PrefBlog

Too soon to call it a trend … but there are interesting goings-on in the credit rating agency world:

The response to the Moody’s Investors Service downgrade of the biggest Nordic banks was rising bond and share prices.

The reaction is the latest sign that investors are paying less attention to the views of rating companies and relying more on their own analysis to determine whether to buy or sell.
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Denmark, which is bringing its proposals to the European Parliament, says ratings often don’t reflect credit risks. Measures to improve the industry include a plan to cut reliance on ratings for both investors and within financial regulation, the Business Ministry in Copenhagen said May 21. The intention is also to make it easier for investors and issuers to demand compensation from ratings companies that fail to do their job properly, the ministry said.

In Denmark, banks have started firing Moody’s after winning assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value. Nykredit A/S, Denmark’s biggest mortgage lender and Europe’s largest issuer of covered bonds backed by home loans, terminated its contract with Moody’s in April, citing its “volatile” views.

There’s nothing in the article about the potential for investors and issuers to demand compensation from investment managers that fail to do their job properly – what a surprise! Assurances from large investors that opinions of ratings companies hold limited value hold limited value – what else are they going to say?

In Greek news:

The New Democracy party in Greece, which supports the austerity measures imposed by the European Union, came first in all six opinion polls published on May 26 as campaigning continued for the country’s general election on June 17.

Party leader Antonis Samaras sought to illustrate the consequences of a euro exit, saying Greek incomes, bank deposits and property values would lose at least half their value within days, while food prices would rise by a quarter.

Hmmm … maybe it will help him win. Maybe. And maybe it will also accellerate the bank run. Maybe.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets off 2bp and DeemedRetractibles down 6bp. Volatility was average. Volume remained light.

Interesting commentary from Fitch about possible changes in the money market:

In particular, we believe further MMF reform will likely lead managers to expand their product offerings beyond MMFs, possibly resulting in one unintended consequence. A potential decrease in information transparency for short-term market participants and regulators could occur, should more cash be moved from highly regulated and transparent MMFs into other parts of the financial system.

For example, corporate investors may shift liquid funds into separately managed cash accounts (SPA) as an alternative to MMFs. SPAs are one way a corporate treasurer could choose to diversify cash management activities without relying on MMFs. SPAs are managed in line with customized investment strategies that are designed to meet the investment objectives of a specific client. Importantly, SPAs are generally designed to provide liquidity from maturing securities with only minimum reliance on secondary market liquidity, which could be could be constrained during times of market stress. In contrast to MMFs which offer same-day liquidity, SPAs require corporate treasurers to have a high degree of confidence in their cash needs and cash flow forecasts.

This comes after revelations that the Fed is offering investment advice:

The Federal Reserve has warned U.S. money market funds to cut their investments in Europe, a top official says.

“The Fed and regulators have tried to stress to money market funds to reduce their exposure to European financial institutions,” Charles Plosser, the president of the Reserve Bank of Philadelphia, told the Wall Street Journal.

However, the Fed has not yet begun to centrally micromanage the economy:

Federal Labour Minister Lisa Raitt tabled a back-to-work bill on Monday, ordering an end to the strike within days at Canadian Pacific Railway Ltd. …

Ms. Raitt’s move comes as the economic impact mounts from the six-day strike by 4,800 members of the Teamsters Canada Rail Conference.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets off 5bp and DeemedRetractibles losing 17bp. SLF DeemedRetractibles performed shockingly badly, with all of them down far more than would have been predicted from knowing that they went ex-Dividend today; otherwise the Performance Highlights table shows fair volatility. Volume was light; no surprise given that it was a US holiday.

Cheerful Greek thoughts from the Institute of International Finance (aka the Bankers’ Club):

The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.

The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,” Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”

The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector.
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For Greece, in its fifth year of recession, it may be more effective to offer extra money to help its battered economy recover, Dallara said. Because Greece’s economy has shrunk so much faster than expected, it may need more time to meet its budget targets and repay its international loans, he said.

Greece’s shrinking economy could be aided “at a cost” of an additional 10 billion euros. “We’re talking about very modest sums compared to what’s already on the table,” he said.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets up 12bp and DeemedRetractibles winning 14bp. Volatility was muted. Volume was well below average.

I may be a little dense, but one point about housing prices has just struck me:

If you had to earn a living predicting home prices and could use just one indicator to do it, which would you choose?

I asked two top economists that question. Their answer was the same: housing affordability.
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Affordability – a type of debt service ratio – gauges the average percentage of income needed to carry a mortgage. This is closely linked to how much homeowners can borrow.

It’s a rather paradoxical statistic. You would think, for instance, that with home prices doubling in the last 10 years, affordability would be getting worse.

Actually, national affordability is almost the same or better than 20 years ago, according to measures by the Bank of Canada and major economists.

For that, we can thank both falling interest rates and rising incomes. Discounted mortgage rates, for example, have dropped more than five percentage points in the last 20 years.

So, to the extent that affordability, as defined, is an accurate gauge of housing value, then once you strip out the relatively volatile interest rate denominator, you’re left with a linear dependence upon nominal incomes. Which will not only capture inflation but also capture productivity gains. And, what’s more, those aren’t just the productivity gains of the average person, but (in Toronto and Vancouver, anyway) are the productivity gains of professionals. Which have been awesome in the last twenty years and which I would expect will continue to be awesome.

Would anybody happen to have any data that tests this idea?

There are some interesting polls from Greece:

A Greek opinion poll showed the Syriza party, which is opposed to implementing Greece’s international financial rescue, building on its lead in voter support ahead of elections to be held on June 17.

Syriza got 30 percent support, compared with the 28 percent in a previous reading a week earlier, according to a Public Issue poll presented on Athens-based Skai TV today. That was ahead of pro-bailout party New Democracy which polled 26 percent compared to 24 percent a week earlier, according to the survey.
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The poll showed 85 percent of Greeks wanted to keep the euro, compared with 12 percent who were opposed to keeping the currency.

There could be some bare-knuckle diplomacy coming if Syriza has the twin objectives of renegotiating the bail-out while staying in the Euro!

It was a negative day for the Canadian preferred share market, with PerpetualPremiums off 2bp, FixedResets down 7bp and DeemedRetractibles losing 24bp. There was a good amount of volatility with no clear pattern – although optimists might wish to assert that the IAG new issue prompted a revaluation of that issuer’s extant issues. Volume was quite low.