PrefBlog

A spokesman for the Ministry of Finance has declared there is no housing bubble:

“We don’t believe we’re in a bubble,” Bank of Canada Governor Stephen Poloz said in testimony Tuesday to the House of Commons Standing Committee on Finance. He said Canada’s long-running boom in the housing market hasn’t been underpinned by the kind of rampant speculative buying that is the hallmark of an asset bubble.

“Our housing construction has stayed very much in line with our estimates of demographic demand,” he said. “There’s no excess.”

This despite the central bank’s own estimate, published last December in its Financial System Review, that Canada’s housing market is overpriced by between 10 and 30 per cent.

Mr. Poloz indicated that he believes the overvaluation is not a symptom of runaway prices and widespread investor speculation, but rather of ongoing strength in consumer demand spurred by historically low interest rates – rates that were cut by the central bank in order to keep consumer demand buoyant to support Canada’s economy during the Great Recession.

A few months ago I received an eMail from a Concerned Investor:

This is not likely to happen but if the BOC 5 year rate fell to minus 2% or lower and some of these insanely priced resets at less than 200 basis points aren’t called ( and by the way probably never will) would the buyer be obliged to pay the issuer the difference ?

… and I answered with a reference to a PrefBlog comment that addressed a question regarding a negative GOC-5 yield.

We are now seeing some real life examples in European markets:

Negative interest rates are an odd fish in the world of finance given that they basically wreak havoc on a central tenet of investing; that investors will be compensated in some way for, you know, investing in things.

Bloomberg’s Alastair Marsh reports today on POPYM 2007-2 A3G, a 2007 securitization deal that bundled together loans made to small businesses in Spain. Trustees for the bonds appear to be halting coupon payments to the debt’s investors after a benchmark interest rate to which the deal is tied turned negative in recent days.
…
While this particular Spanish securitization, put together by Banco Popular, does have a legal clause that stops coupons from turning negative, it’s highly unlikely that all banks which created such bond deals would have anticipated an era of negative rates. In other words, it’s not entirely clear how such securitized debt will react to a sub-zero world.

For what it’s worth, Danish mortgage lender Nykredit said last month that it would fix coupon rates on its own floating-rate bonds to zero if benchmark interest rates turn negative.

Negative yields! On a protracted basis! Ha-ha! That’s as ridiculous an idea as thinking there could ever be a significant decline in US national real-estate prices!

I noted a broadly based retail trend towards low-cost funds and ETFs on April 24. One impediment to such a trend in Canada has just been addressed:

Exchange-traded funds will now be more readily available to investors as an industry solution announced Tuesday will provide mutual fund advisers direction on how to sell ETFs.

Unlike mutual funds, ETFs are sold on an exchange. Currently, mutual fund licensed representatives can trade in exchange-traded funds that meet the definition of a mutual fund under securities legislation. This includes the majority of ETFs in the marketplace.

The problem for the majority of mutual fund advisers is that they do not have access to an exchange in order to settle the trade.

The Canadian ETF Association (CEFTA), along with the Federation of Mutual Fund Dealers (FMFD), announced mutual fund dealers would soon be able to provide advisers access to an exchange through a partnership with custody and trade execution provider National Bank Correspondent Network (NBCN). The solution was announced at the FMFD conference earlier Tuesday.

Of course, there’s a very good chance that the fees on fee-based accounts will (i) exceed the savings generated by the migration and/or (ii) dissuade unsophisticated investors from the notion, but we’ll just have to see how everything shakes out.

Treasury yields rose significantly today:

Treasury 10-year yields reached 2 percent for the first time in a month as the Federal Reserve began a two-day policy meeting and investors were lured away by higher-yielding corporate debt.

U.S. government debt dropped for a second day as Fed policy makers gathered in Washington to debate whether growth is strong enough to raise borrowing costs for the first time since 2006, with economists forecasting a September move. Oracle Corp. and Amgen Inc. are raising money in the bond market, weighing down Treasuries as underwriters hedged bets on interest rates.
…
Yields on 10-year note yields rose eight basis points, or 0.08 percentage point, to 2 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the benchmark 2 percent security due in February 2025 fell 23/32, or $7.19 per $1,000 face value, to 99 31/32.

It’s the first time yields have touched 2 percent since March 26, along with the highest close since March 17 and biggest increase since March 6. Yields are still down from the 2014 close of 2.17 percent.

Treasury five-year note yields added six basis points to 1.40 percent.

In a very encouraging sign, we see an investment firm hiring traders:

Canyon Partners co-Chief Executive Officer Josh Friedman says his credit investment firm has added traders from Wall Street as banks exit market making.

“Wall Street has lots of traders who are available because they’re not allowed to take positions,” Friedman said in a Bloomberg Television interview with Stephanie Ruhle Monday at the Milken Institute Global Conference in Beverly Hills, California. “If we’re interested in buying a security, we want to make sure we have very high talent level on the trading desk to be able to go out and source those securities at cheap prices.”
…
“It’s hard to move large blocks of debt and we’ll find that the people who actually buy it are not intermediaries, but they’ll be end consumers who are not leveraged,” he said. “It means there will be other types of opportunities to make money.”

A “handful or maybe two handfuls” of other credit firms are taking similar action, said Friedman.

And finally, here’s an alternative investment I could wrap myself around:

A U.K. brewer is offering investors an alternative to record-low interest rates at home and negative bond yields in the euro area: bottles of its own craft beer.

Innis & Gunn Brewing Co. Ltd., which is based in Edinburgh, is offering beer coupons in place of interest payments on a 3 million-pound ($4.6 million) notes issue. It’s just the latest small company to embrace crowdfunding to raise cash.

The brewer will use the proceeds of the four-year sale to fund the construction of a new site. The notes offer gross annual interest of 7.25 percent for investments starting at 500 pounds. Investors opting to be paid in beer will receive the equivalent of 9 percent interest a year, the company said.

It was a violently mixed day for the Canadian preferred share market, with PerpetualDiscounts off 20bp, FixedResets up 36bp and DeemedRetractibles gaining 2bp. The Performance Highlights table is lengthy, with ENB, TRP and BAM issues again prominent. Volume was on the high 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 23.41 to be $0.71 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.59 cheap at its bid price of 15.05.

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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).

Most expensive is MFC.PR.I, resetting at +286 on 2017-9-19, bid at 25.28 to be $0.34 rich, while MFC.PR.L, resetting at +216bp on 2019-6-19, is bid at 21.66 to be $0.64 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.72 to be $0.81 cheap. BAM.PR.X, resetting at +180bp 2017-6-30 is bid at 28.46 and appears to be $1.08 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 16.15, looks $0.77 cheap and resets 2015-6-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 24.61 and is $0.45 rich.

It’s nice to see FTS.PR.M replace FTS.PR.K as most expensive of the series. I think this is the first change in either extremity for as long as I’ve been producing these daily Implied Volatility reports.

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Investment-grade pairs now predict an average over the next five years of about 0.25%, but TRP.PR.A / TRP.PR.F is an outlier at -0.84% and the new BNS.PR.Y / BNS.PR.D pair is at +0.83%. The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -1.58%.

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

I talked about my fascination with the Amazon drone proposal on April 13 and it turns out that one Assiduous Reader is involved with the project up to his neck! Now some more details have been released:

In its most detailed public disclosure about a proposed service called Prime Air, Amazon is arguing that cargo drones should be allowed to take flight if the online retailer can show they’re not going to collide with planes or crash to the ground.

The drones, still in development, would mostly fly at least 200 feet off the ground, relying on sensors and computers to select a route to customers’ doors and avoid hazards, Amazon said in a request Friday to the Federal Aviation Administration seeking leniency on pending drone regulations. One Amazon employee would operate many drones simultaneously, according to the request letter.
…
The FAA’s proposed rules would block Amazon’s plans. The agency proposal wouldn’t allow drones to carry commercial cargo and would require they only be flown within sight of an operator, prohibiting flights of 10 miles (16 kilometers), or longer, envisioned by Amazon.

Instead of flatly prohibiting such flights, the FAA needs to set up criteria to allow them if Amazon or other companies can demonstrate they’re safe and reliable, Misener said.
…
The Small UAV Coalition, a trade group representing companies including Amazon and Google Inc., and the Association for Unmanned Vehicle Systems International, another trade group for the drone industry, filed similar comments as Amazon.

AUVSI said the FAA should drop its proposed ban of night drone flights if a user could demonstrate they were as safe as daytime operations.
…
It also highlights the cutting-edge robotics and computer technology underpinning what Amazon wants to do. If a drone loses radio contact with its operator, it must be capable of safely returning to base or landing without harming people or property, for example.

Amazon envisions using automated sensors to “sense-and-avoid” other drones and obstructions, according to its letter. Except for takeoff and landing, drones would stay in a zone of 200 feet to 500 feet from the ground. Most traditional planes and helicopters fly above 500 feet.

I confess to some surprise that the major courier companies are not members of the Small UAV Coalition, but while there are reports that they’re interested in drones, they’re more interested in big ones. Small ones are deprecated; but the Big FedEx Guy sounds a lot like the guys who thought the worldwide market for computers was maybe six units:

Speaking exclusively to IBTimes UK, David Binks, the President of EMEA at FedEx Express, confirmed that the company has “had some conversations” with drone manufacturers – as it does with other technological companies, such as the manufacturers of driverless cars – but that he can only envisage a time when the robots will take a “niche” place in the delivery sector.

“That’s a topic that comes up frequently. I think drones are an interesting tech in terms of what learning we can get out of them and what they facilitate in terms of future technology. We keep an eye on that, we work with the organisations who are developing those types of technology as we do with the automotive industry, who are working on driverless vehicles,” he added.

“I can see a time when perhaps they have a niche use. I don’t know whether that would become a widespread parcel delivery network. We’d have an awful lot of drones in the sky.

“It might be for a very specific delivery opportunity in a remote area where it’s very difficult to get to. I think that type of use might be interesting in the future.”

It will be fascinating to learn how all this shakes out over the next few years; I look forward to the day when I can order beer and pizza at 4am and pick it up from the helipad on the front porch!

Assiduous Reader JP sends me yet another great link (well done, JP!) from the Economist titled Frozen: Regulators have made banking safer. But has that made markets riskier?:

TO ENSURE that it meets the 750 new rules on capital imposed in the aftermath of the financial crisis, JPMorgan Chase employs over 950 people. A further 400 or so try to follow around 500 regulations on the liquidity of its assets, designed to stop the bank toppling over if markets seize up. A team of 300 is needed to monitor compliance with the Volcker rule, which in almost 1,000 pages restricts banks from trading on their own account.

The intention of all these rules is to prevent a repeat of the bankruptcies and bail-outs of 2008. But some observers, including JPMorgan’s boss, Jamie Dimon, and Larry Summers, a former Treasury secretary, argue that in their rush to make banks safer, regulators may have created a riskier financial system. By throttling the bits of banks that “make markets” in bonds, shares, currencies and commodities, the theory goes, watchdogs have made such assets less liquid. Investors may not be able to buy and sell them quickly, cheaply and without moving the price. The consequences in a downturn, when markets are less liquid anyway, could be severe.

The problem is the elimination of the ‘three pillars’ of the financial system: banks, insurers and securities dealers. First the banks were allowed to swallow up the securities sector (or, as in the case of Goldman Sachs, securities dealers were converted willy-nilly into banks). Then banks were no longer permitted to act as securities dealers. And all this has been done without anybody, even once, thinking about what they were doing.

I have no problem with forcing the banks out of the securities business; in fact, I support the idea. But really, something should be in place beforehand, don’t you think? We need to nurture the next generation of securities dealers – I suggest that hedge funds should be, generally speaking, happy to set up trading operations … but you can bet that should they start attempting to do this, they will be vilified by regulators and self-proclaimed “investor advocates” … particularly the ones who like to parade their ignorance by demanding that bonds be exchange traded.

It was a mixed but strong day for the Canadian preferred share market with PerpetualDiscounts gaining 3bp, FixedResets up 48bp and DeemedRetractibles off 1bp. ENB and TRP FixedResets were prominent on the winning side of a lengthy Performance Highlights table. Volume was on the high 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 23.30 to be $0.75 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.75 cheap at its bid price of 14.71.

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Another excellent fit (despite a sharp increase in Implied Volatility today), but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 23.50 to be $0.53 rich, while MFC.PR.L, resetting at +216bp on 2019-6-19, is bid at 21.44 to be $0.69 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.91 to be $0.59 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.70 and appears to be $0.63 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 16.35, looks $0.51 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.58 and is $0.40 rich.

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Investment-grade pairs now predict an average over the next five years of about 0.20%, but TRP.PR.A / TRP.PR.F is an outlier at -0.77% and the new BNS.PR.Y / BNS.PR.D pair is at +0.63%. The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -1.69%0.

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

A story on Bloomberg brought to my attention a Morningstar study titled 2015 Fee Study: Investors Are Driving Expense Ratios Down:

• Investors are paying less for fund management, largely as a matter of choice.
• The asset-weighted expense ratio across all funds was 0.64% in 2014, down from 0.65% in 2013
  and 0.76% five years ago.

• Investors are choosing low-cost funds. Over the past decade, 95% of all flows have gone into funds in the lowest-cost quintile. Passive funds have benefited disproportionately.
• Investors continue to move away from load-based share classes while typically lower-cost share classes, such as Institutional shares, have gained favor.
• Firms sponsoring lineups with lower asset-weighted expense ratios—most notably Vanguard—have gained market share during the past five years.
• Over the past five years, 63% of the fund share classes and exchange-traded products in our universe reduced their expense ratio, but only about 24% of them saw their fee fall by more than 10%.
• Meanwhile, 21% of the share classes we examined ratcheted up their takes.
• Estimated industry fee revenue is at an all-time high, reaching $88 billion in 2014, up from $50 billion 10 years ago.
• During that 10-year period, industry assets under management increased 143% while the asset weighted expense ratio declined 27% and industry fee revenue grew by approximately 78%.
• Thus, the industry—rather than fund shareholders—has benefitted most from the increase in asset under management.

…
During the past decade, low-cost funds have been attracting far more inflows than their more expensive peers. This has helped to reduce the industry’s average asset-weighted expense ratio over time. Mutual funds and ETPs with expense ratios ranking in the least-expensive quintile of all funds attracted an aggregate $3.03 trillion of estimated net inflows during the past 10 years, compared with just $160 billion for funds in the remaining four quintiles. That is to say that 95% of all flows have gone into funds in the lowest-cost quintile. Passive funds (mutual funds and ETPs) have been prominent recipients of the capital flowing into low-cost funds. Compared with funds falling in cost quintiles 2 through 5, funds in the lowest-cost quintile are more likely to be index funds.

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Note that in the US trailers are referred to as 12b-1 fees. The SEC is attemting to ensure that the paperwork associated with such fees is maximized.

Investor Advocates – generally more accurately referred to as “Increased Employment Of Regulators Advocates”, or “Paid Stalking Horses For Regulators” or simply as “Blowhards Without Brains, Knowledge Or Mandate” – will be horrified at the notion that investors are migrating to lower-cost funds without the benefit of increased regulation.

BNS Split Corp. II, proud issuer of BSC.PR.B, has been confirmed at Pfd-2 by DBRS:

The dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution of $0.2003 per share to holders of the Class B Preferred Shares, yielding approximately 4.25% annually on the initial issue price of $18.85. The current yield on the Portfolio shares fully covers the Class B Preferred Share dividends, providing dividend coverage (net of expenses) of approximately 2.5 times. The Class A Capital Shares receive all excess dividend income after the Class B Preferred Share distributions and other expenses of the Company have been paid.

The performance of the Company has been somewhat volatile since the last rating action. However, downside protection did increase to 68.2% on April 16, 2015, compared with 67.5% on April 10, 2014. A recent increase in dividend distributions from the Bank of Nova Scotia helped boost the dividend coverage ratio. As a result, the rating of the Class B Preferred Shares has been confirmed at Pfd-2.

It was a violently mixed day for the Canadian preferred share market, with PerpetualDiscounts down 33bp, FixedResets gaining 81bp and DeemedRetractibles off 4bp. The Performance Highlights table is, predictably, stuffed full of winning FixedResets, with ENB, BAM and TRP issues well represented. 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 22.81 to be $0.51 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.49 cheap at its bid price of 14.69.

Click for Big

Another excellent fit (despite a sharp increase in Implied Volatility today), but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 23.40 to be $0.45 rich, while MFC.PR.L, resetting at +216bp on 2019-6-19, is bid at 21.44 to be $0.70 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.76 to be $0.61 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.68 and appears to be $0.71 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 16.00, looks $0.67 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.40 and is $0.42 rich.

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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 -0.09% The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -1.41%0.

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

Assiduous Reader JP (who always sends me interesting links, unlike most of you) sent me a link a while ago about metals demand in China:

China’s steel and metals markets, a barometer of the world’s second-biggest economy, are “a lot worse than you think,” according to a Bloomberg Intelligence analyst who just completed a tour of the country.

What he saw: idle cranes, empty construction sites and half-finished, abandoned buildings in several cities. Conversations with executives reinforced the “gloomy” outlook.

“China’s metals demand is plummeting,” wrote Kenneth Hoffman, the metals analyst who spent a week traveling across the country, meeting with executives, traders, industry groups and analysts. “Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”

This has been reflected in other statistics …:

A Chinese manufacturing gauge fell to a 12-month low in April, suggesting government efforts to cushion a slowdown are yet to revive the nation’s factories.

The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 49.2, missing the median estimate of 49.6 in a Bloomberg survey, which was also March’s final reading. Numbers below 50 indicate contraction.

The first reading of the economy’s health in April may deepen concern over a slowdown after first-quarter data showed the weakest economic expansion since 2009. Policy makers have stepped up efforts to halt the slide, cutting banks’ reserve requirements by 1 percentage point this week.

… and in default rates:

The true cost of the debt that China’s real estate developers peddled to eager international investors during a five-year property boom is now becoming clear.

Having found themselves shut out of local bond and loan markets seven years ago, a band of developers began looking elsewhere for funds. First an initial public offering, and then a dollar bond sale. It became a well-trodden path. By 2010, a core group of four — Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious Property Holdings Ltd. — raised a total of $5.6 billion. On Monday, Kaisa buckled under $10.5 billion of debt and defaulted.

China’s home builders became the single biggest source of dollar junk debt in Asia amid government measures to prevent a property bubble. Developers already funneled $78.8 billion from international equity and bond markets into an industry that’s grown to account for one third of the world’s second-biggest economy. Most of the first rush of dollar offerings, in 2010, falls due in the next two years.

In fact, manufacturing data globally is no great shakes:

Manufacturing Purchasing Managers Indexes disappointed everywhere today.

Japan, China, France, Germany and the U.S. all had PMI reports out today that missed expectations. Japan, China and France had readings below 50, signifying contraction.

It is a continuation of a 2015 downward trend for Japan and China, a continuation of sub-50 numbers for France and a reversal for Germany and the U.S., which had been producing some great numbers so far this year.

Deutsche Bank was subjected to yet another round of regulatory extortion:

Deutsche Bank AG was ordered to pay a record $2.5 billion fine and fire seven employees to settle U.S. and U.K. investigations into its role in rigging Libor.

Deutsche Bank must terminate six London employees and one in Frankfurt who engaged in wrongful conduct, according to New York’s Department of Financial Services, which was among the international regulators involved in the settlement announced Thursday. While the DFS didn’t identify them by name, one is a managing director, four are directors and two are vice presidents. A U.K. unit agreed to plead guilty to a wire-fraud charge as well.

“Deutsche Bank employees engaged in a widespread effort to manipulate benchmark interest rates for financial gain,” DFS Superintendent Benjamin Lawsky said in a statement. “We must remember that markets do not just manipulate themselves: It takes deliberate wrongdoing by individuals.”

Geez, if I commit fraud, fraud so blatant that somebody thinks they can actually prove it in an actual court, I may well go to jail. Those guys are lucky they worked for a firm willing to help lower tax rates in their host countries.

But, in the end, who cares?

In a way it’s a shame that the Libor settlements are mostly about collecting and typesetting embarrassing instant messages. The interesting question in Libor manipulation is whether it caused a net harm: Did Bank X push Libor up while Bank Y pushed it down in ways that mostly reflected and equilibrated underlying interest-rate market dynamics? Or did the banks mostly work together in a way that systematically enriched them as a group at the expense of their clients as a group?

This seems like a very hard question, but also one that is of curiously little interest to the regulators. Among those regulators, the U.K. FCA has the most detailed mechanism for determining penalties; it is explicitly supposed to consider “the amount of benefit gained or loss avoided.” It completely shrugged off that determination for Deutsche Bank:

Deutsche Bank sought to manipulate LIBOR and EURIBOR submissions in order to improve the profitability of its trading positions. The Authority has not determined the amount of benefit gained.

Isn’t that question — for Deutsche Bank, and for the Libor-manipulating banks as a whole — the important one? Shouldn’t the Libor manipulating banks be assessed on the economic impact of their manipulation, and not just on who had the most bad quotes?

Eric Scott Hunsader of Nanex has released two charts showing Sarao’s (alleged, at this point) spoofing on Flash Crash Day:

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He also states (in three separate tweets):

I now believe Nav Sarao may have been screen trading – though each click would result in placing/cancelling many orders
…
I don’t think Sarao used an automated trading system and could in fact have been trading as he claims (I was wrong yesterday)
…
Actually, I’m going with a hybrid – the spoofing algo was automated and running background, while Sarao click traded positions

Getting back to my main point in all this – that anti-spoofing rules are clearly unenforceable by regulatory measures and should be scrapped – we can allow ourselves to wonder just how fast the spoofing detection algorithm used to produce those two charts is; whether it could run in anything close to real time; and how many false-positives and false-negatives it might be expected to produce. If it could be done in real-time with reasonable accuracy, that would be a very good thing for HFT. Of course, there’s not much time:

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Look at the time scale on the X-axis! The spoofs last less than a second.

From Alberta to Australia, politicians all look the same:

Even for a country with a history of commodity booms, this one was gargantuan.

Over the decade to 2013, Australia racked up $1 trillion in extra exports from the previous 10 years, thanks largely to China’s once-insatiable demand.

Despite the opportunity of funding infrastructure to meet the needs of millions of new citizens, the nation largely blew the extra cash on month-to-month spending. The added A$300 billion ($232 billion) in government revenue generated from the boom went to things like tax cuts and subsidies.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets up 49bp and DeemedRetractibles gaining 1bp. ENB, BAM and TRP FixedResets are all prominent on the Performance Highlights table, which is comprised exclusively of winners. Volume was high.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.51 to be $0.39 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.56 cheap at its bid price of 14.45.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 23.50 to be $0.77 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.40 to be $0.73 cheap.

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This fit has deteriorated.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.30 to be $0.66 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.30 and appears to be $0.81 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 15.81, looks $0.69 cheap and resets 2015-6-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 24.22 and is $0.48 rich.

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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 -0.27% The DC.PR.B / DC.PR.D pair retains its customary outlier status, with a breakeven rate of -1.47%.

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

There are a few new tidbits of information coming out about the arrest of Navinder Singh Sarao, but nothing worth a complete post. I have updated the posts Scapegoat for Flash Crash Isolated! and Flash Crash: Incompetence, Position Limits, Retail. Seems to me to be a case of stupid people attempting to enforce stupid rules in a stupid manner and ending up with a severe case of stupid. So, yeah, the obvious solution is to toss some petty little clown in jail for thirty years or so. That’s justice.

FRBNY President William Dudley gave a speech Monday titled The U.S. Monetary Policy Outlook and its Global Implications which Bloomberg sumamarizes as ‘inflation will pick up due to oil, rent, jobs and expectations’. I was more interested in his endorsement of mission-creep, which I complained about yesterday:

A second area in which we can and must collectively do better is safeguarding global financial stability. Simply put, we failed to act both early enough and decisively enough to stem the credit excesses that spawned the financial crisis and the Great Recession. While the U.S. was not alone in this shortcoming, given our position in the global financial system we especially should have done a better job. We’ve taken important steps through new legislative mandates and a broader effort to rethink our regulatory and supervisory framework. In particular, systemically important banking organizations must now hold higher amounts of capital and liquidity that are better aligned with their risk profiles and the official sector is making progress in ensuring no financial firm will be too-big-to-fail.

Although this remains very much a work in progress, these efforts should help us to avoid repeating the mistakes of the recent past, and enable us to be more proactive in mitigating potential future vulnerabilities. Of course, we at the Fed are not alone here. Since the recent financial crisis, central banks worldwide have been engaged in a broad rethinking of how to better fulfill their mandates.

So it looks like all the central bankers of the world are going to have to go to stockbroker school: ‘Yes, it looks at first glance as if I’ve made some pretty horrible recommendations that have lost you a lot of money. But if you hadn’t done this and then that had happened, it would have been worse!’ Isn’t risk wonderful? There’s always a worse-case scenario you can point at.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 8bp, FixedResets gaining 6bp and DeemedRetractibles off 18bp. The Performance Highlights table continues to show extreme volatility. Volume was high.

PerpetualDiscounts now yield 5.11%, equivalent to 6.64% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.7%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 295bp,, a slight (and perhaps spurious) uptick from the 290bp reported April 8.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.26 to be $0.41 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.39 cheap at its bid price of 14.42.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.I, resetting at +286 on 2017-9-19, bid at 25.06 to be $0.46 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.36 to be $0.69 cheap.

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This fit is actually quite good.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.15 to be $0.50 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.50 and appears to be $0.59 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 15.73, looks $0.80 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.01 and is $0.32 rich.

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Investment-grade pairs now predict an average over the next five years of about 0.30%. The DC.PR.B / DC.PR.D pair has reversed yesterday‘s nonsense and has returned to its customary outlier status, with a breakeven rate of -1.41%.

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

It is becoming increasingly fashionable to ascribe another mandate to central bankers:

“Society has given our central bankers worldwide the responsibility for macro-prudential risk, all the risk in the system, not just the risk in the banking system,” Fink said at the Credit Suisse Global Megatrends conference. “I don’t think there is enough talk about what are the costs of the low rate environment to the other components of our global society — pension funds, retirees, savers, and insurance companies.”

[Axa SA’s Henri] De Castries in 2013 called central bank policies a form of “financial repression” that forced savers to rescue the banking system.

A spokesman for Canada’s Ministry of Finance recently endorsed the idea:

Specifically, we use more and better data to assist our financial system monitoring, backed by deeper conversations and models where appropriate, to make more informed judgments about financial stability risks. We’ve added other potential sources of vulnerability, such as the balance sheets of households, companies and banks, to our macroeconomic models.

We’re also making progress toward a better understanding of how monetary policy actions influence risk taking. For example, when a central bank cuts interest rates to cushion the economy from a shock, the hope is that people will borrow more at that lower interest rate and spend more money. What this means is that financial imbalances are a necessary by-product of monetary policy action, especially if the action is prolonged, so these additional adjustment dynamics must be fully taken into account when conducting policy.

Clearly, though, incorporating financial stability into our monetary policy framework remains a work in progress. As a practitioner, it still feels to me like we are adding various rooms onto a house we love, rather than creating a new, elegant and coherent structure. We need to make sure there’s enough flexibility and clarity about the role of financial stability in our monetary policy framework. We need to better understand how macroprudential policies – such as mortgage insurance rules – that are aimed at promoting financial stability interact with monetary policy.
…
The Bank has been setting policy with a view to balancing the risks facing both the outlook for returning inflation sustainably to its target, and the risks to financial stability such as those posed by the indebtedness of Canadian households. The sudden drop in global oil prices has increased both risks. The oil-price shock is an important setback in our progress toward full capacity, full employment and stable inflation because it is a net negative for economic growth. And because lower oil prices mean lower Canadian income, the shock will worsen the debt-to-income ratio of Canadian households, thereby increasing financial stability risks.

This is absurd mission-creep, which will lead to yet another layer of unaccountable bureaucrats stifling innovation and competition while bloating the financial system and collecting large pay-cheques.

For example, the reincarnation of King Canute rules in Denmark, holding back the tides of speculators responding to economic reality:

Denmark halted government bond auctions on Jan. 30 as part of a series of steps designed to deter investors from pouring into AAA-rated krone assets. Speculation the central bank may need to abandon its currency peg soared after Switzerland dropped its euro cap on Jan. 15. The International Monetary Fund has since declared Denmark triumphant in its battle against speculators, and said the central bank’s handling of the matter added to its credibility.

The central bank’s acknowledgment that Denmark’s bond market may need some liquidity support follows criticism from some of the country’s biggest institutional investors. PFA A/S, Denmark’s largest commercial pension fund, has said the suspension of bond sales is killing liquidity and creating an “unsustainable situation.”

Meanwhile, the Canadian government cemented the structural deficit:

Canada cut its projected surpluses by C$18 billion ($14.7 billion) over the next five years as the federal government copes with the impact of lower oil prices and seeks to finance new tax cuts ahead of an October election.

Canada’s federal government will post a surplus of C$1.4 billion for the fiscal year that began April 1, ending a seven-year run of deficits, aided by the sale of shares in General Motors Co. and by reducing its buffer for emergencies. Surpluses will grow to as high as C$4.8 billion by 2019 as government income recovers.
…
Harper’s almost decade-long, three-term record of wholesale tax cuts has been marred by the run-up of debt totaling almost C$150 billion since the 2008-2009 recession.

Wow, $4.8-billion! I guess the take-away is that we only expect a recession every thirty years or so. Good times!

It was a moderately good day for the Canadian preferred share market, with PerpetualDiscounts winning 31bp, FixedResets gaining 3bp and DeemedRetractibles up 5bp. Volatility continued to be high, as reported on the Performance Highlights table, with FixedResets making up large complements of both winners and losers. Volume was very high, with TRP issues prominent.

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 22.30 to be $0.48 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.59 cheap at its bid price of 14.11.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.I, resetting at +286 on 2017-9-19, bid at 25.05 to be $0.43 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.55 to be $0.48 cheap.

Click for Big

This fit is actually quite good.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.13 to be $0.42 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.40 and appears to be $0.54 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 15.65, looks $0.78 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.01 and is $0.32 rich.

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Investment-grade pairs now predict an average over the next five years of about 0.30%. The DC.PR.B / DC.PR.D pair is just a dumb number, since the Toronto Stock Exchange reports a bid of 15.00 for the latter issue, despite the fact that there were no trades today and the close Monday was 20.14. It is not clear whether the idiotic quote is due to the TSX’s peculiar reporting practices or their inadequate supervision of market makers.

Click for Big

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