Market Action

October 1, 2012

Here’s a good example of why government agencies should not regulate Credit Rating Agencies:

Now, incredibly, Egan-Jones is the sole rater that the SEC has decided to attack. The trouble for the firm started on July 16, 2011, when Egan-Jones downgraded the U.S.’s sovereign debt by one notch, to AA+ from AAA. Egan-Jones cited “the relatively high level of debt and the difficulty in significantly cutting spending.” Two days later, the SEC’s Office of Compliance Inspections and Examinations contacted the firm seeking information about its rating decision. (The next month, S&P also downgraded the U.S.’s sovereign debt, but neither Moody’s nor Fitch did.)

Then, on Oct. 12, Egan-Jones received a call from the SEC notifying the firm of a Wells Notice, an indication that it was being investigated. On April 5 of this year, Egan-Jones again downgraded the U.S. sovereign debt, to AA from AA+. On April 19, leaks started emanating from the SEC that it had voted to start an “administrative law proceeding” against the firm. And on April 24, the SEC filed its complaint.

Just what does the SEC object to so vehemently about Egan- Jones? The commission claims that on its 2008 supplemental application to be a “nationally recognized” ratings firm, Egan- Jones “falsely stated” that it had already rated the credit of 150 asset-backed securities and of 50 sovereign-debt issues. The SEC claims Egan-Jones “willfully made these misstatements and omissions to conceal the fact that it had no experience issuing ratings on ABS or government issuers.” The SEC intends to fine Egan-Jones and to possibly censure Sean Egan — neither move would be good for business.

His lawyer, Alan S. Futerfas, told the Wall Street Journal that the SEC knows that Egan did rate the securities in question but it is “saying he didn’t disseminate it publicly.” Futerfas continued: “It’s a very technical argument the SEC is using; it’s not substantive. There’s nothing in this complaint that suggests or alleges that any rating was without integrity or was not accurate or was not predictive.”

If he is right, that raises a question: Is the SEC retaliating against Egan and his firm for downgrading the U.S. sovereign debt?

Regulation of CRAs inevitably leads to a very tiresome discussion of conspiracy theories. There are certainly problems with “Issuer pays”; “Issuer regulates” is worse.

Is QE3 inflationary? Who cares?

Investors initially increased their inflation expectations on the Fed’s plan. The gap between yields on 10-year notes and same-maturity Treasury Inflation-Protected Securities, or TIPS, widened to 2.73 percentage points on Sept. 17, the highest level since May 2006. The so-called break-even rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, narrowed last week to 2.42 percentage points.

In a startling new development, the SEC has hired somebody with a clue:

The U.S. Securities and Exchange Commission, stung by criticism that it lacks the knowledge to analyze the computerized trading that has come to dominate American stock markets, is planning to catch up.

Initiatives to increase the breadth of data received from exchanges and to record orders from origination to execution are at the center of the effort. Gregg Berman, who holds a doctorate in physics from Princeton University, will head the commission’s planned office of analytics and research.

Berman, who studied experimental and nuclear physics, developed trading strategies in commodities and stocks at a hedge fund and became a founding member of RiskMetrics Group Inc. in 1998 when JPMorgan Chase & Co. spun off the company. He writes programming code and did some of the flash-crash modeling when the SEC examined how trade requests were withdrawn from exchange order books that day.

The analytics and research office plans to hire traders from banks and hedge funds as well as financial engineers and individuals with quantitative and analytical skills. It’s looking for programmers in the C++ computer language and “UNIX gurus who really know how to get under the hood and in former lives may have written trading programs and now are going to write analytical programs,” Berman said.

Traditionalists will be relieved to learn that the new Office of Analytics and Research comes under the Division of Trading and Markets, which is headed by a lawyer.

He also served as counsel to Chairman Schapiro on issues involving the Division of Trading and Markets, including the agency’s analysis and response to the Flash Crash on May 6, 2010, and numerous other market structure and Dodd-Frank related rulemakings, studies, and programs.

Readers will remember that the agency’s response to the Flash Crash was a highly politicized put-up job.

Moody’s believes that the Spanish stress test was insufficiently conservative:

Spain’s banks face a capital shortfall that could climb to 105 billion euros ($135 billion), almost double the estimate the government provided last week, according to Moody’s Investors Service.

The nation’s lenders may need infusions of 70 billion euros to 105 billion euros to absorb losses and still keep capital ratios above thresholds outlined in legislation last year, Moody’s analysts wrote yesterday in a report. That compares with the 53.7 billion euro shortfall found last week after officials commissioned a stress test designed to lift doubts about the financial industry’s ability to withstand losses.

“The recapitalization amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios,” the analysts, Maria Jose Mori and Alberto Postigo, said in the report. “If market participants are skeptical about the stress test, negative sentiment could undercut the government’s efforts to fully restore confidence in the solvency of Spanish banks.”

While many assumptions in the stress test were conservative, some may be questioned, Moody’s said. The test used a 6 percent core capital ratio under a stressed scenario, while the ratings firm assumed capital ratios of 8 percent to 10 percent, according to the report. The rate used by Ireland for its test, including a buffer, was 9 percent.

What makes this interesting is that it continues to reflect one of the big problems of the Credit Crunch: bank capital is supposed to ensure that unexpected losses will bankrupt the company only once in 1,000 years (insert jokes about recent experience here).

The confidence level is fixed at 99.9%, i.e. an institution is expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years. This confidence level might seem rather high. However, Tier 2 does not have the loss absorbing capacity of Tier 1. The high confidence level was also chosen to protect against estimation errors, that might inevitably occur from banks’ internal PD, LGD and EAD estimation, as well as other model uncertainties.

But! In demanding that the banks maintain capital above the regulatory minimum even after experiencing these 1,000-year losses, we are demanding that they remain solvent even after experiencing 1,000 year losses in successive years (which is probably not a million-year two-year-loss; it will depend on the correlation between successive years). I don’t think anybody knows how to deal with this. The concept of a buffer is helpful, but it remains to be seen what will happen to a bank in times of great stress when it has used up its buffer.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 4bp, FixedResets gaining 2bp and DeemedRetractibles up 11bp. There weren’t many volatile issues, but they made up in energy what they lacked in numbers. Volume was low.

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 -0.0190 % 2,449.1
FixedFloater 4.40 % 3.78 % 35,425 17.71 1 0.5119 % 3,619.7
Floater 2.99 % 3.02 % 57,351 19.71 3 -0.0190 % 2,644.3
OpRet 4.65 % 2.77 % 35,186 0.73 4 0.1549 % 2,554.3
SplitShare 5.45 % 4.93 % 70,809 4.55 3 -0.1586 % 2,817.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1549 % 2,335.7
Perpetual-Premium 5.28 % 2.11 % 90,829 0.39 27 -0.0423 % 2,298.9
Perpetual-Discount 4.99 % 4.85 % 105,942 15.77 4 0.5440 % 2,592.7
FixedReset 4.97 % 2.98 % 176,061 4.02 73 0.0175 % 2,437.1
Deemed-Retractible 4.94 % 3.52 % 122,108 1.11 46 0.1138 % 2,378.4
Performance Highlights
Issue Index Change Notes
IGM.PR.B Perpetual-Premium -2.97 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 4.98 %
BAM.PR.N Perpetual-Discount 1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-10-01
Maturity Price : 24.21
Evaluated at bid price : 24.70
Bid-YTW : 4.81 %
GWO.PR.N FixedReset 2.59 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 3.62 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.X FixedReset 212,857 Nesbitt crossed 201,400 at 25.15.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-10-01
Maturity Price : 23.23
Evaluated at bid price : 25.15
Bid-YTW : 3.24 %
CU.PR.C FixedReset 105,667 Nesbitt crossed 48,900 at 26.10; RBC crossed 51,500 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 3.08 %
ENB.PR.P FixedReset 41,357 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-10-01
Maturity Price : 23.11
Evaluated at bid price : 25.05
Bid-YTW : 3.71 %
ENB.PR.N FixedReset 34,715 TD crossed 16,300 at 25.37.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-10-01
Maturity Price : 23.21
Evaluated at bid price : 25.34
Bid-YTW : 3.80 %
BNS.PR.X FixedReset 32,437 Scotia crossed 29,200 at 26.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.52
Bid-YTW : 1.95 %
SLF.PR.F FixedReset 32,000 RBC crossed 26,000 at 26.48.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.44
Bid-YTW : 2.65 %
There were 21 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IGM.PR.B Perpetual-Premium Quote: 26.15 – 26.90
Spot Rate : 0.7500
Average : 0.4477

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 4.98 %

TCA.PR.Y Perpetual-Premium Quote: 51.90 – 52.21
Spot Rate : 0.3100
Average : 0.1878

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 51.90
Bid-YTW : 2.54 %

CU.PR.E Perpetual-Premium Quote: 26.20 – 26.48
Spot Rate : 0.2800
Average : 0.1587

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-09-01
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 4.33 %

BNS.PR.O Deemed-Retractible Quote: 26.51 – 26.87
Spot Rate : 0.3600
Average : 0.2553

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-26
Maturity Price : 26.00
Evaluated at bid price : 26.51
Bid-YTW : 1.08 %

POW.PR.C Perpetual-Premium Quote: 25.62 – 25.92
Spot Rate : 0.3000
Average : 0.2111

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : -25.03 %

BAM.PR.X FixedReset Quote: 25.15 – 25.39
Spot Rate : 0.2400
Average : 0.1584

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-10-01
Maturity Price : 23.23
Evaluated at bid price : 25.15
Bid-YTW : 3.24 %

New Issues

New Issue: BRF FixedReset 4.40%+294

Brookfield Renewable Energy Partners has announced:

that it has agreed to issue a total of 8,000,000 Class A Preference Shares, Series 3 (the “Series 3 Preferred Shares”) on a bought deal basis to a syndicate of underwriters in Canada led by TD Securities Inc., CIBC, RBC Capital Markets and Scotiabank. The Series 3 Preferred Shares will be issued at a price of CDN$25.00 per share, for aggregate gross proceeds of CDN$200,000,000. The Series 3 Preferred Shares are being issued through a wholly-owned subsidiary of, and are guaranteed by, Brookfield Renewable.

Holders of the Series 3 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of CDN$1.10 per share, payable quarterly. The Series 3 Preferred Shares will yield 4.4% annually at the issue price, for an initial period ending July 31, 2019 with the first dividend payment date scheduled for January 31, 2013, based on an anticipated closing date of October 11, 2012. Thereafter, the dividend rate will reset every five years at a rate equal to the then five-year Government of Canada Bond yield plus 2.94%. The Series 3 Preferred Shares are redeemable on or after July 31, 2019.

The holders of Series 3 Preferred Shares will have the right to convert their shares into Class A Preference Shares, Series 4 (the “Series 4 Preferred Shares”), subject to certain conditions, on July 31, 2019 and on July 31 of every fifth year thereafter. The holders of Series 4 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors, at a rate equal to the then 90-day Government of Canada Treasury Bill yield plus 2.94%.

Brookfield Renewable has granted the underwriters an option, exercisable in whole or in part anytime up to two business days prior to closing, to purchase up to an additional 2,000,000 Series 3 Preferred Shares at the issue price on the same terms, for additional gross proceeds of up to CDN$50,000,000.

Brookfield Renewable intends to use the net proceeds of the issue of Preferred Shares to repay outstanding indebtedness and for general corporate purposes. The offering of Series 3 Preferred Shares is expected to close on October 11, 2012.

The Series 3 Preferred Shares will be offered to the public in Canada pursuant to a supplement to Brookfield Renewable’s existing short form base shelf prospectus dated January 23, 2012, that will be filed with securities regulatory authorities in each of the provinces and territories of Canada.

This will join BRF.PR.A, a FixedReset, 5.25%+262, currently trading slightly below $26.00.

MAPF

MAPF Performance: September 2012

The fund outperformed in September, due largely to stellar performance by insurer-issued DeemedRetractibles and BNA.PR.C. … all this for the third straight month! However, there was a change in overall performance in that DeemedRetractibles in general and FixedResets in general underperformed, returning 26bp and 27bp respectively while PerpetualPremiums won 92bp and Floaters excelled with a stellar +1.86% total return.

The fund’s Net Asset Value per Unit as of the close September 28, 2012, was 10.6703 after a dividend distribution of 0.131430.

Returns to September 28, 2012
Period MAPF BMO-CM “50” Index TXPR
Total Return
CPD
according to
Blackrock
One Month +1.03% +0.38% +0.43% +0.44%
Three Months +5.74% +1.64% +1.86% +1.62%
One Year +12.66% +6.45% +6.51% +6.03%
Two Years (annualized) +7.62% +7.19% +5.88% N/A
Three Years (annualized) +10.18% +8.09% +6.90% +6.16%
Four Years (annualized) +21.31% +8.62% +7.44% N/A
Five Years (annualized) +15.83% +5.38% +4.15% +3.51%
Six Years (annualized) +13.25% +4.11%    
Seven Years (annualized) +12.18% +4.10%    
Eight Years (annualized) +11.53% +4.24%    
Nine Years (annualized) +11.96% +4.33%    
Ten Years (annualized) +13.81% +4.61%    
Eleven Years (annualized) +11.98% +4.49%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
CPD Returns are for the NAV and are after all fees and expenses.
* CPD does not directly report its two- or four-year returns.
Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +0.53%, +1.67% and +6.35%, respectively, according to Morningstar after all fees & expenses. Three year performance is +7.00%.
Figures for Jov Leon Frazer Preferred Equity Fund Class I Units (which are after all fees and expenses) for 1-, 3- and 12-months are +0.26%, +0.91% and +3.31% respectively, according to Morningstar. Three Year performance is +4.22%
Figures for Manulife Preferred Income Fund (formerly AIC Preferred Income Fund) (which are after all fees and expenses) for 1-, 3- and 12-months are +0.27%, +1.72% & +5.29%, respectively. Three Year performance is +5.16%
Figures for Horizons AlphaPro Preferred Share ETF (which are after all fees and expenses) for 1-, 3- and 12-months are +0.43%, +2.01% & +6.67%, respectively.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

A problem that has bedevilled the market over the past year has been the OSFI decision not to grandfather Straight Perpetuals as Tier 1 bank capital, and their continued foot-dragging regarding a decision on insurer Straight Perpetuals has segmented the market to the point where trading has become much more difficult. The fund has done well by trading between GWO issues, which have a good range of annual coupons, but is “stuck” in the MFC and SLF issues, which have a much narrower range of coupon, while the IAG DeemedRetractibles are quite illiquid. Until the market became so grossly segmented, this was not so much of a problem – but now banks are not available to swap into (because they are so expensive) and non-regulated companies are likewise deprecated (because they are not DeemedRetractibles; they should not participate in the increase in value that will follow the OSFI decision I anticipate). The fund’s portfolio is, in effect ‘locked in’ to the MFC & SLF issues due to projected gains from a future OSFI decision, to the detriment of trading gains.

SLF DeemedRetractibles may be compared with PWF and GWO:


Click for Big

It is quite apparent that that the market continues to treat regulated insurance issues (SLF, GWO) no differently from unregulated issues (PWF) – despite the fact that the PWF issues are much more subject to unfavourable calls in the near term and should, logically, be deprecated on those grounds alone without any fancy-pants arguments about imposition of the NVCC rule!

Those of you who have been paying attention will remember that in a “normal” market (which we have not seen in well over a year) the slope of this line is related to the implied volatility of yields in Black-Scholes theory, as discussed in the January, 2010, edition of PrefLetter. The relationship is still far too large to be explained by Implied Volatility – the numbers still indicate an overwhelming degree of directionality in the market’s price expectations.

Sometimes everything works … sometimes it’s 50-50 … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’. There were a lot of strongly motivated market participants during the Panic of 2007, generating a lot of noise! Unfortunately, the conditions of the Panic may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, without worrying about the level of monthly turnover.

There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid and I have lots of confidence – backed up by my bond portfolio management experience in the markets for Canadas and Treasuries, and equity trading on the NYSE & TSX – that there is enough demand for liquidity in any market to make the effort of providing it worthwhile (although the definition of “worthwhile” in terms of basis points of outperformance changes considerably from market to market!) I will continue to exert utmost efforts to outperform but it should be borne in mind that there will almost inevitably be periods of underperformance in the future.

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September, 2012 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. Commencing February, 2012, yields on these issues have been set to zero.

Significant positions were held in DeemedRetractible and FixedReset issues on September 28; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31. This presents another complication in the calculation of sustainable yield. The fund also holds a position various SplitShare issues which also have their yields calculated with the expectation of a maturity at par.

I will no longer show calculations that assume the conversion of the entire portfolio into PerpetualDiscounts, as there are currently only four such issues of investment grade, from only two issuer groups. Additionally, the fund has no holdings of these issues.

It should be noted that the concept of this Sustainable Income calculation was developed when the fund’s holdings were overwhelmingly PerpetualDiscounts – see, for instance, the bottom of the market in November 2008. It is easy to understand that for a PerpetualDiscount, the technique of multiplying yield by price will indeed result in the coupon – a PerpetualDiscount paying $1 annually will show a Sustainable Income of $1, regardless of whether the price is $24 or $17.

Things are not quite so neat when maturity dates and maturity prices that are different from the current price are thrown into the mix. If we take a notional Straight Perpetual paying $5 annually, the price is $100 when the yield is 5% (all this ignores option effects). As the yield increases to 6%, the price declines to 83.33; and 83.33 x 6% is the same $5. Good enough.

But a ten year bond, priced at 100 when the yield is equal to its coupon of 5%, will decline in price to 92.56; and 92.56 x 6% is 5.55; thus, the calculated Sustainable Income has increased as the price has declined as shown in the graph:


Click for Big

The difference is because the bond’s yield calculation includes the amortization of the discount; therefore, so does the Sustainable Income estimate.

Thus, the decline in the MAPF Sustainable Income from $0.5500 per unit in June to $0.4934 per unit in September should be looked at as a simple consequence of the funds holdings; virtually all of which have their yields calculated in a manner closer to bonds than to Perpetual Annuities.

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the long-term results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

  • the very good performance against the index
  • the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

MAPF

MAPF Portfolio Composition: September 2012

Turnover was almost non-existent in September, falling to about 2%.

There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:

  • Unaffected Straight Perpetuals
  • DeemedRetractibles explicitly subject to the rules (banks)
  • DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading. Another trend that hasn’t helped has been the migration of PerpetualDiscounts into PerpetualPremiums (due to price increases) – many of the PerpetualPremiums have negative Yields-to-Worst and those that don’t aren’t particularly thrilling; speaking very generally, PerpetualPremiums are to be avoided, not traded! This effect has caused the first of the three segments noted above to disappear for most practical purposes.

Sectoral distribution of the MAPF portfolio on September 28 was as follows:

MAPF Sectoral Analysis 2012-9-28
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0% N/A N/A
OpRet 0% N/A N/A
SplitShare 10.1% (+0.1) 5.10% 5.43
Interest Rearing 0% N/A N/A
PerpetualPremium 0.0% (0) N/A N/A
PerpetualDiscount 0.0% (0) N/A N/A
Fixed-Reset 19.8% (-0.1) 2.30% 1.59
Deemed-Retractible 61.8% (+1.2) 5.09% 7.47
Scraps (Various) 8.0% (-0.6) 6.22% 11.54
Cash 0.3% (-0.6) 0.00% 0.00
Total 100% 4.61% 6.40
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from August month-end. Cash is included in totals with duration and yield both equal to zero.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31, in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section)

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2012-9-28
DBRS Rating Weighting
Pfd-1 0 (0)
Pfd-1(low) 54.0% (+0.7)
Pfd-2(high) 27.6% (+0.4)
Pfd-2 0 (0)
Pfd-2(low) 10.1% (+0.1)
Pfd-3(high) 0.3% (-1.2)
Pfd-3 3.1% (+1.0)
Pfd-4(high) 0.6% (0)
Pfd-4 2.6% (0)
Pfd-4(low) 1.4% (0)
Pfd-5(low) 0% (-0.3)
Cash 0.3% (-0.6)
Totals will not add precisely due to rounding. Bracketted figures represent change from August month-end.

Liquidity Distribution is:

MAPF Liquidity Analysis 2012-8-31
Average Daily Trading Weighting
<$50,000 13.7% (+8.4)
$50,000 – $100,000 1.1% (-8.4)
$100,000 – $200,000 49.2% (-3.0)
$200,000 – $300,000 26.2% (+3.0)
>$300,000 9.5% (+0.5)
Cash 0.3% (-0.6)
Totals will not add precisely due to rounding. Bracketted figures represent change from August month-end.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission) or those who subscribe for $150,000+. Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) as of August 31, 2011, and published in the October, 2011, PrefLetter. While direct comparisons are difficult due to the introduction of the DeemedRetractible class of preferred share (see above) it is fair to say:

  • MAPF credit quality is better
  • MAPF liquidity is a lower
  • MAPF Yield is higher
  • Weightings in
    • MAPF is much more exposed to DeemedRetractibles
    • MAPF is much less exposed to Operating Retractibles
    • MAPF is much more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF weighting in FixedResets is much lower
Market Action

September 28, 2012

There’s renewed grumbling about currency manipulation:

The new idea in trade negotiations is an old idea: punish currency manipulation.

Avery Shenfeld, chief economist at CIBC World Markets, said Thursday in a new commentary that currency policy should be included in any new free-trade agreements.

“Free trade, but free currencies as well,” Mr. Shenfeld wrote. “Trade may be liberalized, but are the exchange rates that set relative prices and costs also going to have their shackles removed? If not, the free market will be anything but free.”

Mr. Shenfeld says that since 2007, international investors have purchased Canadian-dollar bonds worth $280-billion, compared with $65-billion over the previous five years.

That demand is partly explained by a healthy appetite for AAA-rated securities. But international investors also are buying Canada because they are being pushed out of other markets by interventionist central banks. Canada’s dollar is among the most overvalued in the world, Mr. Shenfeld said, citing calculations by the International Monetary Fund.

I can’t agree that great excitement is required over currency manipulation. Just as security price manipulation gives rise to exploitable opportunities for fundamental investors, so does currency manipulation allow consumers and cross-border purchasers to make a killing. If the Chinese want to sell me $1.00 worth of goods for $0.50, I say ‘Fine! Back up the truck!’

On a related note, Spend-Every-Penny has realized it’s good to lock in low yields for longer terms:

The Honourable Jim Flaherty, Minister of Finance, today highlighted adjustments to the debt strategy plan for 2012–13. These adjustments include the temporary reallocation of short-term bond issuance towards long-term bonds.

Since the release of the 2012–13 Debt Management Strategy, published as part of Budget 2012, long-term interest rates have continued to fall and remain near historically low levels.

“Given this environment, it is both advantageous and prudent for our Government to lock in additional long-term funding,” said the Minister. “These adjustments help us meet our goal of raising stable and low-cost funding to meet the financial needs of our Government to best serve taxpayers.”

Further details are provided in the Notice accompanying the Quarterly Bond Schedule on the Bank of Canada website.

The Bank of Canada highlights:

As an extension of the plan outlined in the Debt Management Strategy for 2012-13 to lock in funding at attractive rates, the Government plans to reallocate short-term bond issuance toward long-term bonds. Consequently, for the remainder of 2012-13, the following changes are planned:

Bond Auctions
•10-year bonds – one additional auction will be held in the last quarter of 2012-13;
•30-year nominal bonds – one additional auction will be held, resulting in a total of four auctions in 2012-13; and
•The size of 10-year and 30-year nominal bond auctions may be increased, subject to market conditions.

Regular Bond Buyback Program
•30-year bond buyback operations on a cash basis – operations will be halted for the remainder of 2012-13; and
•30-year bond buyback operations on a switch basis – one additional operation will be conducted in the last quarter of 2012-13.

In all other respects, the implementation of the medium-term debt strategy, announced in Budget 2011, will continue. The adjustments to the debt strategy outlined above will be monitored and, if necessary, modified to ensure that the market for Government of Canada securities continues to function well.

The problem with the Bank of Canada’s debt management process is that the planning horizon is only ten years. This reduces the advantage of issuing long bonds relative to a more rational thirty-year planning horizon.

It looks like there’s a little bit of profit-taking in the junk bond market:

Speculative-grade bonds in the U.S. are poised for their biggest weekly loss since May as buyers withdraw money from domestic funds that buy the debt for the first time in more than three months.

The securities lost 0.6 percent this week through yesterday after gains in the five previous periods, Bank of America Merrill Lynch index data show. Funds that buy the notes reported $5 million of outflows, with investors pulling $65 million from exchange-traded funds, according to a Sept. 27 Bank of America Corp. (BAC) report.

Yields on speculative-grade bonds closed at 7.125 percent yesterday, up from a record low 6.948 percent reached on Sept. 19 as an unexpected drop in demand for U.S. durable goods other than transportation signaled a slowdown in business investment and exports. Investors sold the debt as concern mounted that the European Central Bank’s current bailout funds would be insufficient to prevent a sovereign default.

“There was legitimate selling for the first time,” said Timothy Gramatovich, chief investment officer at Peritus Asset Management LLC. “This is the first week in recent memory that we actually saw bonds offered out there.”

Investors yanked 3.9 million shares, worth about $157 million, from State Street Corp.’s ETF that buys junk bonds on Sept. 27, the biggest outflow since May 21, according to data compiled by Bloomberg. U.S. high-yield bond funds reported net withdrawals of $310 million, the first decline after 13 consecutive weeks of inflows, according to Lipper.

The regulatory pretense of concern over LIBOR has had its intended effect:

Oversight of Libor will be handed to the U.K.’s financial regulator, and dozens of the currencies and maturities that make up the benchmark axed, under proposals designed to revive confidence in a rate tarnished by scandal.

The British Bankers’ Association should be stripped of the responsibility for managing the rate and other organizations invited to replace it, Financial Services Authority Managing Director Martin Wheatley said in London today. More than 100 Libor rates tied to currencies and maturities where there isn’t enough trading data to set them properly should be scrapped, and a code of conduct introduced for how lenders contribute to the benchmark backed by criminal penalties, he added

“Governance of Libor has completely failed,” Wheatley said as he unveiled a report on the future of Libor. “This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system.”

The FSA should receive greater powers to vet bankers who contribute to the rate, according to Wheatley, who will become the chief executive officer of the Financial Conduct Authority, when the FSA splits into two agencies next year.

The “first priority” of Libor’s new administrator will be to create a code of conduct for rate submitters with specific guidelines that the submissions be corroborated by trade data, he said.

“Transactions will need to be recorded and there needs to be a requirement for regular external audit of submitting firms,” Wheatley said.

The Bank of Canada has released a completely unconvincing discussion paper by David Xiao Chen, H. Evren Damar, Hani Soubra and Yaz Terajima titled Canadian Bank Balance-Sheet Management: Breakdown by Types of Canadian Financial Institutions. My hackles rose as early as the third paragraph:

Our main findings regarding the first objective are summarized as follows. First, risk indicators have decreased during the past three decades for most non‐Big Six financial institutions, and have remained relatively unchanged for the Big Six banks. As a result, a divergence between non‐Big Six and the Big Six banks is observed, especially in leverage and capital ratios. Second, heterogeneity among non‐Big Six financial institutions has increased, especially in capital and funding ratios. The observed overall decline and increased heterogeneity in the risk indicators follow certain regulatory changes, such as the introduction of liquidity guidelines on funding in 1995 and the implementation of bank‐specific leverage requirements in 2000. This suggests that regulatory changes have had significant and heterogeneous effects on the management of balance sheets by financial institutions and, given that these regulations required more balance‐sheet risk management, they contributed to the increased resilience of the banking sector.

Excuse me? Isn’t that last line a bit of circular reasoning? Regulating funding and leverage certainly had an effect on funding and leverage. Whether this has any connection with “resilience” is another matter entirely, one that is not addressed in the paper.

The mystery is resolved in the concluding statements:

The resilience of the Canadian financial system could be attributed to the conservatism and prudent approach of its regulatory bodies. Over the past couple of decades, Canadian banks were resilient to several financial stresses that, for the most part, originated outside Canada’s borders. More
recently, at the onset of the 2007 financial crisis, while many international foreign banks faced difficulties and required public capital injections and debt guarantees, the Canadian financial system did not require any public assistance or experience any bank failures. It has been argued that this was due in large part to the tighter regulatory ratios set by the Office of the Superintendent of Financial Institutions (OSFI), which exceeded international minimums. Potentially more important is OSFI’s regulatory approach based on individual financial institutions. A part of the observed heterogeneity in balance‐sheet ratios among Canadian banks is likely attributable to this.

OK, so the purpose of the paper was to evangelize OSFI-worship. Next!

The Canadian preferred share market closed the month and quarter with a good day: Perpetual premiums won 18bp, FixedResets gained 7bp and DeemedRetractibles were up 2bp. Volatility was average. Volume was average.

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 -0.4917 % 2,449.5
FixedFloater 4.42 % 3.80 % 35,785 17.68 1 0.0466 % 3,601.2
Floater 2.99 % 3.01 % 59,265 19.69 3 -0.4917 % 2,644.8
OpRet 4.66 % 3.35 % 54,048 1.44 4 -0.1726 % 2,550.4
SplitShare 5.44 % 4.91 % 73,317 4.56 3 0.1191 % 2,822.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1726 % 2,332.1
Perpetual-Premium 5.28 % 2.07 % 93,565 0.40 28 0.1777 % 2,299.9
Perpetual-Discount 4.91 % 4.88 % 105,397 15.69 3 0.2625 % 2,578.7
FixedReset 4.96 % 2.95 % 176,613 4.03 72 0.0687 % 2,436.7
Deemed-Retractible 4.94 % 3.48 % 124,996 1.06 46 0.0194 % 2,375.7
Performance Highlights
Issue Index Change Notes
GWO.PR.N FixedReset -3.57 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.20
Bid-YTW : 3.97 %
POW.PR.D Perpetual-Premium 1.07 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-31
Maturity Price : 25.50
Evaluated at bid price : 25.56
Bid-YTW : -0.23 %
SLF.PR.H FixedReset 1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 3.90 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.L Deemed-Retractible 149,445 National crossed blocks of 50,000 and 19,800 at 25.75; they also bought blocks of 47,100 and 22,700 from Nesbitt at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-04-27
Maturity Price : 25.00
Evaluated at bid price : 25.58
Bid-YTW : 3.70 %
TD.PR.G FixedReset 125,845 Scotia bought 13,400 from RBC at 26.95; TD crossed two blocks of 50,000 each at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 1.87 %
BNS.PR.X FixedReset 87,095 Scotia bought 77,800 from RBC at 26.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.54
Bid-YTW : 1.89 %
ENB.PR.P FixedReset 86,580 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-28
Maturity Price : 23.11
Evaluated at bid price : 25.06
Bid-YTW : 3.75 %
TD.PR.A FixedReset 72,726 National crossed 30,000 at 25.93, then bought 39,200 from Nesbitt at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.93
Bid-YTW : 2.78 %
SLF.PR.F FixedReset 72,176 RBC sold 48,100 to Scotia at 26.48, then crossed 19,100 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.49
Bid-YTW : 2.52 %
There were 32 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.N FixedReset Quote: 23.20 – 24.05
Spot Rate : 0.8500
Average : 0.5704

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.20
Bid-YTW : 3.97 %

TCA.PR.X Perpetual-Premium Quote: 51.27 – 51.89
Spot Rate : 0.6200
Average : 0.3999

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 51.27
Bid-YTW : 2.65 %

BNA.PR.C SplitShare Quote: 24.10 – 24.43
Spot Rate : 0.3300
Average : 0.2029

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 5.10 %

POW.PR.A Perpetual-Premium Quote: 25.30 – 25.59
Spot Rate : 0.2900
Average : 0.1744

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-28
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : -11.74 %

FTS.PR.E OpRet Quote: 26.47 – 26.88
Spot Rate : 0.4100
Average : 0.3259

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 26.47
Bid-YTW : 1.14 %

BNS.PR.L Deemed-Retractible Quote: 25.58 – 25.80
Spot Rate : 0.2200
Average : 0.1404

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-04-27
Maturity Price : 25.00
Evaluated at bid price : 25.58
Bid-YTW : 3.70 %

Issue Comments

Omega Preferred Equity Fund to be Closed to New Investors

National Bank Securities has announced:

the Omega Preferred Equity Fund’s closure to new investors as of September 30, 2012. The closure of the Omega Preferred Equity Fund will allow the fund’s portfolio manager (Intact Investment Management Inc.) to continue applying its current investment philosophy. After the fund’s closure to new investors, the fund will continue to be available to existing investors, and shall also remain available to certain other investors, including funds that are managed by NBSI or its affiliates.

“The Omega Preferred Equity Fund was launched in 2007 and has proven to be a superior investment product for investors looking for stable distributions of tax-efficient dividend income” said Michel Falk, President of NBSI. The fund has grown steadily in size since its inception, recently surpassing $470 million in assets under management.

NBSI will be launching the Altamira Preferred Equity Fund for new investors seeking dividend income and capital preservation. This fund will aim to invest in a diversified portfolio of dividend-paying preferred equities.

A preliminary simplified prospectus relating to the Altamira Preferred Equity Fund has been filed with the Canadian securities authorities. Units of the Altamira Preferred Equity Fund cannot be acquired until the relevant securities authorities issue receipts for the simplified prospectus of the fund. Please read the prospectus before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Essentially, this means that National has decided that all new money will be managed in-house. It will be remembered that National Bank owns Altamira.

I can’t find anything about “Altamira Preferred” on SEDAR.

Market Action

September 27, 2012

U.S. Securities and Exchange Commission member Daniel Gallagher is favourably disposed towards a floating NAV for money-market funds:

Requiring money funds to have a fluctuating share price “is an attractive option that I am likely to support,” Gallagher, a Republican, said in an interview.

Gallagher said he couldn’t vote for Schapiro’s plan because its centerpiece was to make the funds hold extra capital. The cushion was too small to protect investors, Gallagher said, leading him to believe the money would be used as collateral in case the funds needed to borrow from the Federal Reserve.

Schapiro has argued that the funds’ $1 share price encourages investors to flee at the first sign of trouble. That’s because those who react quickly can sell their shares at $1 each even if the net asset value has dropped below that level.

The industry has maintained that a floating share price would make money funds unworkable for many investors by saddling them with new accounting and tax obligations. In addition, insurers, municipalities and other large users of money funds are often legally bound to invest assets they account for as cash in funds with a stable share price.

Schapiro gave up on her plan on Aug. 22 after three of the five commissioners — Republicans Gallagher and Troy Paredes, joined by Democrat Luis Aguilar — told her they wouldn’t vote to issue it for public comment. Her proposal spelled out two options, the capital cushion coupled with some restrictions on redemptions, or the floating share price.

On Aug. 28, Gallagher and Paredes said they supported an alternative that would allow firms running money funds to prohibit withdrawals to stop investor flight in the event of a run. They backed Aguilar’s call for further study on whether new rules could cause investors to move money from money-market funds to other unregulated investments.

In the interview, Gallagher said his support of a floating share price was contingent on the SEC “fully understanding and addressing” the tax and accounting issues that could arise with the change. Gallagher said a fluctuating share price may need to be coupled with other protections, such as the freezing redemptions option that he and Paredes had suggested.

If anybody knows what the ‘capital used as collateral’ idea is all about, please let me know, because I haven’t the faintest notion regarding what is being implied. I think the redemption freeze idea is just plain stupid.

I am advised of a government checklist for choosing investment advisors:

Does your financial professional try to “time” the market?
•Financial professionals cannot forecast market changes successfully on a consistent basis. For most people, changing strategies or buying and selling investments frequently will just result in higher costs and more losses. The right financial strategy should do well without frequent changes, in good markets and bad.

Now, I’m not much of a fan of market timing, but nevertheless this seems a bit overreaching to me. We have a government agency pronouncing officially on the relative merits of investment strategies? It’s actually a little scary!

Good fiscal news federally, not so much provincially:

Ottawa’s cost-cutting measures have put it on a sound fiscal track for the future, but the provinces are left holding the bag, says Canada’s budget watchdog.

Mr. Page also judges the Canada Pension Plan and Quebec Pension Plan fiscally sound.

But the report, released Thursday, shows provinces and municipalities adding so much debt over the next 70 years or so they would resemble Greece and Italy if something is not done.

The report calculates that provinces and their municipalities have a fiscal gap of about 2 per cent of gross domestic product now – or $36-billion – and by 2086 will have debt worth 350 per cent of GDP. Meanwhile, Ottawa will be in a structural surplus.

While he has been critical of the Harper government in the past for failing to acknowledge it was in a structural deficit several years ago – for which he took personal blow-back – Mr. Page said Ottawa has acted to rectify the situation.

In the past two years, Finance Minister Jim Flaherty put a limit to growth on health transfers to provinces, essentially froze program spending for five years, and raised the age of eligibility for benefits under Old Age Security to 67 from 65.

The change in health transfers alone is responsible for about three-quarters of the provincial fiscal gap, Mr. Page says, or about $25-billion in fiscal room.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets winning 19bp and DeemedRetractibles up 12bp. Volatility was muted. Volume was average.

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 -0.0567 % 2,461.6
FixedFloater 4.42 % 3.80 % 36,221 17.68 1 0.7977 % 3,599.6
Floater 2.98 % 2.99 % 54,840 19.73 3 -0.0567 % 2,657.9
OpRet 4.65 % 3.25 % 54,039 0.71 4 0.3561 % 2,554.8
SplitShare 5.44 % 4.90 % 73,181 4.56 3 0.0000 % 2,818.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.3561 % 2,336.1
Perpetual-Premium 5.29 % 2.45 % 94,382 1.02 28 0.0414 % 2,295.8
Perpetual-Discount 4.92 % 4.91 % 105,571 15.67 3 0.0783 % 2,572.0
FixedReset 4.95 % 3.06 % 173,154 4.03 72 0.1882 % 2,435.0
Deemed-Retractible 4.93 % 3.54 % 122,425 1.12 46 0.1197 % 2,375.2
Performance Highlights
Issue Index Change Notes
MFC.PR.I FixedReset 1.34 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 3.77 %
GWO.PR.N FixedReset 2.38 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.06
Bid-YTW : 3.51 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.P FixedReset 237,088 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-27
Maturity Price : 23.11
Evaluated at bid price : 25.05
Bid-YTW : 3.75 %
PWF.PR.P FixedReset 144,644 TD crossed 129,400 at 25.20; Scotia crossed 10,600 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-27
Maturity Price : 23.39
Evaluated at bid price : 25.19
Bid-YTW : 3.02 %
BNS.PR.Y FixedReset 46,279 TD bought 38,400 from Nesbitt at 25.21.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 2.76 %
BNS.PR.X FixedReset 43,981 RBC sold 20,000 to Scotia at 26.94, then crossed 20,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.92
Bid-YTW : 1.91 %
RY.PR.H Deemed-Retractible 36,262 RBC crossed 34,300 at 26.88.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-24
Maturity Price : 26.00
Evaluated at bid price : 26.86
Bid-YTW : 1.10 %
CM.PR.P Deemed-Retractible 33,275 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-29
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 0.74 %
There were 29 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.E FixedReset Quote: 26.25 – 26.59
Spot Rate : 0.3400
Average : 0.2225

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-19
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 3.07 %

ELF.PR.F Perpetual-Premium Quote: 24.75 – 24.99
Spot Rate : 0.2400
Average : 0.1560

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-27
Maturity Price : 24.47
Evaluated at bid price : 24.75
Bid-YTW : 5.35 %

W.PR.J Perpetual-Premium Quote: 25.35 – 25.70
Spot Rate : 0.3500
Average : 0.2673

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-27
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : -14.16 %

FTS.PR.G FixedReset Quote: 25.27 – 25.45
Spot Rate : 0.1800
Average : 0.1190

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-27
Maturity Price : 24.07
Evaluated at bid price : 25.27
Bid-YTW : 3.42 %

RY.PR.D Deemed-Retractible Quote: 25.64 – 25.84
Spot Rate : 0.2000
Average : 0.1440

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.64
Bid-YTW : 3.84 %

MFC.PR.G FixedReset Quote: 25.67 – 25.86
Spot Rate : 0.1900
Average : 0.1404

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-19
Maturity Price : 25.00
Evaluated at bid price : 25.67
Bid-YTW : 3.75 %

Market Action

September 26, 2012

I’m all in favour of a cap on leverage at banks … but a leverage cap of 12.5:1 seems quite extreme:

Banks should be required to reduce by half the amount they can borrow against equity to make the financial system safer, according to former Federal Deposit Insurance Corp. Chairman Sheila Bair.

Bair called for a “hard-and-fast” leverage ratio of 8 percent in “Bulls by the Horns,” her memoir of the financial crisis published this month. That’s double the 4 percent ratio U.S. banks must adhere to currently and more than twice the 3 percent called for by new global rules on bank capital.

Lenders could borrow about 13 times their equity, based on Bair’s suggestion, compared with 25 times under existing U.S. rules. Bair, 58, who stepped down from the FDIC last year, was a proponent of the Basel Committee on Banking Supervision introducing a simple leverage ratio, which ignores the riskiness of different loans in setting minimum capital requirements. While the Basel committee agreed on including such a ratio, European countries have balked at implementation.

The Basel committee narrowed the definition of what counts as capital. It also devised a method of tallying assets for calculating leverage ratio that puts aside the different accounting standards used in the U.S. and Europe. The new method would increase the balance sheets of U.S. banks because of differences in how derivatives are treated.

Using Basel’s narrower capital definition, the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair’s leverage recommendation. JPMorgan Chase & Co. (JPM) would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.’s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets.

At some point, we’re going to be so safe that nothing happens. An unchanging world of tick-boxes … the regulators’ dream.

The CDHowe Institute has issued a plea for more RRBs – More RRBs, Please! Why Ottawa Should Issue More Inflation-Indexed Bonds:

This Commentary explores the potential impact of a larger RRB issue over the next five years than Ottawa currently plans. Rather than the $2.4 billion annually now planned, we suggest $7.2 billion annually. We further recommend that two-thirds of the larger RRB issue have 10-year maturities rather than the 30-year maturities exclusively issued to date. A plausible estimate of the net interest savings on federal debt comes to $200 million in 2016/17 and $500 million over the period until then. We canvass a number of ways the federal government can ensure that this higher RRB issue does not hurt the depth and liquidity of the market for its nominal debt.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 18bp, FixedResets down 5bp and DeemedRetractibles gaining 1bp. Volatility was average. Volume was low.

PerpetualDiscounts (all three of them!) now yield 4.91%, equivalent to 6.38% interest. Long corporates now yield about 4.25% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, a sharp increase from the 200bp reported September 19.

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 0.3794 % 2,463.0
FixedFloater 4.46 % 3.83 % 36,644 17.61 1 -0.0469 % 3,571.1
Floater 2.98 % 2.99 % 55,432 19.73 3 0.3794 % 2,659.4
OpRet 4.67 % 3.37 % 53,378 1.45 4 -0.2304 % 2,545.7
SplitShare 5.44 % 4.89 % 71,815 4.56 3 0.1193 % 2,818.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2304 % 2,327.8
Perpetual-Premium 5.28 % 2.44 % 94,811 1.03 28 0.1760 % 2,294.8
Perpetual-Discount 4.91 % 4.91 % 104,855 15.66 3 0.2762 % 2,570.0
FixedReset 4.96 % 3.06 % 177,765 4.25 72 -0.0541 % 2,430.5
Deemed-Retractible 4.94 % 3.65 % 121,261 1.90 46 0.0088 % 2,372.4
Performance Highlights
Issue Index Change Notes
GWO.PR.N FixedReset -2.49 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 3.81 %
IGM.PR.B Perpetual-Premium 1.00 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 26.00
Evaluated at bid price : 26.85
Bid-YTW : 3.92 %
VNR.PR.A FixedReset 1.11 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 3.49 %
TCA.PR.Y Perpetual-Premium 1.35 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 51.95
Bid-YTW : 2.44 %
Volume Highlights
Issue Index Shares
Traded
Notes
PWF.PR.P FixedReset 91,570 Scotia crossed blocks of 20,000 and 50,000 at 25.20, and bought 10,000 from TD at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-26
Maturity Price : 23.39
Evaluated at bid price : 25.18
Bid-YTW : 3.02 %
ENB.PR.P FixedReset 56,460 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-26
Maturity Price : 23.12
Evaluated at bid price : 25.08
Bid-YTW : 3.75 %
BNS.PR.X FixedReset 55,650 TD crossed 50,000 at 26.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.82
Bid-YTW : 2.16 %
CM.PR.K FixedReset 49,205 Scotia crossed 40,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 2.64 %
CM.PR.G Perpetual-Premium 44,687 TD crossed 29,800 at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-26
Maturity Price : 25.50
Evaluated at bid price : 25.60
Bid-YTW : -5.40 %
RY.PR.X FixedReset 29,950 TD crossed 25,000 at 26.99.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.87
Bid-YTW : 2.54 %
There were 23 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.N FixedReset Quote: 23.50 – 24.20
Spot Rate : 0.7000
Average : 0.4107

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 3.81 %

GWO.PR.I Deemed-Retractible Quote: 23.95 – 24.46
Spot Rate : 0.5100
Average : 0.3335

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.95
Bid-YTW : 5.09 %

PWF.PR.L Perpetual-Premium Quote: 25.48 – 25.85
Spot Rate : 0.3700
Average : 0.2321

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 25.25
Evaluated at bid price : 25.48
Bid-YTW : 5.01 %

MFC.PR.I FixedReset Quote: 25.42 – 25.74
Spot Rate : 0.3200
Average : 0.1998

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.42
Bid-YTW : 4.07 %

CM.PR.L FixedReset Quote: 26.35 – 26.66
Spot Rate : 0.3100
Average : 0.1941

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 2.64 %

RY.PR.C Deemed-Retractible Quote: 25.80 – 26.07
Spot Rate : 0.2700
Average : 0.1715

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-11-24
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 3.68 %

Issue Comments

SBC.PR.A Announces Term Extension Details

Brompton Split Banc Corp has announced:

At a special meeting held on March 29, 2012, shareholders of Brompton Split Banc Corp. (the “Fund”) approved a special resolution to allow the Board of Directors to extend the term of the Class A Shares and the Preferred Shares for up to 5 years and to determine the distribution rates for the extended term. The Board of Directors is pleased to announce that it has approved a 5 year extension to the term of the Class A Shares and Preferred Shares to November 29, 2017. The Fund was originally scheduled to terminate on November 30, 2012. The distribution rate for the Fund’s Preferred Shares for this new 5 year term which commences on December 1, 2012 will be $0.45 per annum paid in equal quarterly amounts. The new Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. The Preferred Share distribution for the quarter ended December 31, 2012 is expected to be $0.12493 per Preferred Share which takes into account the new distribution rate for December and the previous distribution rate for October and November. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution at $0.10 per Class A Share.

The extension allows shareholders to continue to enjoy the benefit of the Fund’s portfolio of common shares of six Canadian Banks: Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank. Canadian banks have stood out amongst their global peers as examples of stability over the long term and through the credit crisis. Canadian banks continue to have attractive dividend yields and return on equity. As well, the extension of the term of the Fund is not a taxable event and enables shareholders to defer potential capital gains tax liability that would have otherwise been realized on the redemption of the Class A Shares or Preferred Shares until such time as such shares are disposed of by shareholders.

In connection with the extension, those shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares or Class A Shares on November 30, 2012 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 30, 2012. The notice expiry for the special retraction is October 31, 2012 at 5:00 p.m. (Toronto time).

The favourable vote for the extension was reported on PrefBlog. SBC.PR.A was last mentioned on PrefBlog in connection with its semi-annual report for 12H1. The issue was recently confirmed at Pfd-3 by DBRS.

SBC.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Market Action

September 25, 2012

Charles Plosser of the Philiadelphia Fed outlined his opposition to QE3, including one very good point:

Continued expansion of the Fed’s balance sheet has other costs as well. By greatly expanding the size of the Fed’s balance sheet, the new asset-purchase program will exacerbate the challenges that the Fed will face when it comes time to exit this period of extraordinary accommodation, risking higher inflation and harm to the Fed’s reputation and credibility. I have been a student of monetary theory and policy for over 30 years. One constant is that central banks tend to find it easier to lower interest rates than to raise them. Moreover, identifying turning points is difficult even in the best of times, so timing the change in the direction of policy is always a challenge. But this time, exit will be even more complicated and risky. With such a large balance sheet, our transition from very accommodative policies to less accommodative policies will involve using tools we have not used before, such as the interest rate on reserves, term deposits, and asset sales. Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation. At this point, it is impossible to know whether such asset sales will be disruptive to the market. A rapid tightening of monetary policy may also entail political risks for the Fed. We would likely be selling the longer maturity assets in our portfolio at a loss, meaning that we may be unable to make any remittances to the U.S. Treasury for some years. Yet, if we don’t tighten quickly enough, we could find ourselves far behind the curve in restraining inflation.

The SEC has hardened its stance that investing has nothing to do with fundamentals:

A New York-based brokerage allowed overseas clients to run a scheme aimed at distorting stock prices by rapidly canceling orders, according to the U.S. Securities and Exchange Commission.

Clients of Hold Brothers On-Line Investment Services were “repeatedly manipulating publicly traded stocks” by placing and erasing orders in an illegal strategy designed to trick others into buying or selling, the SEC said today in a release. Hold Brothers, its owners, and the foreign firms Trade Alpha Corporate Ltd. and Demonstrate LLC agreed to settle allegations that the New York broker failed to supervise customers and pay $4 million in total SEC fines.

The SEC complaint targeted practices that abused high-speed computer trading on American equity venues. As high-frequency activity has grown in recent years, the agency’s efforts to stop fraudulent practices such as “layering” or “spoofing” have extended to the automated trading tactics.

“The fairness principle that underlies the foundation of our markets demands that prices of securities accurately reflect a genuine supply of and demand for those securities,” Daniel M. Hawke, the chief of the SEC’s enforcement division’s market abuse unit, said in the statement. “The SEC will not tolerate any abusive practice that is designed to distort these natural forces.”

Bluffing is part of the trading game. A fundamental investor can often take advantage of the little boys’ games. But logic has no relevance to regulation.

The Kansas City Fed has a good review of deposit insurance:

The effect on the financial system of this emergency assistance and related risk-taking incentives is difficult to assess and measure. However, a unique circumstance in the 1930s provides an insight into how a piece of the federal safety net—federal deposit insurance—has altered the financial landscape. The vast majority of U.S. banks quickly became insured after the Federal Deposit Insurance Corporation (FDIC) began offering deposit insurance in 1934. Many state-chartered banks in Kansas, however, chose to remain uninsured. Why
did these Kansas banks think they could operate successfully without deposit insurance following the worst banking crisis in U.S. history?
Also, how did these banks differ from the banks that quickly adopted deposit insurance, and what might these differences tell us about
deposit insurance?

Another forthcoming article asks have cheques met their match?:

During the last decade, both demand-side and supply-side factors have contributed to a surge in new methods of making person-to-person (P2P) payments. On the demand side, the driving factors have been the emergence of new forums for commerce such as online auctions and the increasing desire by consumers to monitor and control payments. On the supply side, the main factors have been technological advancements such as faster Internet speeds, increased computing power and smartphones. Despite the surge in new P2P payment methods, studies show that consumers in the United States still prefer to make payments to other people with checks and cash. In fact, P2P payments by check are the only type of check payment that is still increasing. If consumers could be induced to use a digital alternative to P2P payments by cash and check, the efficiency and safety of the U.S. payments system might be enhanced.

It was a moderately good day for the Canadian preferred share market, with PerpetualPremiums winning 13bp, FixedResets gaining 4bp and DeemedRetractibles up 6bp. Volatility was minimal. Volume returned to low levels.

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 0.2663 % 2,453.7
FixedFloater 4.46 % 3.83 % 38,145 17.62 1 1.4755 % 3,572.8
Floater 2.99 % 3.00 % 56,206 19.71 3 0.2663 % 2,649.4
OpRet 4.66 % 3.29 % 53,606 1.45 4 0.0576 % 2,551.6
SplitShare 5.45 % 4.89 % 70,719 4.57 3 0.0663 % 2,815.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0576 % 2,333.2
Perpetual-Premium 5.28 % 3.03 % 93,128 1.02 28 0.1345 % 2,290.8
Perpetual-Discount 4.92 % 4.93 % 105,396 15.63 3 0.4718 % 2,562.9
FixedReset 4.96 % 3.07 % 178,915 4.30 72 0.0414 % 2,431.8
Deemed-Retractible 4.94 % 3.52 % 121,554 1.06 46 0.0671 % 2,372.2
Performance Highlights
Issue Index Change Notes
BAM.PR.G FixedFloater 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-25
Maturity Price : 22.13
Evaluated at bid price : 21.32
Bid-YTW : 3.83 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.P FixedReset 361,615 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-25
Maturity Price : 23.09
Evaluated at bid price : 25.00
Bid-YTW : 3.76 %
RY.PR.T FixedReset 120,157 TD crossed 100,000 at 26.99.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 2.37 %
RY.PR.L FixedReset 100,414 TD crossed 100,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.09
Bid-YTW : 2.81 %
BMO.PR.K Deemed-Retractible 59,808 Nesbitt crossed 50,000 at 26.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-11-25
Maturity Price : 26.00
Evaluated at bid price : 26.31
Bid-YTW : 0.47 %
BNS.PR.T FixedReset 53,414 TD crossed 49,600 at 26.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.77
Bid-YTW : 2.28 %
BNS.PR.Z FixedReset 31,993 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 3.07 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.E Deemed-Retractible Quote: 26.15 – 26.40
Spot Rate : 0.2500
Average : 0.1407

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 5.16 %

ELF.PR.H Perpetual-Premium Quote: 26.12 – 26.50
Spot Rate : 0.3800
Average : 0.2782

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-17
Maturity Price : 25.00
Evaluated at bid price : 26.12
Bid-YTW : 5.03 %

BAM.PF.A FixedReset Quote: 25.40 – 25.65
Spot Rate : 0.2500
Average : 0.1625

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-25
Maturity Price : 23.23
Evaluated at bid price : 25.40
Bid-YTW : 4.11 %

RY.PR.T FixedReset Quote: 26.95 – 27.20
Spot Rate : 0.2500
Average : 0.1629

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 2.37 %

BMO.PR.L Deemed-Retractible Quote: 27.01 – 27.19
Spot Rate : 0.1800
Average : 0.1108

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 26.00
Evaluated at bid price : 27.01
Bid-YTW : 0.39 %

SLF.PR.I FixedReset Quote: 25.36 – 25.55
Spot Rate : 0.1900
Average : 0.1316

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 3.89 %