PrefBlog

Inflation expectations can become self-fulfilling, which worries Richard Fisher:

Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s third round of large-scale asset purchases has led to an increase in market expectations for higher inflation without more job creation.

“I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction.”
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Measures of expected future inflation “have ramped up pretty quickly,” Fisher said. The five-year, five-year forward breakeven rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after the FOMC decided on QE3. That was up half a percentage point from July 26.

Congress’s inaction on fiscal policy and excessive government regulation are holding back businesses from spending on hiring and investment, Fisher said in a later Bloomberg Television interview. The Fed’s stimulus efforts, or so-called quantitative easing, won’t work because the central bank can’t address those obstacles to growth, he said.

There might be another SEC attempt to destroy the public bond market:

The U.S. Securities and Exchange Commission should scrutinize corporate bond markets to determine if retail investors can find fair prices, said Commissioner Daniel Gallagher.

Gallagher, a Republican on the five-member commission that regulates securities trading, called for the agency to look at the imbalance of information available to retail investors and institutional traders in a speech today at a financial-markets conference hosted by Georgetown University’s McDonough School of Business in Washington.

“Retail investors continue to face significant headwinds in the bond markets,” Gallagher said. “Unlike their large institutional counterparts, retail investors generally have less expertise in the basics of bond trading and cannot tap into large dealer networks for quotes in order to shop around for the best prices available.”

Gallagher said the SEC issued a report this year on the state of the municipal securities market and should consider a similar effort with the corporate bond market, “given how large and important that market has become.” That doesn’t necessarily mean more regulation, he said.

You know what regulators mean when they say a study won’t necessarily mean more regulation, don’t you? I don’t have to spell it out for you, do I?

Westcoast Energy, proud issuer of W.PR.H and W.PR.J, has been confirmed by DBRS at Pfd-2(low):

DBRS has today confirmed the Unsecured Debentures, First Preferred Shares and Commercial Paper ratings of Westcoast Energy Inc. (Westcoast or the Company) at A (low), Pfd-2 (low) and R-1 (low), respectively, all with Stable trends. The rating actions incorporate DBRS’s expectation that Westcoast’s significant capex program (projected to be $1.2 billion in 2012, including only $426 million spent through June 30, 2012, and likely to remain elevated in the medium term), will result in negative free cash flows and pressure its credit ratios, as incremental financing will likely come from increased long-term debt issuance.
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The Company’s financial profile remains relatively strong despite rising capex related to its medium-term growth program. Increasing earnings and cash flow from expansions placed in service to date have resulted in relatively strong credit ratios. Westcoast should generate sufficient cash flow to meet a significant portion of its capex and dividend payments going forward, with manageable funding needs at both Union Gas Limited and the Company. Westcoast’s consolidated credit metrics will likely continued to be pressured over the medium term as a result of its significant growth capex, although the metrics are underpinned by Westcoast’s mostly low-risk and regulated operations and will likely remain within the parameters of the current ratings.

It was a good day for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles gaining 9bp and FixedResets up 3bp. Volatility picked up a little. Volume was average.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 200bp, unchanged from the September 12 report.

TD says the housing bubble is yesterday’s news:

TD Economics has gradually reduced its estimate of the overvaluation in Canada’s house prices, as the growth in people’s disposable income picks up while the market stagnates.

The quarterly economic forecast that the bank released Tuesday pegs the current overvaluation in the market at 10 per cent. It had previously estimated that prices were 15 per cent too high, and then suggested a range of 10 to 15 per cent.

Rick Waugh says the same thing:

Canada’s housing market is “at worst” destined for a soft landing, the head of one of the country’s largest banks predicted Tuesday.

Speaking in Toronto, Bank of Nova Scotia chief executive officer Rick Waugh said even though there is a housing bubble in Canada, he doesn’t expect the residential real estate market to crash.

I don’t have figures on how good either party is at predicting house prices.

The slow-motion bank run (is that a jog?) in Europe continues:

An accelerating flight of deposits from banks in four European countries is jeopardizing the renewal of economic growth and undermining a main tenet of the common currency: an integrated financial system.

A total of 326 billion euros ($425 billion) was pulled from banks in Spain, Portugal, Ireland and Greece in the 12 months ended July 31, according to data compiled by Bloomberg. The plight of Irish and Greek lenders, which were bleeding cash in 2010, spread to Spain and Portugal last year.

The flight of deposits from the four countries coincides with an increase of about 300 billion euros at lenders in seven nations considered the core of the euro zone, including Germany and France, almost matching the outflow. That’s leading to a fragmentation of credit and a two-tiered banking system blocking economic recovery and blunting European Central Bank policy in the third year of a sovereign-debt crisis.

It was a quiet day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets up 4bp and DeemedRetractibles gaining 2bp. Volatility was muted. Volume was below average.

Let’s all reach for yield!

Rates on U.S. high-yield corporate bonds fell below 7 percent for the first time last week, according to Bank of America Merrill Lynch index data.

Average borrowing costs for speculative-grade companies from Sprint Nextel Corp. (S) to HCA Holdings Inc. (HCA) dropped to an unprecedented 6.965 percent Sept. 14 from 7.07 percent the day earlier, Bank of America Merrill Lynch’s U.S. High Yield Master II index data shows. The gauge was at 8.54 percent at year-end and 8.79 percent a year ago, the index data show.

There’s a good editorial on Bloomberg about licensing:

The average cosmetologist in the U.S. trains for 372 days before earning a license. The average emergency medical technician spends 33 days in training. From this, one might conclude that Americans are obsessed with primping but tragically unprepared for emergencies.

Actually, the disparity merely confirms what a muddle the process of occupational licensing is. In 1952, fewer than 5 percent of U.S. workers required a state license. By 2006, according to a survey that year by the Gallup Organization, 29 percent of workers said they needed a government-issued license to do their job.

It’s a serious concern for civil liberties: governments should be in the business of prohibitions – with the growth in licensing, they are in the business of permissions.

Bloomberg’s editors have been on a hot streak lately, bringing to my attention a reckless change in US pension law:

So Congress changed the discounting rules, allowing companies to choose discount rates based on a 25-year average of corporate bond yields instead of using an average of just two years.
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Meanwhile, companies that go bankrupt will tend to have accrued larger unfunded liabilities. The bulk of those liabilities are covered by the Pension Benefit Guaranty Corp., a federal agency backstopped by taxpayers.

The pension legislation also raised the premiums that companies pay into the agency, which, in theory, should offset costs to taxpayers. But Congress counted the increased premiums as funds available to pay for highway construction, essentially double-counting the money.

This relief of pension funding obligations will undermine the solvency of pension funds in part to address a problem that doesn’t exist. Companies protest that they can’t afford to adjust to sharply falling discount rates. The costs they face, however, are a mix of costs they should have been able to control and costs they do control.

In the first category is any increase in unfunded pension liabilities due to lower discount rates. It’s true: Given the crashing bond yields of recent years, without relief, pension funds would be told to start holding many more assets. But the flip side of falling yields is that bond prices have risen significantly.

If a pension plan invested in bonds with maturities matching its obligations — that is, enough 10-year bonds to cover the payments due in 10 years, and so forth — the value of its holdings should have risen enough to cover its added asset needs. Only companies that chose not to properly match their maturities are left closing a gap.

But immunizing liabilities is BORING!

Spanish banks are slowly but surely bleeding deposits:

Spanish banks, already hooked on cheap European Central Bank loans, are hemorrhaging deposits as the government debates whether to seek a bailout.

Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain.
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There is “a clear underlying trend of accelerating deposit decline,” Nomura’s Quinn wrote in a Sept. 4 report. Term deposits by households fell 6.9 percent in July from a year earlier, while those of companies fell 24 percent, which “points to continued deposit declines in the future,” he said.

It was a mixed day for the Canadian preferred shares market, with PerpetualPremiums gaining 4bp, FixedResets up 3bp and DeemedRetractibles down 6bp. Volatility was muted. Volume returned to “lousy”.

As I have often complained, there is a growing trend in securities administration la-la-land to treat creditors according to who they are rather than what they have. The receiver’s response to a Lehman creditor is another example:

Defunct brokerage Lehman Brothers Inc., which hasn’t paid institutional creditors a dime of its $25 billion hoard after four years in liquidation, is being urged to settle fights with affiliates and pay up.
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Elliott Management Corp., a New York hedge fund, demanded in June that brokerage trustee James Giddens sell securities and pay an initial $3.2 billion soon. Giddens responded this week, saying Elliott is a “claims trader” and doesn’t share other customers’ interests. Yesterday, two creditor groups sided with Elliott, with an unofficial group in favor of giving Giddens just 60 days to resolve claims with a European affiliate. The official group didn’t set a deadline.
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By March 30, Giddens had $25.4 billion of securities in hand, Elliott said. By selling securities, he could pay almost 26 cents on the dollar of allowed claims totaling $12.2 billion, while still reserving enough money for disputed claims, the hedge fund said.

Goldman Sachs Group Inc. (GS) disagreed, saying customers should get the securities in their accounts, which may be worth more than money poured from a cash pool.

Giddens shouldn’t be treating traders differently from other customers, said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt.

“There is really no basis in law,” he said. “In the long run, this will hurt liquidity in the marketplace.”

One problem, of course, is that receiverships are a very nice meal ticket for all involved, except the creditors. The company can’t fight back!

DBRS confirmed Brookfield Renewable Energy Partners, proud guarantor of BRF.PR.A:

DBRS has today confirmed the ratings of Brookfield Renewable Energy Partners L.P. (BREP or the Company) and its related security instruments, including the Company-guaranteed Senior Unsecured Debentures and Notes at BBB (high) and Class A Preference Shares, Series 1 at Pfd-3 (high). All trends are Stable. The ratings reflect BREP’s lower-risk renewable generation mix supported by a high level of long-term contracted output, geographical diversification and operating efficiency. Constraints on the ratings include earnings and cash flow volatility resulting from fluctuation in hydrology and wind resources, high dividend payout ratios despite continued high growth-capital spending, and structural subordination to project-level debt. DBRS expects BREP to fund any material acquisition in the future and refinance maturing project debt with non-recourse project-level debt and equity to maintain a reasonable financial profile for the assigned rating category.

The credit metrics of BREP are within range for the current rating profile. Operating cash flow remains well in excess of maintenance capital expenditure requirements. However, significant growth capex and dividends have resulted in free cash flow deficits, which have been funded with a reasonable mix of debt and equity. As a result, leverage has remained relatively stable.

Additionally, DBRS confirmed IGM Financial, proud issuer of IGM.PR.B:

DBRS has today confirmed the ratings of IGM Financial Inc.’s (IGM, or the Company) Unsecured Debentures at A (high) and the First Preferred Shares at Pfd-2 (high). Trends for both are Stable.

IGM is one of the most consistently profitable financial services companies in Canada, reflecting a leading market position in the mutual funds manufacturing and distribution market through the operations of both Investors Group Inc. (IG) and Mackenzie Financial Corporation (Mackenzie). The rating is primarily based on the profitability, operating cash flow and business strengths of the Company’s IG subsidiary, while recognizing the complementary positive contribution of diverse products, brands and distribution channels offered through Mackenzie and Investment Planning Counsel Inc.

In addition to strong profitability, the Company has a conservative financial profile. Debt plus preferred shares-to-EBITDA was less than 1x in 2011, which is conservative, and the Company’s ratio of debt plus preferred shares-to-total capitalization remains appropriate for the rating, at just over 25%. While IG’s redemption rates are better than the industry average, the continuing net mutual fund redemptions at Mackenzie are not yet a major concern in determining IGM’s rating.

As a member of the Power Financial Corporation (Power) group of companies, IGM benefits from the additional financial flexibility of having a strategic shareholder and the associated strong governance and risk avoidance management model typical of Power subsidiaries.

It was a good day for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles gaining 10bp and FixedResets winning 11bp. Volatility was average. Volume was average.