PrefBlog

The IMF has released the March 2011 edition of Finance and Development. There’s an article by André Meier titled Up or Down:

Some have predicted postcrisis deflation in advanced economies, others high inflation. Worries about either are probably exaggerated.
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Historical episodes of persistent large output gaps in advanced economies show a clear pattern of disinflation, supported by weak labor markets and low wage growth. However, declines in inflation appear to become more modest when the initial rate of inflation is already quite low, suggesting some combination of better-anchored inflation expectations and downward nominal rigidities, such as resistance to outright wage cuts. Moreover, fluctuations in oil prices and exchange rates can introduce significant shortterm volatility in inflation outturns.

Developments since the beginning of the global financial crisis are consistent with this pattern. Despite large swings in headline rates, underlying inflation in advanced economies has generally declined, with many core measures reaching the very low rates at which disinflation typically petered out during past [persistent large output gap] episodes. Thus, while upside inflation risks should be limited in countries facing continued economic slack, a slide into outright deflation does not seem very likely either.

There’s also a very hopeful article titled Healing Health Care Finances by Benedict Clements, David Coady, Baoping Shang, and Justin Tyson. Hey, here in Canada, no problem! You see, what we’re going to do is keep standards high but costs low through the use of a well-respected technique that has just been approved by an expert group of 23-year-old B.Comms with clipboards: Doing a shitty job. Whenever something goes wrong and this becomes public knowledge, just fire whoever was standing nearest. Works every time. How many voters really have any insights into the public health system, anyway?

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts down 21bp, FixedResets gaining 17bp and DeemedRetractibles losing 16bp. For all that, the market was relatively well behaved, with only one entry on the Performance Highlights table. Volume remained high.

The migration of traders continues:

Guggenheim Partners LLC, the closely held investment bank and asset manager, plans to hire as many as 150 staff being pushed out of banks’ proprietary-trading units because of U.S. financial rules enacted last year.

Loren M. Katzovitz and Patrick Hughes, 49-year-old managing partners who have worked together since 1993, are launching Guggenheim Global Trading LLC in Purchase, New York, with an initial investment of $500 million as soon as June 1, they said yesterday in an interview. The firm plans to hire 100 to 150 traders and manage as much as $2 billion, they said.

Much the same thing is happening in Canada:

The cultural gulf between Canada’s independent securities firms – with their eat-what-you-kill pay structures – and the more staid bank-owned investment dealers is steadily widening. Some of the people who recruit bankers and traders say that the result of a move to more deferred pay and smaller cash bonuses at bank-owned firms means they are attracting a more risk-averse type of person, which is what regulators were seeking.

The pay system at independent firms like GMP Securities remains simple. Bankers and traders get paid for the business they bring in. Base salaries are rare, but bonus payments are regular and in cash. Bonuses are big when business is good, and they can dry up in fallow times.

It will be interesting to see how this plays out. I can tell you that the quality of institutional bond desk personnel has declined over the past 15 years. There’s still lots of the old guys around, but as they retire and move on, they’re being replaced by order-takers.

General Growth, the object of Brookfield’s affections, is taking advantage of better tone in the CMBS market:

General Growth Properties Inc. (GGP), the U.S. mall owner planning to refinance $5 billion of mortgage debt, tapped UBS AG and Morgan Stanley (MS) to fund loans as banks rebuild inventory to back bonds tied to commercial real estate.

UBS agreed to provide a $375 million loan on the 977,000- square-foot Providence Place Mall in Rhode Island, according to a person with direct knowledge of the deal who declined to be identified because the talks are private. Morgan Stanley will lend about $150 million for a Humble, Texas property, according to a person familiar with those negotiations. The banks plan to package the loans for sale as securities, the people said.

General Growth, which emerged from the largest real estate bankruptcy in U.S. history in November after piling up $27 billion in debt, plans to refinance $5 billion in mortgages in 2011, Chief Executive Officer Sandeep Mathrani said during a March 1 conference call with analysts. Property owners nationwide are benefiting as the Federal Reserve keeps its benchmark interest rates near-zero to stimulate economic growth.
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General Growth buckled under its debt load when the market for commercial-mortgage backed bonds shut down in 2008 and the company was unable to refinance properties. The real estate investment trust has $18.2 billion in outstanding mortgage debt, Mathrani said.

A mixed, relatively quiet day on the Canadian preferred share market, as PerpetualDiscounts lost 5bp, FixedResets were down 7bp, and DeemedRetractibles gained 4bp. There are only two entries on the Performance Highlights table – and neither would have made had their closing bids been a penny lower. Volume remained at elevated levels.

DBRS has released a commentary titled Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings:

• Sovereign credit ratings serve as a general benchmark for all other DBRS credit ratings. DBRS uses a case-by-case approach when rating non-sovereign entities or transactions, and avoids using a static “sovereign ceiling” concept, because this would imply that ratings are capped at the sovereign rating. DBRS does not institute a maximum number of notches between the sovereign rating and non-sovereign ratings.
• Financial institution and corporate ratings are typically constrained by the sovereign rating, although both could have a higher credit rating that that of the central government, with the level of operations outside of the country of domicile typically being a key consideration. Structured Finance ratings are addressed on a case-by-case basis and in many instances can be higher than the sovereign rating.
• In certain cases, country risks, which do not necessarily result in sovereign rating changes, may also affect non-sovereign ratings.
• Within the Euro zone, non-sovereign ratings may enjoy a lower degree of influence from sovereign-related stresses, since there is far lower exchange rate risk, less regulatory risk and existing support mechanisms from European institutions.

It was a mixed day on the Canadian preferred share market, as PerpetualDiscounts were up 10bp, FixedResets gained 6bp, but DeemedRetractibles got knocked back for 16bp. Not much volatility, with only two issues on the Performance Highlight list. Volume was above average.

PerpetualDiscounts now yield 5.61%, equivalent to 7.28% at the now standard equivalency factor of 1.3x. Long Corporates now yield about 5.5%, so the pre-tax interest equivalent spread is now about 180bp. Given the change in the equivalency factor, this is not really comparable to prior figures; the raw data for February 23 was 5.61% for PerpetualDiscounts and 5.50 for Long Corporates, so the change is really zero.

The Federal Reserve Bank of New York has released a Staff Report by Olivier Armantier, Eric Ghysels, Asani Sarkar, and Jeffrey Shrader titled Stigma in Financial Markets: Evidence from Liquidity Auctions and Discount Window Borrowing during the Crisis:

We provide empirical evidence for the existence, magnitude, and economic impact of stigma associated with banks borrowing from the Federal Reserve’s discount window facility. We find that, during the height of the financial crisis, banks were willing to pay an average premium of at least 37 basis points (and 150 basis points after Lehman’s bankruptcy) to borrow from the Term Auction Facility rather than from the discount window. The incidence of stigma varied according to bank characteristics and market conditions. Finally, we find that discount window stigma is economically relevant since it increased banks’ borrowing costs during the crisis. Our results have important implications for the provision of liquidity by central banks.

Also released was a Staff Report by Maria Kasch and Asani Sarkar titled Comovement Revisited:

We find, unlike earlier studies, that there is no rise in the market betas of stocks that enter the S&P 500 index when the estimated factor model is that of Fama and French (1993). We also find that SMB and HML factor betas decline after the stocks are added to the index. This decline is explained by strong increases in earnings and in the market value of the event stocks in the period around―and, in particular, prior to―their inclusion in the index. We suggest that inclusions to the S&P 500 index are informative events that trigger a reassessment of the risk of newly added firms by drawing the broad market’s attention to their extraordinary growth in size and profitability.

It was a good day in the Canadian preferred share market, with PerpetualDiscounts up 16bp, FixedResets gaining 3bp and DeemedRetractibes winning 11bp. Above-average volume.