PrefBlog

Nothing happened today, but it looks as if the US government might take a week off:

President Barack Obama and the top two leaders in Congress failed to reach a budget deal in their third White House meeting in two days, taking the government to the brink of a partial shutdown.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 15bp, FixedResets off 8bp and DeemedRetractibles down 6bp. Volatility remains low, and volume was light.

We’re learning more about the discount window:

Details of Fed lending released last week show that Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $37 billion, with an average daily loan amount of $12.3 billion in the 18 months after Lehman Brothers Holdings Inc. collapsed in September 2008. The House subcommittee that oversees the Fed plans hearings on the central bank’s discount window lending to offshore financial institutions next month.

By lending to Dexia, the Fed kept money flowing into local government projects throughout the U.S. as well as the money market funds that invested in them. Dexia guaranteed bonds issued by entities as varied as the Texas State Veterans Land Board in Austin and the Los Angeles County Metropolitan Transportation Authority.

“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” said Matt Fabian, a Concord, Massachusetts-based senior analyst and managing director at Municipal Markets Advisors, an independent research company. “The market has extensive exposure to foreign banks.”

It will be remembered that illiquidity is different from insolvency – I fully support the loan of funds to illiquid banks, as long as this is done at a penalty rate. It is capital injections to insolvent banks that arouses my ire.

Speaking of illiquidity and insolvency, Portugal needs help:

Portugal has asked the European Union for a bailout after a domestic political crisis helped push borrowing costs to record levels, making it the third euro region country to seek a rescue.

“I tried everything but we came to a moment that not taking this decision would bring risks we can’t afford,” Prime Minister Jose Socrates said in a televised statement from Lisbon today. “The government decided to make the European Commission a request for financial aid.”
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Portuguese bond yields have surged since Socrates offered to resign on March 23 following a parliamentary rejection of proposed budget cuts.
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Portugal has been trying to avoid requesting aid for the first time since 1983, when it received external help from the Washington-based IMF. Its credit rating was nevertheless cut by Moody’s Investors Service for the second time in three weeks yesterday, taking it to Baa1. That’s the same level as Ireland, Russia, Mexico and Thailand.

Portugal has struggled to convince investors it can avoid a bailout partly because its economy has barely grown in the past decade. It has expanded at an average annual rate of less than 1 percent in the period, ranking among Europe’s weakest growth rates. Unemployment rose to 11.1 percent in the fourth quarter, the highest since at least 1998, as the economy contracted for the first time in a year.

Portugal reported a budget deficit last week equal to 8.6 percent of the 2010 gross domestic product, higher than the 7.3 percent the government had previously forecast.

DBRS has made some changes to its split-share rating methodology:

With the release of the updated methodology, DBRS’s approach to rating split share transactions is largely unchanged. The primary rating factors are the downside protection and dividend coverage available to the preferred shares; the credit quality, diversification and volatility of the portfolio; and the size of capital share distributions and net asset value (NAV) level where distributions are suspended.

The updates to the methodology are minor in nature, including changes to the criteria for portfolio holdings, the addition of a currency hedging section and adjustments to other rating factors for assigning initial preferred share ratings and for the surveillance of existing ratings.

I was very please to see the following explicitly stated:

DBRS views the strategy of writing covered calls as an additional element of risk for preferred shareholders because of the potential to give up unrealized capital gains that would increase the downside protection available to cover future portfolio losses. Furthermore, an option-writing strategy relies on the ability of the investment manager. The investment manager has a large amount of discretion to implement its desired strategy, and the resulting trading activity is not monitored as easily as the performance of a static portfolio. Relying partially on the ability of the investment manager rather than the strength of a split share structure is a negative rating factor.

Every day I get a little more relieved that I don’t work for a big firm:

But the events at that 2009 party have become the subject of two lawsuits and an internal investigation by the firm.

The catalyst for it all was a 13-page complaint about the party penned the next day by Sarah Diebel, then a junior lawyer with the firm. She delivered it to an MDC partner in accordance with the firm’s sexual harassment policy.

In the letter, Diebel described the party as a “night of debauchery” where “free booze flowed” and where the firm’s partners became “extremely intoxicated.”

She described at length how partners behaved inappropriately, and at one point singled out Cowling and another lawyer for “rubbing their butts up against me and other women.”

Diebel later concluded: “While I like to dance, I don’t like being groped.”

Puerile garbage like that results in lawsuits, resignations, firings and, worst of all, being discussed seriously by adults more than a day afterwards? Grow up, people, and stop pretending this high-school crap is the end of the world.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts getting thumped for a loss of 20bp, FixedResets losing 1bp and DeemedRetractibles down 7bp. Not much volatility. Volume was good.

The National Bank issues subject to the issuer bid closed bid within a few pennies of the tender price. If you haven’t tendered or sold by now, you may have problems – get cracking right away! Most dealers will have a cut-off day for instructions at least one day prior to next Monday’s expiration.

PerpetualDiscounts now yield 5.52%, equivalent to 7.18% interest at the standard equivalency factor of 1.3x. Long Corporates now yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 160bp, a sharp tightening from the 170bp reported on March 30, due to an increase in long corporate yields being unmatched by PerpetualDiscounts.

There’s some cheerleading for solar power:

Electricity from coal costs about 7 cents a kilowatt hour compared with 6 cents for natural gas and 22.3 cents for solar photovoltaic energy in the final quarter of last year, according to New Energy Finance estimates.

Comparisons often overstate the costs of solar because they may take into account the prices paid by consumers and small businesses who install roof-top power systems, instead of the rates utilities charge each other, said Qu of Canadian Solar.

I’ll believe it when I see it.

There are more cross-currents in the Fed Funds rate:

U.S. money market rates dropped to about one-year lows as a change in deposit insurance fees makes some banks reluctant to lend securities and the Treasury reduces issuance of bills to avoid exceeding the debt limit.

The average rate for overnight federal funds, known as the fed effective rate, fell to 0.09 percent yesterday, the lowest since June. The rate was 0.18 at the start of the year. The average rate for borrowing and lending Treasuries for one day in the repurchase agreement market fell to 0.028 percent, the lowest since at least May 3, 2010, or as far back as index data is provided by the Depository Trust & Clearing Corp.

The Federal Deposit Insurance Corp. began last week to adjust calculations of U.S. banks’ deposit insurance fees to include all liabilities rather than just domestic deposits. The Treasury has reduced the amount of Supplementary Financing Program bills, or SFPs, it sells on behalf of the Federal Reserve by $195 billion to help avoid exceeding the U.S. debt limit.

“The new FDIC assessment structure, while intended to better protect taxpayers from large bank failures, has distorted activity in the short-term rates markets,” Brian Smedley, a strategist in New York at Bank of America Merrill Lynch, said in an interview. “This change will discourage opportunistic borrowing by insured banks in the fed funds and repo markets in particular, as banks will avoid leveraging their balance sheets unnecessarily to reduce the fees they pay the FDIC.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets gaining 5bp, and DeemedRetractibes losing 11bp. Volatility was minimal, volume was reasonable.

National Bank issues subject to the issuer bid feature in the volume highlights as the deadline approaches. The prices are now reasonable relative to the tender price, although note that this is the last day of cum-dividend trading. Tomorrow they are ex-Dividend and it will be the last day to trade for regular settlement that will settle on the tender date.

The predicted hike in the European policy rate is causing some angst:

Primed to raise its benchmark interest rate this week for the first time in almost three years, President Trichet’s European Central Bank again faces the conundrum that its monetary policy rarely suits all 17 members of the euro area, where the kaleidoscope of growth ranges from record expansion to recession paired with a sovereign-debt crisis.

The upshot may be that the normalization of rates from a record low of 1 percent will disproportionately hurt Spain, Greece, Portugal and Ireland, while failing to nip inflation threats in Germany. Such uneven fallout risks exacerbating the two-speed European recovery and dealing further damage to the bonds of so-called peripheral nations.

But the outlook for Treasuries continues to be bright (according to some):

Treasuries are signaling that the $9 trillion market will weather the end of the Federal Reserve’s quantitative easing program in June without suffering a selloff that drives long-term borrowing cost higher.

The class of investors that includes foreign central banks purchased 60 percent of the $66 billion in benchmark 10-year U.S. notes sold this year, up from 42 percent in 2010.
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Rising demand from international investors and financial institutions bodes well for bonds with the Fed’s plan to buy more than $600 billion of Treasuries more than 80 percent complete. U.S. fixed-income assets are retaining their appeal as the credit quality of European sovereign debt deteriorates and banks meet tighter risk standards governing the capital they need cushion against losses.

Algos gone wild? RBC bought 2100 shares of CIU.PR.C in 12 transactions starting at 25.05 at 12:04pm and finishing at 27.00 at 12:18. Too much time-span to be a retail market order … I wonder what happened there? The lucky seller was Byron Securities (who?), which sold 900 shares at an average price of 25.85.

Other than that, it was a relatively quiet day for the Canadian preferred share market, with PerpetualDiscounts down 1bp, FixedResets gaining 4bp and DeemedRetractibles up 5bp. Only three entries on the performance highlights table, and volume was nothing special.