Issue Comments

CU.PR.B Closes at Premium

It’s been a long time … but if the issue can hold on to its gains for another three weeks, then we’ll have a member of the long neglected PerpetualPremium index.

Vital statistics are:

CU.PR.B Perpetual-Discount YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 5.65 %

It was transferred from PerpetualPremium to PerpetualDiscount at the June 2008 rebalancing, which left four issues in the PerpetualPremium index as of 2008-6-30.

Market Action

June 10, 2009

Here’s a switch! Treasuries were under pressure today … Russia’s concerned about credit quality:

Thirty-year bond yields reached the most in a year after a Russian central bank official said the nation may buy International Monetary Fund bonds.

Russia’s central bank may switch some of its reserves from Treasuries to International Monetary Fund bonds, the bank’s first deputy chairman, Alexei Ulyukayev, said in Moscow today. His comments were confirmed by a bank official who declined to be named, citing bank policy.

Finance Minister Alexei Kudrin said last month that Russia planned to buy $10 billion of IMF bonds using money from its foreign reserves.

Russia holds $138.4 billion of U.S. debt. China is the largest U.S. creditor, with $767.9 billion. The U.S. government must rely on foreign investors to sustain record borrowing.

The dollar fell as Russia’s announcement added to speculation central banks around the world may try to diversify their reserves away from the U.S. currency. The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, decreased 0.2 percent to 79.649, after sliding 1.3 percent yesterday.

“The market is reacting to this Russia thing,” said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. “The dollar has restarted its dive to lower levels.”

Perhaps not surprisingly, the Treasury 10-year auction was horrible:

Treasuries declined, pushing 10-year yields to the highest level since October, as the government sold $19 billion of the securities and Russia said it may switch some reserves from U.S. debt.

The notes drew a yield of 3.99 percent, the highest since August 2008. The auction was the second of three sales this week that will raise $65 billion, part of the government’s record borrowing program. A Russian central bank official said the nation may buy International Monetary Fund bonds.

“There are an awful lot of Treasuries being auctioned and there’s going to be more and more and more and more,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

The yield on the 10-year note rose seven basis points, or 0.07 percentage point, to 3.92 percent at 2:44 p.m. in New York, according to BGCantor Market Data. It earlier reached 3.99 percent, the highest since Oct. 16. The 3.125 percent security maturing in May 2019 declined 1/2, or $5.00 per $1,000 face amount, to 93 1/2.

The 30-year bond yield touched 4.83 percent, the highest in a year. The government is scheduled to sell $11 billion of the securities tomorrow.

Lots of volume but not much price action for preferreds today, although Floaters got hit – largely due to TRI.PR.B, which had low volume and a high closing spread, so it’s not clear how seriously the decline should be taken. PerpetualDiscounts closed with a yield of 6.35%, equivalent to 8.89% interest at the standard equivalency factor of 1.4x; long corporates are now yielding about 6.6%, having returned +3.43% on the month-to-date, so the pre-tax interest-equivalent spread is now about 229bp … up from the 213bp calculated on June 4 due almost entirely to a decline in long corporate bonds that has – over the week – been unmatched by preferred shares … the yield on PerpetualDiscounts is actually fractionally higher that it was at the last calculation.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -1.9893 % 1,289.5
FixedFloater 6.98 % 5.51 % 30,057 16.28 1 0.4516 % 2,159.9
Floater 2.92 % 3.28 % 86,200 18.96 3 -1.9893 % 1,610.9
OpRet 4.98 % 3.81 % 135,650 0.94 14 0.1757 % 2,179.5
SplitShare 5.82 % 5.88 % 60,155 4.25 3 -0.0611 % 1,872.9
Interest-Bearing 5.99 % 7.57 % 25,082 0.54 1 0.0000 % 1,989.2
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 -0.0174 % 1,734.4
Perpetual-Discount 6.33 % 6.35 % 160,883 13.37 71 -0.0174 % 1,597.4
FixedReset 5.68 % 4.79 % 557,261 4.36 39 0.0137 % 2,008.9
Performance Highlights
Issue Index Change Notes
TRI.PR.B Floater -5.25 % Not necessarily a meaningful decline, as this traded 1,975 shares in a range of 16.01-17.15 before closing at 16.25-10, 3×10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 16.25
Evaluated at bid price : 16.25
Bid-YTW : 2.44 %
NA.PR.M Perpetual-Discount -2.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 23.72
Evaluated at bid price : 23.91
Bid-YTW : 6.35 %
MFC.PR.B Perpetual-Discount -1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 18.60
Evaluated at bid price : 18.60
Bid-YTW : 6.29 %
PWF.PR.K Perpetual-Discount -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 18.78
Evaluated at bid price : 18.78
Bid-YTW : 6.70 %
GWO.PR.I Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 17.55
Evaluated at bid price : 17.55
Bid-YTW : 6.43 %
BMO.PR.J Perpetual-Discount -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 18.66
Evaluated at bid price : 18.66
Bid-YTW : 6.09 %
NA.PR.L Perpetual-Discount -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 19.75
Evaluated at bid price : 19.75
Bid-YTW : 6.22 %
TD.PR.C FixedReset 1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 25.96
Bid-YTW : 4.86 %
CM.PR.E Perpetual-Discount 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 21.75
Evaluated at bid price : 21.75
Bid-YTW : 6.54 %
BAM.PR.J OpRet 1.37 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 22.21
Bid-YTW : 7.36 %
BAM.PR.M Perpetual-Discount 1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 16.05
Evaluated at bid price : 16.05
Bid-YTW : 7.59 %
ELF.PR.F Perpetual-Discount 1.81 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 18.56
Evaluated at bid price : 18.56
Bid-YTW : 7.29 %
BAM.PR.N Perpetual-Discount 2.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 15.96
Evaluated at bid price : 15.96
Bid-YTW : 7.63 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.P FixedReset 128,920 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 6.76 %
RY.PR.R FixedReset 99,685 National bought two lots of 10,000 from RBC at 26.95, then crossed 30,000 at 27.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.96
Bid-YTW : 4.52 %
MFC.PR.E FixedReset 98,740 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 25.17
Bid-YTW : 5.53 %
TD.PR.M OpRet 88,225 RBC crossed 75,000 at 26.10, then another 10,000 at the same price.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2013-10-30
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 3.81 %
BNS.PR.X FixedReset 66,350 National bought 10,000 from Scotia at 27.10, then crossed 30,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.02
Bid-YTW : 4.65 %
BNS.PR.Q FixedReset 56,779 RBC crossed 25,000 at 24.99, then bought 10,000 from National at the same price. It is interesting to note that BNS.PR.Q carries terms of 5.00%+170 resetting in October 2013 and trades in block size at par … while today’s new BMO issue is 5.40%+241 resetting in February 2015. Huh. Make of it what you will … that’s a pretty hefty new issue concession … or something.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-10
Maturity Price : 24.86
Evaluated at bid price : 24.91
Bid-YTW : 4.58 %
There were 51 other index-included issues trading in excess of 10,000 shares.
Seminars

FloatingRate Video Seminar Accredited for CE Hours

I am pleased to announce that the Seminar on FloatingRate issues has been accredited for four hours of IDA Continuing Education – Professional Development.

Note that this seminar does not cover FixedResets; it deals exclusively with the issues eligible for the HIMIPref™ sub-indices comprising FloatingRate; that is, Ratches, FixedFloaters and Floaters.

Access to the material may be purchased by clicking the icon below:

New Issues

New Issue: BMO FixedReset 5.40%+241

Issue: Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 23

Size: 8-million shares (=$200-million) + greenshoe 3-million shares (=$75-million)

Dividends: 5.40% (=$1.35 annually); reset to 5-Year Canadas + 241bp each Reset Date. First dividend lovely and fat at $0.58808 payable November 25, 2009, assuming a June 19 close.

Reset Dates: February 25, 2015 and every five years thereafter.

Convertable: By holder every Reset Date to and from Series 24, which pay 3-month bills +241bp, reset quarterly.

Redeemable: Every Reset Date at $25.00. Series 24 is redeemable every Reset Date at $25 and at $25.50 at all other times.

BMO Press Release.

Update: I am advised on good authority that the size of the deal has been increased to 14-million shares (=$350-million) with a 2-million share greenshoe (=$50-million).

Update, 2009-6-19: Press Release confirming the size increase.

Market Action

June 9, 2009

Here’s another good reason to avoid working for a bank:

Treasury Secretary Timothy Geithner said federal bank regulators and the Securities and Exchange Commission will play key roles in the administration’s effort to change the way financial executives are paid.

Geithner said the Obama administration is moving ahead with its guidelines on corporate compensation, part of a broader plan for an overhaul of financial regulation that will be announced next week. Changes are needed so bank executives aren’t enticed to take on too much risk, he said.

You will note that regulators are the chosen method of enforcement, not ownership – so efforts to repay TARP funds will only go so far. It will be most interesting to see how this plays out … will the big banks start contracting out work they want done properly? Or will they embrace the Canadian cult of mediocrity?

DBRS today revised its methodology for Secured Leveraged Loans:

Under the revised policy, the result of any notch-up of the instrument rating for a high-yield issuer will be limited to an instrument rating of BBB (low), regardless of the level of the recovery rating that may have been assigned to the instrument.

In assigning ratings to leveraged finance (i.e., high-yield) issues, DBRS first assigns an issuer rating that reflects the default risk of the issuer itself, then assigns separate recovery ratings and instrument ratings to the issuer’s specific debt instruments. The instrument rating is a blend of both the issuer rating and the recovery rating and, therefore, may be notched up from the issuer rating in cases where the recovery rating reflects above-average post-default recovery prospects. Likewise, the instrument rating may be notched down in cases where the recovery rating reflects diminished recovery prospects.

The likelihood of default is more remote for investment-grade issuers, which is why DBRS only assigns recovery ratings to non-investment-grade issuers. The effect of this policy refinement is to lessen the weighting of recovery on the instrument ratings of non-investment-grade credits that are on the cusp of becoming investment grade. DBRS believes – and empirical data demonstrates – that default is a substantial possibility for issuers in the B category and below; therefore, the recovery outlook should weigh relatively heavily on the instrument rating. As a company moves through the BB range and approaches investment grade, the likelihood of default is significantly less, and it is appropriate to restrict the beneficial impact of the recovery rating on the final instrument rating outcome.

This resulted in changes of rating for Sears MTNs:

In Sears Canada’s case, the Company was originally assigned an issuer rating of BB. However, based on DBRS’s recovery analysis, expected recovery is 90% to 100% for the MTN holders in a post-default scenario. This level of recovery equates to a recovery rating of RR1 and an MTN rating of BBB, or three notches above the issuer rating (see the DBRS rating report dated September 19, 2008).

In reviewing our leveraged finance methodology, DBRS noted that as a company moves through the BB rating range and approaches investment grade, the likelihood of default is significantly less; therefore, DBRS felt it appropriate to restrict the beneficial impact of the recovery rating on the final instrument rating outcome. Thus, the effect of this policy refinement is to lessen the weighting of recovery on the instrument ratings of non-investment-grade credits that are on the cusp of becoming investment grade.

The revised leveraged finance methodology has therefore capped Sears Canada’s MTN rating at BBB (low), two notches above the issuer rating.

… and Domtar:

Domtar was originally assigned (and maintains) an Issuer Rating of BB. However, based on DBRS’s recovery analysis, the Secured debt was assigned a recovery rating of RR1, which assumes an expected recovery of 90% to 100% in a post-default scenario. The RR1 equated to a Secured rating of BBB, or three notches above the issuer rating (see rating report dated May 12, 2009).

In reviewing our leveraged finance methodology, DBRS noted that as a company moves through the BB rating range and approaches investment grade, the likelihood of default is significantly lower. Therefore, DBRS felt it appropriate to restrict the beneficial impact of the recovery rating on the final instrument rating outcome. The effect of this policy refinement is to lessen the weighting of recovery on the instrument ratings of credits that are on the cusp between investment grade and non-investment grade.

The revised leveraged finance methodology has therefore capped Domtar’s Secured rating at BBB (low), which is effectively a two-notch upgrade above the issuer rating.

Connor Clark has announced:

the closing of the initial public offering of Canadian Banc Capital Securities Trust (“Canadian Banc” or the “Fund”). The Fund raised gross proceeds of $96,289,000 from the issuance of 3,600,000 Class A Units and 251,560 Class F Units (collectively the “Units”) at a price of $25.00 per Unit.

Excuse me for living, but this product looks completely insane to me. Expenses are:

  • 5.25% New issue selling commission on the Class A units. (one-time)
  • About maybe 0.7% issue expenses (one-time)
  • Management fee of 0.50%
  • Service fee of 0.40% on Class A units
  • 0.35% Counterparty fee
  • Ongoing expenses of 0.15%

Amortizing the issue expenses over the five year life of the fund and assuming all units are Class A gives you an MER of 2.45%. The counterparty fee is there because the fund is structured to pay the income as return of capital / capital gains.

And all for what? A FIVE YEAR investment in PERPETUAL SECURITIES. That fact alone makes my hackles rise; you can just bet it’s being sold to Granny as a five year investment. They justify this in the prospectus by using pretend-maturities:

The Portfolio Manager uses the first date upon which the securities may be called at par (rather than the legal maturity) in order to calculate duration. Based on this approach, the duration of the Indicative Portfolio is approximately 6.4 years.

The preferred share market had another strong day today, as FixedResets continued their march towards a zero percent yield-to-call!

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.1701 % 1,315.6
FixedFloater 7.02 % 5.54 % 30,356 16.23 1 2.6490 % 2,150.2
Floater 2.87 % 3.30 % 86,548 18.91 3 0.1701 % 1,643.6
OpRet 4.99 % 3.79 % 136,773 2.54 14 0.0993 % 2,175.7
SplitShare 5.82 % 6.32 % 55,642 4.25 3 1.6132 % 1,874.0
Interest-Bearing 5.99 % 7.53 % 25,248 0.54 1 0.0000 % 1,989.2
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 0.1958 % 1,734.7
Perpetual-Discount 6.33 % 6.34 % 163,038 13.46 71 0.1958 % 1,597.7
FixedReset 5.68 % 4.80 % 562,427 4.36 39 0.1791 % 2,008.7
Performance Highlights
Issue Index Change Notes
MFC.PR.C Perpetual-Discount -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 17.57
Evaluated at bid price : 17.57
Bid-YTW : 6.44 %
POW.PR.C Perpetual-Discount -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 21.97
Evaluated at bid price : 21.97
Bid-YTW : 6.73 %
BAM.PR.M Perpetual-Discount 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 15.81
Evaluated at bid price : 15.81
Bid-YTW : 7.71 %
PWF.PR.I Perpetual-Discount 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 22.63
Evaluated at bid price : 22.85
Bid-YTW : 6.66 %
RY.PR.W Perpetual-Discount 1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 20.06
Evaluated at bid price : 20.06
Bid-YTW : 6.17 %
GWO.PR.J FixedReset 1.56 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 4.88 %
BAM.PR.N Perpetual-Discount 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 15.55
Evaluated at bid price : 15.55
Bid-YTW : 7.84 %
CM.PR.P Perpetual-Discount 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 21.69
Evaluated at bid price : 21.97
Bid-YTW : 6.34 %
GWO.PR.I Perpetual-Discount 1.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 17.75
Evaluated at bid price : 17.75
Bid-YTW : 6.36 %
POW.PR.D Perpetual-Discount 2.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 19.13
Evaluated at bid price : 19.13
Bid-YTW : 6.66 %
BAM.PR.G FixedFloater 2.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 25.00
Evaluated at bid price : 15.50
Bid-YTW : 5.54 %
BNA.PR.C SplitShare 6.89 % Asset coverage of 1.9-:1 as of May 29 according to the company.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 15.51
Bid-YTW : 10.89 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.P FixedReset 268,697 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.38
Bid-YTW : 6.74 %
MFC.PR.E FixedReset 103,352 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 25.18
Bid-YTW : 5.51 %
BNS.PR.P FixedReset 72,452 RBC crossed 60,500 at 25.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 25.10
Evaluated at bid price : 25.15
Bid-YTW : 4.80 %
RY.PR.D Perpetual-Discount 61,662 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-09
Maturity Price : 18.45
Evaluated at bid price : 18.45
Bid-YTW : 6.17 %
BNS.PR.T FixedReset 56,900 RBC crossed 46,500 at 27.18.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.13
Bid-YTW : 4.54 %
CM.PR.M FixedReset 43,600 National Bank crossed 25,000 at 27.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.22
Bid-YTW : 4.98 %
There were 46 other index-included issues trading in excess of 10,000 shares.
Issue Comments

YPG.PR.A & YPG.PR.B: Normal Course Issuer Bid

Yellow Pages Income Fund has announced:

that its subsidiary YPG Holdings Inc. has received approval from the Toronto Stock Exchange on its notice of intention to make a normal course issuer bid for its first preferred shares through the facilities of the Toronto Stock Exchange from June 11, 2009 to no later than June 10, 2010, in accordance with applicable regulations of the Toronto Stock Exchange.

Under its normal course issuer bid, YPG Holdings intends to purchase for cancellation up to but not more than 1,200,000 and 800,000 of its outstanding first preferred shares, series 1 and first preferred shares, series 2, respectively, representing 10% of the public float of each series of first preferred shares outstanding on June 9, 2009. YPG Holdings currently has 12,000,000 first preferred shares, series 1 and 8,000,000 first preferred shares, series 2 issued and outstanding. Within the past 12 months, YPG Holdings has not purchased any of its first preferred shares. The average daily trading volumes of YPG Holdings’ first preferred shares, series 1 and first preferred shares, series 2 for the period between December 1, 2008 and May 31, 2009 were 17,290 and 20,929, respectively. In accordance with the rules of the Toronto Stock Exchange, the maximum numbers of first preferred shares, series 1 and first preferred shares, series 2 that can be purchased on a daily basis by YPG Holdings are respectively 4,322 and 5,232, subject to the block purchase exception.

YPG Holdings believes that the trading price of the series 1 and series 2 first preferred shares may from time to time not reflect the fundamentals and future prospects for the business of YPG Holdings and the Fund. YPG Holdings’ directors have authorized this normal course issuer bid and, in their opinion, such purchases are in the best interest of YPG Holdings and its securityholders and constitute an appropriate use of YPG Holdings’ funds.

The yields of YPG.PR.A and YPG.PR.A were discussed on PrefBlog last March; while the junkier credits have surged in price since then, they closed last night at 22.50-73 (7.82-50%) and 17.46-69 (10.98-76%), giving interest equivalent yields well in excess of, for instance, the YPG 5.25 of 2016, currently quoted to yield 7.48%.

Not much has happened as yet on this news, although prices have moved up … YPG.PR.A is now 22.61-87 and YPG.PR.B is now 17.71-99. Note that today is the last cum-dividend date for the current coupon: it goes ex-Dividend tomorrow.

It is not my normal practice to comment on NCIB’s unless the company has a history of actually putting up a little actual cash to back up their press release … but in this case spreads are so extreme that a healthy company might well consider a buy-back attractive.

Market Action

June 8, 2009

More evidence that the credit markets are mending, this time from the CDO market:

A “remarkable change” in investor sentiment has doubled the price of some collateralized loan obligation securities in the past month, according to Morgan Stanley analysts.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk, or junk, loans and slice them into securities of varying risk and return. Pieces graded AA, the third highest-level of investment grade, rose from 23 cents on the dollar to 47 cents in the past month, Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a June 5 report. Securities ranked A have gained 13 cents from 10 cents since the end of last month, the report said.

Ares Management LLC and Boston-based Sankaty Advisors LLC are among investors that started bidding on CLO securities in late April and the first week of May. Prices for the single-A portions had dropped 90 percent since the financial crisis began in 2007 even as the loans packaged in them had regained some their value. The S&P/LSTA U.S. Leveraged Loan 100, an index of loans rated below investment grade, rose 12 cents from Dec. 31 to 73.6 cents on the dollar on May 1. Loans have since increased in value to 79 cents.

“The continuing rally in underlying leveraged loans has been a major driver of this change in investor sentiment,” on CLOs, the analysts wrote in the report. A “fierce rally” is under way, they wrote.

The top-rated CLO bonds have risen from 71 cents on the dollar to 77 cents since May, the report said.

At the same time, hedge fund financing is getting a little harder:

HSBC Holdings Plc’s U.S. securities division will no longer extend structured financing to hedge-fund investors to leverage their investments, a person familiar with the company’s plans said.

The bank is halting the financing by its structured-funds products division and eliminating an unspecified number of jobs in New York, said the person, who asked not to be identified because the information hasn’t been made public. The group reports to Steven Phan, global head of the investment access and solutions groups in London, the person said. Phan declined to comment.

Remember those charts comparing the current bear to others? They’re looking a lot better now, but into the breach step Barry Eichengreen & Kevin H. O’Rourke, just in case anybody’s feeling cheerful, with a piece on VoxEU A Tale of Two Depressions:

This is an update of the authors’ 6 April 2009 column comparing today’s global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion — today’s crisis is at least as bad as the Great Depression.


Click for big


Click for big

On a brighter note, equities were rescued from a bad day by Nobel Laureate Paul Krugman:

The U.S. economy probably will emerge from the recession by September, Nobel Prize-winning economist Paul Krugman said.

“I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer,” he said in a lecture today at the London School of Economics. “Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing.”

FixedResets had another good day, bringing the median YTW down to 4.81%. Since 5-Year Canadas have now gapped up to 2.69%, it is interesting to speculate on the terms of the next FixedReset issue. Could a bank do something at 5.00%+230?

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0973 % 1,313.4
FixedFloater 7.20 % 5.72 % 30,134 16.00 1 0.0000 % 2,094.7
Floater 2.87 % 3.31 % 79,559 18.89 3 0.0973 % 1,640.8
OpRet 5.00 % 3.80 % 137,033 2.54 14 -0.0596 % 2,173.5
SplitShare 5.91 % 5.80 % 51,469 4.25 3 -0.0620 % 1,844.3
Interest-Bearing 5.99 % 7.49 % 25,292 0.54 1 -1.2821 % 1,989.2
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 -0.0125 % 1,731.3
Perpetual-Discount 6.34 % 6.35 % 163,873 13.46 71 -0.0125 % 1,594.5
FixedReset 5.69 % 4.81 % 568,541 4.36 39 0.1293 % 2,005.1
Performance Highlights
Issue Index Change Notes
ELF.PR.F Perpetual-Discount -2.87 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 18.26
Evaluated at bid price : 18.26
Bid-YTW : 7.41 %
STW.PR.A Interest-Bearing -1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2009-12-31
Maturity Price : 10.00
Evaluated at bid price : 10.01
Bid-YTW : 7.49 %
RY.PR.W Perpetual-Discount -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 19.76
Evaluated at bid price : 19.76
Bid-YTW : 6.27 %
BAM.PR.I OpRet -1.19 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2013-12-30
Maturity Price : 25.00
Evaluated at bid price : 24.02
Bid-YTW : 6.83 %
NA.PR.K Perpetual-Discount -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 23.28
Evaluated at bid price : 23.55
Bid-YTW : 6.27 %
POW.PR.C Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 21.97
Evaluated at bid price : 22.24
Bid-YTW : 6.63 %
PWF.PR.L Perpetual-Discount 1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 19.52
Evaluated at bid price : 19.52
Bid-YTW : 6.64 %
BAM.PR.J OpRet 1.25 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 21.94
Bid-YTW : 7.54 %
CIU.PR.A Perpetual-Discount 2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 19.20
Evaluated at bid price : 19.20
Bid-YTW : 6.04 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.E FixedReset 149,351 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 5.54 %
BAM.PR.P FixedReset 111,109 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 6.76 %
TD.PR.N OpRet 83,019 TD crossed 41,000 at 26.06; RBC crossed 39,800 at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-05-30
Maturity Price : 25.75
Evaluated at bid price : 26.07
Bid-YTW : 3.68 %
TD.PR.P Perpetual-Discount 79,020 TD crossed 25,000 at 21.35; RBC bought 34,800 from Nesbitt at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 6.27 %
BNS.PR.Q FixedReset 57,703 Nesbitt crossed 40,000 at 24.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 24.81
Evaluated at bid price : 24.86
Bid-YTW : 4.58 %
PWF.PR.E Perpetual-Discount 47,105 Nesbitt bought 13,000 from RBC at 21.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-06-08
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 6.56 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Issue Comments

KSP.UN Downgraded to Pfd-4 by DBRS

DBRS has announced that it:

has today downgraded the LROC Preferred Units issued by Kingsway Linked Return of Capital Trust to Pfd-4 from Pfd-3. The rating remains Under Review with Negative Implications, where it was initially placed on February 10, 2009.

The LROC Preferred Units are supported by an exposure to a note guaranteed by Kingsway Financial Services Inc. and Kingsway America Inc. (collectively, Kingsway) through a forward purchase agreement. The downgrade of the LROC Preferred Units is a result of DBRS downgrading the long-term debt ratings of Kingsway on June 4, 2009, to BB (low) from BBB (low) and leaving the ratings Under Review with Negative Implications.

The DBRS downgrade of Kingsway has been previously discussed on PrefBlog.

KSP.UN is not tracked by HIMIPref™.

Interesting External Papers

Natural Level of Interest Rates

Assiduous Readers will know I often use the Interesting External Papers section of PrefBlog as my notepad when reviewing the literature for my own purposes. And that is exactly what this post is … not so much for readers’ information, but for mine, when I want to find this stuff again!

The Bank of Canada Review of Spring 2003 contained an essay by David Longworth, Deputy Governor and life-time employee of the Bank, titled Inflation Targeting and Medium Term Planning: Some Simple Rules of Thumb:

Real long-term bond rates typically average slightly above long-term real growth rates.

Footnote: This has tended to be the case in Canada over the last 20 years. Economic theory would suggest that the real rate of return on capital would exceed the real growth rate of the economy. As long as the risk premium on private capital relative to government bonds is not too large, we would also expect that the real yield on government bonds would be slightly higher than the real growth of the economy. All this is strictly true only in a closed economy. In a small open economy, this real interest rate would reflect the world real interest rate, which in turn would reflect the real growth rate of the world economy.

The Congressional Budget Office has published its December 2007 Background Paper: How CBO Projects the Real Rate of Interest on 10-Year Treasury Notes:

This background paper summarizes CBO’s methods for calculating the natural rate of interest and applying it in projections of the real and nominal interest rates on 10-year Treasury notes.

Estimating the natural rate of interest, either over history or for projections, is a two-step procedure. First, CBO estimates the real return on capital (adjusted for taxes on profits). That estimate is based on the agency’s view of the economy’s physical production process—how capital and labor are used to produce output and generate complementary income payments to capital and labor. Because all output simultaneously generates income, data from either the income side or the product (output) side of the national income and product accounts (NIPAs), compiled by the Bureau of Economic Analysis, can be used. Second, CBO estimates an adjustment for the risk in actually realizing the return on capital. Because part of the return on capital is compensation for the risk that some firms will default and inflict losses on investors, an estimate of the real rate based on income payments from capital is higher than the natural rate. Therefore, that risk premium must be removed to yield an estimate of the natural rate. That rate is comparable to the real rate on 10-year Treasury notes, which is also free of default risk. In particular, the risk premium is based on a weighted average of separate estimates of the risk of holding equity and debt claims on capital; it also includes an adjustment for the different tax treatment of profits and interest payments generated by businesses.

Over the next 10 years, CBO projects, the natural rate of interest will decline slightly, from an estimated level of about 3.6 percent in 2006 to about 3 percent. That decline stems from a projected decline in the return on capital, much of which reflects a projected slowdown in the growth of the labor force.

CBO uses two complementary approaches for estimating the return on capital, one from the income side and the other from the product, or production, side.1 The income-based approach measures the rate of return on capital as the ratio of capital income to the capital stock. Its construction has the advantage of being independent of assumptions about production relationships or determinations of whether the economy is in or out of equilibrium. It provides a relatively smooth estimate of the return on capital over the historical and projection periods.

The income-side measure is estimated as the ratio of capital income to the capital stock (see Figure 2). Capital income is a domestic private-sector concept estimated as the sum of domestic corporate profits, people’s rental income, 35 percent of proprietors’ income, and interest paid by domestic businesses, using data from the NIPAs2,3 The private-sector capital stock, valued at the prices of newly produced investment goods, consists of businesses’ plant (that is, facilities) and equipment, software, inventories, housing, and land—all valued at current market prices.

The income-side measure of the return on capital has both cyclical and trend components. From 1960 to 1970 and from 1991 to 2001, the return rose during the recoveries from recessions and peaked during the expansions, before falling as the expansions matured. Across business cycles, the return has exhibited extended periods in which the underlying trend was falling (as from 1960 to 1980) and then rising (from 1980 to the late 1990s).

The estimate of the natural rate of interest is obtained by adjusting the real return on capital (in this instance, the income-side measure) for both tax effects and the combined risk premium (see Figure 7).


Click for big

Thomas Laubach & John C. Williams, Measuring the Natural Rate of Interest:

A key variable for the conduct of monetary policy is the natural rate of interest – the real interest rate consistent with output equaling potential and stable inflation. Economic theory implies that the natural rate of interest varies over time and depends on the trend growth rate of output. In this paper we apply the Kalman filter to jointly estimate the natural rate of interest, potential output, and the trend growth rate, and examine the empirical relationship between these estimated unobserved series. We find substantial variation in the natural rate of interest over the past four decades in the United States. Our natural rate estimates vary about one-for-one with changes in the trend growth rate. We show that policymakers’ mismeasurement of the natural rate of interest can cause a significant deterioration in macroeconomic stabilization.

FRBSF Economic Letter, 2003-10-31:

Importantly, the natural rate of interest can change, because highly persistent changes in aggregate supply and demand can shift the lines. For example, in a recent paper, Laubach (2003) finds that increases in long-run projections of federal government budget deficits are related to increases in expected long-term real interest rates; in Figure 1, an increase in long-run projected budget deficits would be represented by a rightward shift in the IS curve and a higher natural rate. In addition, economic theory suggests that when the trend growth rate of potential GDP rises, so does the natural rate of interest (see Laubach and Williams (2003) for supporting evidence).

Interesting External Papers

Breakeven Inflation and Inflation Expectations

Econbrowser‘s Menzie Chinn wrote a recent post asking everybody to take a deep breath and calm down a little about inflation, titled High Anxiety (about Interest and Inflation Rates):

Of course, the United States in 2009 is different than Japan in 2001. One key difference is that Japan was, and remains, a net creditor. America is a big net debtor to the rest of the world, with extremely large holdings of US Treasurys by foreign private and state actors. And so, for me, I worry more about higher real interest rates (portfolio balance effects) than higher inflation. But even here, real yields according to TIPS seems fairly low in historical perspective (and roughly comparable to those prevailing during the period characterized as “the saving glut”).

My bottom line: Think, and recollect, before panicking.

In the post, he referenced a paper by Stefania D’Amico, Don H. Kim and Min Wei (all of the Fed’s Division of Monetary Affairs), Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices:

We examine the informational content of TIPS yields from the viewpoint of a general 3-factor no-arbitrage term structure model of inflation and interest rates. Our empirical results indicate that TIPS yields contained a “liquidity premium” that was until recently quite large (~ 1%). Key features of this premium are difficult to account for in a rational pricing framework, suggesting that TIPS may not have been priced efficiently in its early years. Besides the liquidity premium, a time-varying inflation risk premium complicates the interpretation of the TIPS breakeven inflation rate (the difference between the nominal and TIPS yields). Nonetheless, high-frequency variation in the TIPS breakeven rates is similar to the variation in inflation expectations implied by the model, lending support to the view that TIPS breakeven inflation rates are a useful proxy for inflation expectations.

This paper was cited by Grishenko & Huang (which has been discussed on PrefBlog), who emphasize:

In a related study, the long-run averages of inflation risk premium in D’Amico, Kim, and Wei (2006) can be positive or negative depending on the different series that they use to fit the three-factor term-structure model.

Footnote: See Figures 4 through 6 in their paper.

Back to D’Amico et al.:

Specifically, we model the dynamics of nominal yields, inflation, and TIPS yields in a general no-arbitrage term structure model setting, and examine the extent to which these data are consistent with each other. Furthermore, we seek to establish some basic facts about the real term structure and the inflation risk premia implicit in nominal bond yields and to obtain an estimate of the “liquidity premium” in TIPS yields.

Our main results can be summarized as follows. In all the cases that we have examined, estimating the model taking TIPS yields at their face value fails to produce plausible estimates of inflation expectations or inflation risk premia. The difference between the observed TIPS yields and the model-implied real yields estimated without TIPS data indicates that the “liquidity premium” was quite large in the early years of TIPS’s existence, but has become smaller recently. This liquidity premium turns out to be difficult to account for within a simple rational pricing framework, suggesting that TIPS may not have been priced efficiently in their early years. Nonetheless, time variation in TIPS-based and model-implied breakeven rates are quite similar, suggesting that changes in the TIPS breakeven rates largely reflects changes in inflation expectations or in the investors’ attitude toward inflation risks, rather than being random movements.

They conclude:

The answer to the question of whether the TIPS breakeven rate can be taken as inflation expectation is more complicated. We find that the weekly changes in the model-implied 10-year inflation expectation tend to line up with the weekly changes in the 10-year TIPS breakeven rate. However, we also find that time variation in the inflation risk premium and the TIPS liquidity premium, the latter of which may also include other unaccounted-for effects, are often significant enough to drive a wedge between the qualitative behavior of the breakeven rates and inflation expectations. Our findings in this paper provide support for the use of TIPS breakeven rate information as a proxy for inflation expectations, but also provide a justification for caution. Indeed, in speeches that touch on inflation, policy makers often refer to the TIPS breakeven rate, but they also recognize that the interpretation of this measure is complicated by inflation risk premia and liquidity issues and then continue to monitor a large number of variables to gauge inflation expectations and underlying inflation pressures. More data and more work on TIPS modeling in the future will ndoubtedly shed more light on the informational content of TIPS prices.