capital markets articles are concerned. Articles are:

• Inflation Dynamics in the Post-Crisis Period
• The Slowdown in Global Trade
• Improving the Foundation of Canada’s Payments System
• The “Bank” at the Bank of Canada
• The Use of Cash in Canada

Some investors thought they heard opportunity knock today … but only the ding-dongs:

Fooling investors is surprisingly easy. You can even do it on the government’s official site for company filings.

The latest reminder unspooled within a few minutes Thursday when a notice came out that a purported private-equity firm made a bid to buy Avon Products Inc. In a market where computers scrape filings and trade automatically on news headlines, the stock shot up 20 percent before the company said it was a hoax.

The notice, submitted by a firm registered at an empty office, was filed on the Securities and Exchange Commission’s Edgar system, which houses more than 20 million company filings for investors to peruse. Already more than 4,700 filings have been submitted today.

The SEC doesn’t verify whether entities using its filing systems “are real or have money,” said James Maloney, a former SEC official now at law firm Gibson Dunn & Crutcher. Getting access to Edgar “is no more complicated than signing up for an e-mail account,” he said.
…
Should the SEC vet Edgar filings before they go out? Maloney says no.

“It would be the equivalent of saying don’t let anyone have e-mail or Twitter because they might use it for bad purposes,” he said.

Live by the sword, die by the sword. Good riddance.

Still, it was a pretty good day, all in:

The Standard & Poor’s 500 Index closed at an all-time high, halting a three-session slide, as Microsoft Corp. and Apple Inc. led a rally in technology shares and the weaker dollar spurred gains in multi-national companies.

It looks like infrastructure investors have another target:

Greece will continue with efforts to privatize the country’s largest port and regional airports as it seeks ways to attract investment for other state assets, Economy Minister George Stathakis said, in a government concession in talks with its creditors.

The privatization process that is already underway for the Piraeus Port Authority SA, operator of Greece’s largest harbor, and for 14 regional airports will continue, Stathakis said today in an interview in Tbilisi, Georgia. “We’re trying to revise some elements of these privatizations in order to improve them and I think we’ll get a sensible agreement for both.”

A sale of the Piraeus Port would be a reversal on the part of Greece’s Syriza party-led government, which had earlier pledged to block such moves. As part of ongoing negotiations to unlock aid to Europe’s most-indebted nation, Greek’s European creditors have asked for more specific policy proposals in areas including labor market deregulation, a pension-system overhaul, sales tax reform and privatization of state-held assets. Still, Stathakis said the government doesn’t plan to sell other assets at the moment.

Fed hikes? What Fed hikes?

The longer U.S. central bankers wait to initiate their tightening cycle, the more traders push back their expectations for when borrowing costs will start rising. On Thursday, futures contracts were implying that traders saw the fed funds rate at about 0.3 percent rate by December. That’s the lowest estimate of the year, and about half the forecast for the overnight lending benchmark that the Fed gave in March.

The market is essentially calling the Fed’s bluff. Traders are betting that policy makers won’t be able to raise rates this year without disrupting stocks and bonds, something that they’d really rather not do. So either U.S. policy makers will have to risk another market-wide tantrum, or they’ll give in to traders who embrace the idea of these historically low borrowing costs sticking around for longer.

I’m not going to try and guess whether hikes will come this year, next year, or not until after my retirement. But my fears of a disorderly return to normal are growing.

It was a mixed day for the Canadian preferred share market today, with PerpetualDiscounts off 7bp, FixedResets up 4bp and DeemedRetractibles gaining 1bp. The Performance Highlights table is shorter than it has been of late, but still much longer than the 2014 average. Volume was very low.

PerpetualDiscounts now yield 5.06%, equivalent to 6.58% 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 slight (and perhaps spurious) widening from the 250bp reported May 6.

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 24.15 to be $0.94 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.79 cheap at its bid price of 24.92.

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).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 24.75 to be $0.51 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.35 to be $0.65 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.54 to be $0.86 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.93 and appears to be $0.52 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.33, looks $0.98 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.00 and is $0.57 rich.

Click for Big

Investment-grade pairs predict an average over the next five-odd years of about 0.30%, including the TRP.PR.A / TRP.PR.F at -0.36% and the BNS.PR.Y / BNS.PR.D pair at +0.78. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -0.85%, while BRF.PR.A / BRF.PR.B is at -1.05%.

Click for Big

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

On April 30, S&P published its 2014 Annual Global Corporate Default Study And Rating Transitions:

In a year marked by considerable geopolitical turmoil, the ending of the Federal Reserve’s monthly asset purchases, and the steep decline in the price of oil, corporate borrowers fared very well by historical standards. In the full year, 60 global corporate issuers defaulted, considerably lower than the 81 last year and the lowest total since 2011 (see table 1). These 60 defaulted issuers accounted for a total of $91.6 billion in debt, down from $97.3 billion in 2013.

Overall, credit quality and rating stability remained high in 2014 (see table 6). The ratio of downgrades to upgrades increased marginally relative to 2013, but the rate of upgrades still outpaced that of downgrades. Overall, the percentage of rating actions decreased, and the magnitude of individual rating changes remained muted. This pushed the average number of notches recorded among downgrades to 1.36 from 1.38 in 2013. Meanwhile, the average number of notches for upgrades remained nearly unchanged, at 1.16 versus 1.15 in 2013 (see chart 13). (Watch the related CreditMatters TV segment titled, “Standard & Poor’s Global Corporate Default And Rating Transitions Study,” dated April 30, 2015.)

Overview

• •The number of global defaults in 2014 declined to 60 from 81 in 2013. This helped push the global speculative-grade default rate down to 1.42% from 2.28% at the end of 2013. Similar to 2013, this decline is a result of both a smaller number of defaults and an increase in the number of speculative-grade issuers in 2014–up to 3,163 from 2,804 a year earlier.
• •The one-year global Gini ratio rose to 93 in 2014, which is the second highest in 34 years. This is largely attributable to the roughly 91% of the rated defaulters in 2014 beginning the year with ratings of ‘B-‘ or lower.
• •The overall rate of rating actions decreased in 2014. The downgrade rate decreased to 8.4% from 9.4% in 2013, while the upgrade rate declined to 9.3% from 11.4%. Ratings stability increased, with the rate of unchanged ratings hitting a 10-year high of 74.5%.
• •Consistent with past years, the U.S. continues to account for the majority of defaults globally in 2014, at 55%. However, this is the lowest percentage in the past 34 years. Following the U.S., emerging markets accounted for just over 25% of the remaining defaulters.

They have also published a bit more commentary:

U.S. corporate credit performed exceptionally well in 2014 as the number of rated companies defaulting declined to its lowest number since 2007. While the Federal Reserve completed its round of tapering, winding down its monthly large-scale asset purchases, interest rates for highly rated credits fell from already low levels. Corporate bond issuance surpassed $1 trillion for a third consecutive year, and investment-grade and Treasury bond yields fell. As the speculative-grade market faced rising volatility during the year brought about by falling oil prices and rising geopolitical strains, the speculative-grade default rate fell to below 2%, less than one half of its long-term average. Slow but steady economic growth continued to support business conditions, and the upgrade to downgrade ratio improved as more U.S. companies were upgraded than downgraded in 2014. The number of U.S. corporate defaulters fell to 33 from 45 in 2013. The defaulting companies were either unrated or were rated ‘B-‘ and lower as of the beginning of 2014, consistent with our findings that Standard & Poor’s Ratings Services’ U.S. corporate credit ratings continue to serve as effective indicators of relative credit risk. (Watch the related CreditMatters TV segment titled, “Standard & Poor’s U.S. Corporate Default And Rating Transitions Study,” dated May 11, 2015.)

Overview

• •In 2014, 33 U.S. companies with $82 billion in outstanding debt defaulted; by comparison, 45 U.S. corporates defaulted with $64.9 billion of outstanding debt in 2013.
• •The U.S. speculative-grade (‘BB+’ and lower) corporate default rate fell to 1.59% as of year-end 2014 from 2.16% as of year-end 2013. Of the companies that defaulted in 2014, the highest rated was ‘B-‘.
• •Companies in the lowest rating categories had the highest default rates: 25% of the companies rated ‘CCC’/’C’ at the beginning of the year had defaulted by the end of the year.
• •The one-year Gini ratio for Standard & Poor’s 2014 ratings’ performance climbed to a new high of 96.1%. This is the highest one-year Gini recorded for U.S. corporates in our data going back to 1981.
• •Overall, ratings were more stable in 2014 than in 2013: Nearly 76% of ratings were unchanged in 2014, up from 72% the prior year.

SEC Chair Mary Jo White gave a speech lauding the opportunities that market complexity gives for regulatory employment, and the fine job the SEC is doing, titled Optimizing Our Equity Market Structure. These were Opening Remarks at the Inaugural Meeting of the Equity Market Structure Advisory Committee:

It is fitting that today we are starting our market structure discussion with an assessment of Rule 611 of Regulation NMS — the order protection rule. The selection of this rule for the inaugural meeting is reflective of how important it is to examine the fundamentals of our current market and regulatory structure, to explore their impact and assess their continued utility. This is not done just for an interesting discussion — although I am sure it will be that. Rather, we are about the serious business of optimizing the structure of our equity markets through a careful, data-driven assessment where no issue is off limits or any assumption unquestioned. And Rule 611 is most certainly a rule that features prominently in the discussion of market structure, with different views of its various impacts, including critiques that it has: (1) contributed to excessive fragmentation; (2) led to increased off-exchange trading; (3) harmed institutional investors; and (4) failed to achieve the objective of enhancing displayed liquidity. The Division of Trading and Markets has prepared and posted on our website a memorandum that is intended to help explore the extent to which these claims may or may not be accurate. Addressing Rule 611 will no doubt serve to highlight the other forces that have shaped our market structure, whether they be regulatory, competitive, or technological.

Rule 611 is part of Regulation NMS:

Regulation NMS includes new substantive rules that are designed to modernize and strengthen the regulatory structure of the U.S. equity markets. First, the “Order Protection Rule” requires trading centers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution of trades at prices inferior to protected quotations displayed by other trading centers, subject to an applicable exception. To be protected, a quotation must be immediately and automatically accessible. Second, the “Access Rule” requires fair and non-discriminatory access to quotations, establishes a limit on access fees to harmonize the pricing of quotations across different trading centers, and requires each national securities exchange and national securities association to adopt, maintain, and enforce written rules that prohibit their members from engaging in a pattern or practice of displaying quotations that lock or cross automated quotations. Third, the “Sub-Penny Rule” prohibits market participants from accepting, ranking, or displaying orders, quotations, or indications of interest in a pricing increment smaller than a penny, except for orders, quotations, or indications of interest that are priced at less than $1.00 per share. Finally, the Commission is adopting amendments to the “Market Data Rules” that update the requirements for consolidating, distributing, and displaying market information, as well as amendments to the joint industry plans for disseminating market information that modify the formulas for allocating plan revenues (“Allocation Amendment”) and broaden participation in plan governance (“Governance Amendment”).

After all the garbage coming from the regulators, it’s nice to see that someone gets it:

An ex-Jefferies & Co. trader convicted last year of lying to buyers and sellers of mortgage-backed bonds may have done nothing worse in one judge’s view than what a homeowner does when selling a house.

There’s a “certain amount of license and puffery” that goes on in the bond market, especially with “big boys” “who are capable of very sophisticated analysis,” U.S. Circuit Judge Barrington D. Parker said Wednesday during the appeal of Jesse Litvak’s conviction. “This kind of thing goes on all the time.”

Litvak, 40, was found guilty by a federal jury in New Haven, Connecticut, in March 2014, becoming the first person convicted of fraud tied to the Troubled Asset Relief Program set up by the U.S. amid the 2008 financial crisis. On appeal, Litvak says the case would make crimes out of statements in everyday negotiations such as car sales and that his lies weren’t material to the bond transactions.

Parker, one of three judges hearing the case in the U.S. Court of Appeals in New York, may agree. He asked Assistant U.S. Attorney Jonathan Francis if a real estate broker would be making a material misrepresentation by falsely telling a home buyer that a seller wouldn’t accept a lower offer.

Francis said the rules are different in the securities industry and that a higher standard is needed to discourage deceit and ensure that markets are fair and that investors won’t be ripped off.

Mr. Francis’ position is, of course, bullshit. The reason there is more regulation in the securities industry than in real-estate is because there are more layers of middlemen in securities transactions and these middlemen are giant corporations who pay regulatory fees as a part of doing business and pass them on to clients without itemization. If clients knew how much regulation was costing them, directly and indirectly, there would be a lot less regulation.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 24bp, FixedResets off 3bp and DeemedRetractibles down 7bp. The performance highlights table shows volatility remains a big factor, with Enbridge issues prominent on the bad side. Volume was on the low side of average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.20 to be $0.99 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.79 cheap at its bid price of 15.78.

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).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 24.75 to be $0.60 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.33 to be $0.61 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.52 to be $0.83 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.97 and appears to be $0.56 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.46, looks $1.01 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.08 and is $0.50 rich.

Click for Big

Investment-grade pairs predict an average over the next five-odd years of about 0.30%, including the TRP.PR.A / TRP.PR.F at -0.36%. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -1.06%, while BRF.PR.A / BRF.PR.B is at -1.36%.

Click for Big

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

For those who missed it, Bloomberg has an admirable piece on the some explanations of the global bond rout:

Between the ECB’s bond buying and the threat of deflation, yields across Europe started to go negative this year, meaning investors were essentially paying for the privilege to lend their money out. That created a spill over effect into bond markets in the rest of the world as investors went in search of a better deal, pulling yields down in those markets too. The average yield across all Germany’s debt went negative about three weeks ago. That seems to have been the straw that broke the camel’s back. Since then that average yield has climbed to the highest level this year. Yields on about $2 trillion of bonds across 12 countries still linger below zero.

The US Department of So-Called Justice has decided a little more regulatory extortion is never a bad thing:

The U.S. Justice Department is set to rip up its agreement not to prosecute UBS Group AG for rigging benchmark interest rates, according to a person familiar with the matter, taking a new step to hold banks accountable for repeat offenses.

The move by the U.S. would be a first for the industry, making good on a March threat by a senior Justice Department official to revoke such agreements and putting banks on notice that these accords can be unwound if misconduct continues.
…
UBS’s cooperation in the currency probe may help shield it from antitrust charges in that matter. However, the bank is still exposed to fraud charges in that case, and any admission of wrongdoing could also put it in violation of an earlier deal the Zurich-based bank struck with the Justice Department.

In a December 2012 non-prosecution agreement with the U.S. to resolve a worldwide investigation into the manipulation of the London interbank offered rate, or Libor, UBS promised not to commit crimes for two years.

Don’t bet your bottom dollar on Chicago, Chicago:

Chicago had its credit rating cut to junk by Moody’s Investors Service after the Illinois Supreme Court’s rejection of a state pension-overhaul plan reduced the city’s options for fixing its own underfunded system.

The two-level downgrade to Ba1 affects $8.1 billion of general obligations, which were already the lowest-rated among the 90 biggest U.S. cities, excluding Detroit. The outlook is still negative. Moody’s has dropped the city seven levels since July 2013.
…
The deterioration in the credit standing of the third-most-populous U.S. city underscores how pension promises are squeezing the finances of states and localities nationwide. Moody’s downgrade compounds Chicago’s fiscal struggles: its counterparties can immediately demand as much as $2.2 billion in accelerated principal, accrued interest and termination fees, New York-based Moody’s said in the report.

There’s an interesting piece on Bloomberg about using technology to compete with cheap labour:

A few years ago, in an effort to diversify his company’s offerings, Pomini teamed up with Selvaggia Armani, an artist and designer. The two began working on a series of lamps designed by Armani and manufactured to order on Pomini’s 3D printers. The pieces—some of which include intricate meshwork or interlocking chains that would be difficult to produce using traditional methods—take shape slowly, each layer fused from powdered nylon by a high-power laser. The project was a surprising success: Pomini now works with more than a dozen designers; he introduced 3D­printed jewelry in 2012. “This is the beauty of this technology,” says Armani, 47. “You can build things that are impossible.”
…
Armani have helped turn northeastern Italy into an unlikely hothouse of innovation. Last year growth in the region was positive for the first time since 2007, at 0.5 percent. Exports rose by 3.5 percent in 2014 and are expected to keep climbing. In the province of Trento, for instance, the public and private sectors together invest some 2 percent of gross domestic product in research and development. At the Centro Moda Canossa—a trade school in Trento for children age 14 to 18 specializing in fashion design and tailoring—the faculty recently added a class in which students incorporate 3D printing, laser cutting, and microcontroller chips into their designs. “You can’t offer a job from the past. Nobody will come,” says Michele Bommassar, 36, the school’s vice director. “You have to offer the jobs of the future.”

Is anybody in Canada listening? No? OK, go back to sleep, then. You’ll want to be rested for the anti-globalization demo.

In other news, Hydro One, having achieved the pinnacle of operating efficiency, has decided to join the Junior Justice League:

A Hydro One employee will be fired following an incident on Sunday when a female television reporter was harassed by Toronto FC fans hurling obscenities while she was doing a live hit.

“Hydro One is taking steps to terminate the employee for violating our Code of Conduct,” Hydro One spokesman Daffyd Roderick said in a statement.

“Respect for all people is ingrained in the code and our values. We are committed to a work environment where discrimination or harassment of any type is met with zero tolerance.”

So now, not only will universities like Dalhousie be able to administer the extra-judicial flavour of the month (as discussed on January 6) but any two-bit corporation will be able to do the same. So we are beginning to see a reversion to the good old days, when your employer had the ability to regulate every aspect of your life … it will be interesting to learn when unions become popular again, which will happen as soon as enough people get fed up with the abuse and fearful of its consequences – especially when it results from an essentially random occurance of internet pile-on.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts losing 26bp, FixedResets off 4bp and DeemedRetractibles down 8bp. FixedResets dominated both ends of the Performance Highlights table. Volume was extremely 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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.26 to be $0.49 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.21 cheap at its bid price of 25.00.

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).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.04 to be $0.40 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.33 to be $0.35 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.65 to be $0.69 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.96 and appears to be $0.55 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.30, looks $1.08 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.00 and is $0.50 rich.

Click for Big

Investment-grade pairs predict an average over the next five-odd years of about 0.40%, but TRP.PR.A / TRP.PR.F remains an outlier at -0.39%. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -1.12%.

Click for Big

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

Markets are forecasting no changes in the Canadian policy rate:

The bond market is starting to believe Bank of Canada Governor Stephen Poloz’s newfound optimism in the Canadian economy, resetting borrowing costs back to the day of his shock rate cut.

Traders have almost completely priced out another rate cut in banker’s acceptances contracts, a predictor of interest rates. Contracts due December, 2015, reached 1 per cent this month for the first time since Jan. 21, the day the Bank of Canada lowered its overnight rate to 0.75 per cent to contend with the collapse in the price of oil, the nation’s biggest export.

So-called Bax contracts have settled about 20 basis points above the central bank’s target rate on average since 1992, data compiled by Bloomberg show. The yield has averaged 0.91 per cent this year.

It was another violently mixed day for the Canadian preferred share market, with PerpetualDiscounts down 58bp, FixedResets gaining 18bp and DeemedRetractibles off 6bp. A lengthy Performance Highlights table is dominated by FixedResets, particularly on the good side. Volume was average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.24 to be $0.98 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.90 cheap at its bid price of 24.95.

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).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.65 to be $0.49 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.16 to be $0.55 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.52 to be $0.62 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.98 and appears to be $0.58 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.68, looks $0.95 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.40 and is $0.64 rich.

Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.40%, but TRP.PR.A / TRP.PR.F is an outlier at -0.51% and BNS.PR.Y / BNS.PR.D is at +0.78%. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -1.03% while BRF.PR.A / BRF.PR.B is at +1.03%.

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!

April’s job-creation score was better, March was worse, and the U.S. jobless rate crept closer to the Federal Reserve’s moving target for full employment.

The 223,000 increase in payrolls last month followed a revised 85,000 gain in March that was the smallest since June 2012, figures from the Labor Department showed Friday in Washington. The jobless rate fell to 5.4 percent, the lowest since May 2008, from 5.5 percent.
…
Wage growth remained limited, with average hourly earnings rising 0.1 percent in April after a revised 0.2 percent March gain that was weaker than initially reported. The median forecast in a Bloomberg survey projected a 0.2 percent increase for last month.

Compared with a year earlier, hourly pay was up 2.2 percent last month, holding within the narrow range tracked over the past four years.
…
The report also included positive news on the size of the labor force. The participation rate, which indicates the share of working-age people who are employed or looking for work, increased to 62.8 percent from 62.7 percent in March, which matched the lowest since 1978. The gain was paced by 45-to-64 year-old Americans.
…
The Fed now defines full employment as between 5 percent and 5.2 percent, according to projections released after their March 17-18 meeting. The range was lowered from 5.2 percent to 5.5 percent after the jobless rate reached the top of the scale in February.

In Canada, not so much:

The Target effect is denting Canada’s jobs numbers.

Employers shed a total of 19,700 jobs last month, according to Statistics Canada, the most since August, as retailers eliminated thousands of sales, cashiers and clerks positions.

The numbers show the impact of a raft of store closings amid upheaval in the sector, including Target Canada, Best Buy, Mexx, Smart Set, Indigo Books and Sony. The sector may be in flux, but it remains the largest source of employment in the country.
…
The retail sector posted a loss of 20,500 workers, Statscan said Friday, leaving employment levels flat from a year earlier. Monthly jobs numbers can be volatile, but separate payrolls data show the retail sector has contracted for four months in a row.

In January, Target said it was pulling out of Canada, an abrupt move that spelled job losses for 17,600 of its workers over the ensuing months and put pressure on hundreds of firms that served the chain, forcing some of them to lay off staff, too.

Across Canada, the jobless rate stayed at 6.8 per cent as fewer people looked for work.

Monthly numbers can swing up and down, but smoothed-out averages show employment has grown by just 2,600 jobs on average per month in the past half-year. Year-over-year employment growth has been stuck below 1 per cent for the past 13 months.

Other sectors shed workers as well last month, in construction and information services. Natural resources were little changed in the month, but are down 6.6 per cent from a year earlier, reflecting the oil price slide.

On the other hand, it’s my understanding that in Toronto, house flippers have basically been priced out of the market by eager-to-buy veterans of too many bidding wars. In the States, not so much:

Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms.

Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. Borrowing costs — traditionally the highest in residential lending — are tumbling as the firms compete for customers.

The foray represents a deepening bet on the housing market by Wall Street-backed companies, many of which have built rental-home empires during the past three years and started specialty-lending businesses to finance smaller investors. Big firms with deep pockets and access to cheap capital may have an edge over local private lenders that have dominated flipper financing.
…
Home flippers are benefiting from rising prices, limited new construction and a shortage of inventory on the market. While quick resales have decreased from the start of the housing market’s rebound, when investors snapped up discounted distressed homes, profits are getting bigger.

The average gross profit for completed flips in the first quarter was $72,450, up from $61,684 a year earlier and the highest in records dating to 2011, according to a report Thursday from RealtyTrac, a real estate data firm. Markets with the highest average gross return on investment included Baltimore, central Florida and Detroit.

‘Who will watch the watchers?’ query the wise men in Congress. Watcher watchers!

Senate Banking Committee Chairman Richard Shelby is putting the finishing touches on a bill that could give Congress more power over the New York Fed and create a commission with authority to propose sweeping reforms of the entire Fed system.

Other senators want to curb the Fed’s ability to bail out banks during a financial meltdown and increase transparency of its regulation.

“Shelby wants to do something with the Fed,” said Ed Mills, a financial-policy analyst at FBR & Co. in Arlington, Virginia, and a former adviser to Democrats in the House and Senate. “It seems as if they’re going to have something in here that is additional oversight of the Fed or rebalancing some of the power internally at the Fed, whether staff resources or more transparency.”

There’s really only one structural problem with the Fed: it has responsibility for both bank supervision and monetary policy. While there are good arguments to be made in favour of combining the mandates, as has been discussed previously on PrefBlog (see, for example, September 10, 2008 and Willem Buiter’s Prescription), I continue to think that puts just too much power in the hands of one institution.

As far as ‘Fed bailouts of Wall Street Banks’ are concerned – well, for the most part that’s a canard. The explicit bail-outs were done by the Treasury with the authority of congress. The Fed simply lent to solvent banks against adequate collateral … which is what Central Banks are supposed to do during a liquidity crisis. They can, however, be criticized for not ensuring that these loans were not made at penalty rates:

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Brookfield Investments Corporation, proud issuer of BRN.PR.A (which is not tracked by HIMIPref™) has been confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating of Pfd-2 (low) with a Stable trend for the Senior Preferred Shares of Brookfield Investments Corporation (Brookfield Investments or the Company). The rating continues to be based on the strength of Brookfield Investments’ owner (Brookfield Asset Management Inc. or BAM; rated A (low), Stable trend by DBRS), as well as the Company’s relatively stable portfolio of real estate and asset management investments, with strong asset and dividend coverage. The rating remains limited by Brookfield Investments’ exposure to the volatility of overall capital markets, concentration of investments in the real estate sector, lack of investment restrictions and the relative illiquidity of unlisted investments.

It was another strong-mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 19bp, FixedResets up 33bp and DeemedRetractibles off 2bp. The strength in FixedResets came at the end of the day:

TXPL

Click for Big

A Performance Highlights table of unsurprising size was unsurprisingly dominated by winning FixedResets, but there were a few losers in the mix. Volume was quite 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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.48 to be $0.96 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.12 cheap at its bid price of 25.04.

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).

Most expensive is MFC.PR.K, resetting at +222 on 2018-9-19, bid at 23.52 to be $0.28 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.61 to be $0.43 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 20.52 to be $0.60 cheap. BAM.PR.X, resetting at +180bp 2017-6-30 is bid at 18.51 and appears to be $0.57 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.63, looks $0.76 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.14 and is $0.52 rich.

Click for Big

Investment-grade pairs now predict an average over the next five years of about 0.35%, but TRP.PR.A / TRP.PR.F is an outlier at -0.78% and BNS.PR.Y / BNS.PR.D is at +0.84%. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -0.68% while DC.PR.B / DC.PR.D is now at 0.95%.

Click for Big

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