PrefBlog

The MMF industry is resisting even the ineffective reforms proposed by the SEC:

The compromise, unanimously approved by SEC commissioners June 5, would harm investors and the economy, and would increase systemic risk, the Investment Company Institute said today. The group supported an alternative option offered by the SEC to limit withdrawals when funds come under stress.

“Our opposition to floating NAV remains as firm as ever,” Paul Schott Stevens, president of the Washington-based ICI, said in the text of a speech he is scheduled to deliver today in Baltimore. “Forcing funds to float their NAVs doesn’t address the problem.”

The plan would exempt funds that buy only U.S. government-backed securities and retail funds, a concession regulators made to address concerns of fund providers.
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The commission’s proposal includes the option of allowing a fund’s board to temporarily halt withdrawals and require it to impose a fee of 2 percent on all redemptions if the fund’s weekly liquid assets fell below 15 percent of total assets. The commission left open the option of adopting either floating NAV or withdrawal restrictions, or both together.

“Liquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressure in periods of market turmoil,” Schott said in his speech at a conference organized by research firm Crane Data LLC.

Of course, they do nothing to address the core problem of default in the underlying portfolio, but who cares?

The Fed released the FOMC statement:

The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
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Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Bernanke added a little colour at the press conference (emphasis added because the Globe did):

Federal Reserve Chairman Ben S. Bernanke said the central bank may start reducing bond purchases later this year and end them in the middle of 2014 if the economy continues to improve as the central bank forecasts.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Bernanke said today in a press conference in Washington. “If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

Market reaction was modestly negative:

U.S. stocks retreated, following a two-day rally in the Standard & Poor’s 500 Index, as the Federal Reserve said risks to the economy have decreased, spurring concern the central bank will reduce its stimulus efforts.

Eight of 10 groups in the S&P 500 fell, even as the Fed said it will keep buying bonds at a pace of $85 billion a month. Utility and phone shares fell the most, extending losses to at least 0.5 percent.

Switzerland is resisting US hegemony:

Swiss parliament rejected a bill designed to resolve a dispute over undeclared bank accounts held by U.S. citizens, potentially setting the stage for American prosecution of the country’s banks.

Members of parliament’s lower house voted 123 to 63 against the bill, which would have allowed Swiss banks to cooperate with the U.S. and to settle a long-running dispute over wealthy American tax evaders. The government has said it has no plan B, in the event of the bill failing to pass.

Today’s award for disingenuity is given to David Phillips of First Leaside:

He said he was delighted with the findings of a third-party report prepared by accounting firm Grant Thornton Ltd. in August, 2011, which concluded First Leaside needed to raise money to remain viable. The OSC has asked First Leaside to commission the review because it was concerned about the firm’s health.

Mr. Phillips said he saw the report as an “affirmation” and “vindication” of his strategy and thought it would address the OSC’s worries. He said it was unsurprising to him that Grant Thornton said the firm needed to raise cash to remain viable, because that was always the case for an investment company.
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The report said First Leaside’s viability hinged on its ability to raise new funds from investors because it did not have enough cash to support its operations, and said the company had an “equity deficit” because its real estate assets were worth less than their outstanding mortgages.

It was back to carnage as usual for the Canadian preferred share market, with PerpetualPremiums losing 33bp, FixedResets off 21bp and DeemedRetractibles down 29bp. The Performance Highlights table is suitably gory, with only one winner among many, many losers – many of them Brookfield issues. Volume was quite high.

It’s nice to see someone with a brain making an impact amidst all the SEC lawyers:

Concern that American stock markets have become more susceptible to split-second crashes due to computerization isn’t supported by the data, a Securities and Exchange Commission official said.

Most “mini-flash crashes,” a term sometimes applied when an individual U.S. stock briefly surges or plunges for no obvious reason, are the result of human errors, not broken software, said Gregg Berman, head of the SEC’s Office of Analytics and Research.
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In September, the Senate Subcommittee on Securities, Insurance and Investment held hearings on the impact of computerized trading amid concern algorithmic and high-frequency strategies are contributing to investor uncertainty.

“A popular meme has emerged that, taken collectively, sudden price spikes indicate a broken market” and may be harbingers of another crash like the one in 2010, Berman said in New York today at a conference sponsored by the Securities Industry and Financial Markets Association. Critics who blame everything on electronic trading “may be looking in the wrong place,” he said.

DBRS has downgraded the debt of TCA and TRP but left the preferred share ratings unchanged:

DBRS has today downgraded the Issuer Rating and Unsecured Debentures & Notes rating of TransCanada PipeLines Limited (TCPL) to A (low) from “A”, the Junior Subordinated Notes rating of TCPL to BBB from BBB (high) and the Medium-Term Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. (NGTL), a wholly owned subsidiary of TCPL, to A (low) from “A”, all with Stable trends. The NGTL rating action reflects DBRS’s view that continued financial and liquidity support from TCPL is key to NGTL’s long-term debt rating.

DBRS has also confirmed the preferred share ratings of TCPL and of TransCanada Corporation (TCC, TCPL’s parent company) at Pfd-2 (low) with Stable trends, reflecting DBRS’s belief that the existing ratings are already conservative relative to TCPL’s Issuer Rating and that DBRS views it as unlikely that any debt instruments will be issued at TCC. These actions remove all of the above-noted ratings from Under Review with Negative Implications where they were placed on March 28, 2013.DBRS has today downgraded the Issuer Rating and Unsecured Debentures & Notes rating of TransCanada PipeLines Limited (TCPL) to A (low) from “A”, the Junior Subordinated Notes rating of TCPL to BBB from BBB (high) and the Medium-Term Notes & Unsecured Debentures rating of NOVA Gas Transmission Ltd. (NGTL), a wholly owned subsidiary of TCPL, to A (low) from “A”, all with Stable trends. The NGTL rating action reflects DBRS’s view that continued financial and liquidity support from TCPL is key to NGTL’s long-term debt rating. DBRS has also confirmed the preferred share ratings of TCPL and of TransCanada Corporation (TCC, TCPL’s parent company) at Pfd-2 (low) with Stable trends, reflecting DBRS’s belief that the existing ratings are already conservative relative to TCPL’s Issuer Rating and that DBRS views it as unlikely that any debt instruments will be issued at TCC. These actions remove all of the above-noted ratings from Under Review with Negative Implications where they were placed on March 28, 2013.
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Finally, TCC’s financial profile remains reasonable, as capex has been lower than previously anticipated due to the Keystone XL delay, partly offsetting weaker earnings and cash flow in 2012. DBRS believes that the recent weakness in credit metrics, compared with prior periods, was partly due to factors that are not likely to reoccur on an ongoing basis, including the Sundance A power purchase agreement (PPA) force majeure, the increased planned outage days at Bruce Power’s Unit A3 and A4 and the lower-than-expected capacity payments at the Ravenswood natural gas and oil-fired generating facility. DBRS notes that Bruce Power’s Unit 1 and Unit 2 were both placed into commercial service during Q4 2012 following a significant refurbishment program. The Company will likely experience a significant free cash flow deficit once capex on Keystone XL gets underway, if approved, likely resulting in a moderately negative impact on credit metrics prior to improvement in subsequent years as some projects are placed into service and begin to generate cash flow.

It’s not just Standard & Poor’s (see report) that’s pressuring Spectra:

Spectra Energy Corp., which distributes natural gas in Ontario and operates in British Columbia as Westcoast Energy Inc., is facing pressure to spin off its Canadian assets from an activist investor.

In a June 17 letter to Spectra chief executive Greg Ebel, Thomas E. Sandell, chief executive of New York-based Sandell Asset Management, said Spectra should review strategic alternatives for Westcoast, including a potential initial public offering. Spectra should also consider transforming itself into a holding company akin to Kinder Morgan Inc., Williams Companies, Inc. and Oneok, Inc., Sandell said.

Another down day for the Canadian preferred share market – but with a difference! PerpetualPremiums were off 1bp, FixedResets lost 20bp and DeemedRetractibles were down 10bp. FixedResets are prominent in the Performance in the Performance Highlights table, which is comprised entirely of losers. Volume was high.

Overall it was mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets up 5bp and DeemedRetractibles off 1bp. The averages concealed a lot of underlying volatility, however, as the Performance Highlights table is quite lengthy and features a number of BAM FixedReset losers. Volume was quite high.

This housing news is counter-intuitive:

Home repossessions in the U.S. jumped 11 percent in May after declining for the previous five months as rising prices and limited inventory for sale across the country spurred banks to complete foreclosures.

Lenders took back 38,946 homes, up from 34,997 in April, according to Irvine, California-based data firm RealtyTrac, which tracks notices of default, auction and seizures. Thirty-three states had increases in the number of homes repossessed, RealtyTrac said in a report today.

Banks are more willing to move to the final stage of foreclosure because there is sufficient demand and prices are improving, said Eric Workman of Tinley Park, Illinois-based Mack Cos., which aggregates single-family rental homes and resells them to individuals and institutional investors. U.S. home prices advanced almost 11 percent in the year through March, the biggest 12-month gain since April 2006, according to the S&P/Case-Shiller index of values in 20 cities.
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Private-equity firms, hedge funds and individuals are all buying foreclosed or distressed homes to turn into rental properties as prices remain 28 percent below their 2006 peak. Companies including Blackstone Group LP (BX), which has invested more than $5 billion to buy almost 30,000 homes, and Colony American Homes Inc., which owns more than 12,000 properties, are helping to increase prices in areas hit hard by the real estate crash by draining the market of inventory as low borrowing costs and improving employment fuel demand from buyers.

Guess who’s the latest big bankruptcy?:

Detroit (9845MF), on the brink of bankruptcy with $17 billion in liabilities, will suspend payments on $2 billion of unsecured debt, beginning with an installment due today, Emergency Manager Kevyn Orr said.

With today’s missed $39.7 million payment on debt issued to fund pensions, Detroit becomes the most populous U.S. city to default since Cleveland in 1978. Unsecured creditors may receive as much as 10 cents on the dollar under a deal Orr offered to more than 100 creditors and union representatives today.

The city would create a regional water agency to take the place of its municipally owned department, and active and retired workers would see their pensions reduced under the plan. Detroit also would spend $1.25 billion over a decade to improve services, eliminate blight and create a more livable community.

If our experience is any indication, a regional water agency is just another tax grab – rates in Toronto have soared, while personnel have unchecked power and huge arrogance.

Meanwhile, in the reaching for yield department:

Junk-rated borrowers from Rite Aid Corp. (RAD) to Atkins Nutritionals Holdings Inc. are raising a riskier type of loan that offers a lesser claim on their assets at a pace last seen before the financial crisis.

Second-lien loan issuance has climbed to $17.1 billion this year, versus $18.6 billion in all of last year and on pace to surpass the record $28.7 billion issued in 2007, according to data compiled by Bloomberg. Rite Aid, the third-largest U.S. drugstore chain, reduced the interest rate on its $500 million loan due to increased investor demand, while dieting company Atkins raised $355 million in loans, including second-lien debt, to fund a dividend.

Investors are turning to the junior-ranking loans that would shield them from an increase in interest rates and offer more protection than bonds, which have been pummeled as speculation increases the Federal Reserve (FDTR) will pare back its unprecedented stimulus. Second-lien loans have fallen just 0.3 percent since Fed Chairman Ben S. Bernanke said the central bank could reduce its asset purchases if the economy shows sustained improvement, while junk bonds have lost 9 times more.

The BoE is losing a good man:

Incoming Bank of England Governor Mark Carney will get an early chance to overhaul management of the U.K. central bank after Paul Tucker said he will step down as deputy governor.

Beaten by the Canadian to the governorship, Tucker said today he will end three decades in policy making later this year and work in U.S academia. Fellow deputy Charlie Bean is also scheduled to leave in the next year and other officials are nearing the ends of their terms. Carney has already left the Bank of Canada and formally starts work in London on July 1.

The UK’s loss is a US win. Tucker, by the way supported high trigger CoCos.

Nothing to do with economics, but this is alleged Medicare fraud too good to ignore:

Based in part on surreptitious tape recordings, an FBI affidavit lays out allegations that a Sacred Heart pulmonologist kept patients too sedated to breathe on their own, then ordered unneeded tracheotomies for them — enabling the for-profit hospital to reap revenue of as much as $160,000 per case.
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The affidavit contains an allegation that tracheotomy patients were lucrative for doctors as well as the hospital: The physician could bill $160 each time he visited a tracheotomy patient at the hospital, versus $32 for seeing a ventilator patient in a nursing home.

Today’s puzzle in included in the recent article Four tips for nervous bond investors:

Step 4: Understand the differences between individual bonds, bond funds and guaranteed investment certificates.
Bond fund prices move in the opposite direction of interest rates – they fall when rates are rising and rise when rates decline. With the exception of a fairly obscure category called the target date bond ETF, there is no maturity date where your original investment is handed back to you.

Individual bonds give you that maturity date, although investors may not get back exactly what they paid for their bonds. That’s because many bonds today sell with a price premium over their issue price. When they’re redeemed, it will be at the issue price.

GICs are a big problem-solver for investors worried about holding bonds in a rising rate world. GICs aren’t easily sold before maturity unless you buy a cashable version (which will mean a sacrifice in yield). But they can provide higher yields than government and many high quality corporate bonds, with the additional benefit of deposit insurance from either the federal Canada Deposit Insurance Corp. or credit union plans that vary from province to province. “I like GICs in a rising rate environment,” said [fixed income strategist at TD Wealth] Mr. [Sheldon] Dong. “They preserve your capital.”

Is the assertion that GICs have less interest rate risk than any other bond with the same cash-flows? If so, then I trust all readers will be aware that this is hogwash. You can’t eliminate risk by ignoring it.

It was a day of recovery (or sucker’s rally!) for the Canadian preferred share market today, with PerpetualPremiums (many of which should really be called PendingPerpetualDiscounts, until the month-end rebalancing of the indices!) winning 28bp, FixedResets gaining 18bp and DeemedRetractibles up 22bp. The very lengthy Performance Highlights table is dominated by winning Straight Perpetuals. Volume was above average.

Riding the tiger is easy … the hard part is getting off:

Federal Reserve Chairman Ben S. Bernanke has repeatedly said a reduction in the Fed’s $85 billion in monthly bond purchases wouldn’t mean an end to record easing. Investors are behaving as if they don’t believe him.

The yield on the 10-year Treasury note has risen to 2.19 percent, an almost 14-month high, from 1.63 percent on May 2 as investors bet the Fed will begin trimming bond buying. The surge is undermining Bernanke’s unprecedented effort to hold down borrowing costs and combat 7.6 percent unemployment.
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Investors interpret policy makers’ talk of reduced bond purchases as a signal the Fed will begin to increase its main interest rate as soon as next year. They see a 47 percent chance the Fed will raise the rate to at least 0.5 percent from zero to 0.25 percent by December 2014, according to prices for federal funds futures contracts.

That’s an increase from about 20 percent probability two months ago. It also contrasts with a majority of 14 Fed officials who forecast in March that the FOMC won’t increase the federal funds rate until 2015 or later. The Fed has held the rate banks charge one another for overnight loans near zero since December 2008.

I mentioned a pseudo-scandal in the FX market yesterday … naturally it is being used as an excuse for more regulation:

Global regulators may start overseeing currency rates in a widening response to benchmark-rate setting scandals that began with revelations on the manipulation of Libor, according to two people familiar with the matter.

The International Organization of Securities Commissions, a Madrid-based group known as Iosco that harmonizes market rules, may propose final guidelines improving transparency and oversight of benchmarks, including the WM/Reuters rates, as soon as next month, said the people, who asked not to be named because the talks aren’t finalized.

There was a bit of a rebound for the Canadian preferred share market today, with PerpetualPremiums winning 13bp, FixedResets up 10bp and DeemedRetractibles gaining 6bp. The lengthy Performance Highlights Table has more winners than losers, for a change, with BAM PerpetualDiscounts continuing to head the loser list. Volume was above average.