PrefBlog

Ireland looks like it’s heading for the debt trap:

Ireland will today try to sell as much as 1.5 billion euros ($1.96 billion) in bonds as the government tries to convince investors the country can avoid a European Union bailout.

One day after the premium on Irish 10-year debt over German equivalents rose to a record, the Dublin-based National Treasury Management Agency is offering between 1 billion euros and 1.5 billion euros of four- and eight-year bonds. The auction results will be announced after 10 a.m.

Investors’ concerns about the fiscal health of some euro nations are resurfacing four months after the EU announced an almost $1 trillion rescue package to stamp out contagion from Greece’s fiscal crisis. The spread on Irish debt over bunds yesterday exceeded 400 basis points as the government struggles to cap the cost of bailing out its banking system. In Portugal, the spread climbed as high as 399 basis points.

The Bank Act review cycle has started again:

The Honourable Jim Flaherty, Minister of Finance, today launched the scheduled review of legislation governing federally regulated financial institutions.

“The Government reviews the statutes that govern federally regulated financial institutions every five years to ensure Canada remains a global leader in financial services,” said Minister Flaherty. “This practice sets Canada apart from almost every other country in the world.”
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“Some fine-tuning to the system may be required, but wholesale change is not necessary,” he said. “The Government would like to hear the views of all Canadians on how to improve our financial system.”

My wish-list includes greater clarity on the status of Bankers’ Acceptances in bankruptcy (are they covered bonds? Can investors look through the bank guarantee to the actual issuer of the paper?) and a requirement that the seniority of instruments within the “general” bucket be specified … if I own a BDN, is that more or less senior than a BA?

The FOMC Statement was gloomy:

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

and accordingly:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

This had an effect:

Gold rose to a record, Treasury two-year yields slid to an all-time low while the dollar weakened as the Federal Reserve said it’s willing to ease monetary policy further if needed to boost the economy. Most U.S. stocks fell.

Gold futures surged as much as 0.9 percent to $1,292.40 an ounce as of 4 p.m. in New York as the dollar depreciated against 15 of 16 major counterparts. The 10-year Treasury yield lost 13 basis points to 2.58 percent and the 2-year yield slid to a record low of 0.4155 percent.

Quadravest, purveyor of SplitShare funds, has announced:

Dividend Select 15 Corp. (“The Company”) is pleased to announce the filing of a preliminary prospectus dated September 17, 2010 for a proposed new offering of equity shares at $10.00 per share.
The Company has been created to provide investors with an opportunity to invest in a portfolio (the “Portfolio”) of 15 high quality Canadian companies (the “Portfolio Companies”) whose shares provide an attractive dividend yield, and which have shown solid earnings growth and have a history of capital appreciation. The Company will employ a covered call writing strategy to generate additional income to the Portfolio. The 15 Portfolio Companies will be selected from among the following 20 companies listed on the Toronto Stock Exchange: [Usual suspects – JH]

Interestingly, the prospectus makes the flat statement:

The Company will not borrow money or use leverage as part of its investment strategies.

In accordance with the usual state of affairs, the prospectus fully discloses the investment managers’ experience, but is completely silent regarding the investment managers’ performance.

The Canadian preferred share market continued to move from strength to strength on heavy volume today, with PerpetualDiscounts up 27bp and FixedResets gaining 18bp.

Stub quotes will be butted out:

NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets sought permission from regulators yesterday to eliminate stub quotes, or bids and offers as low as pennies or as high as thousands of dollars provided by market makers that were blamed for worsening the May 6 crash.
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Stub quotes are placeholders provided by market makers at prices as low as 1 cent to satisfy a regulatory obligation to submit both bids and offers. Transactions aren’t meant to occur at those levels.

I don’t understand why stub quotes were ever allowed in the first place. As some HFT firms have pointed out:

In exchange for meeting stricter obligations, market makers are generally given advantages over other market participants, which act like subsidies,” RGM, Hudson River, Allston and Quantlab said in their letter. “These advantages have typically involved preferential access to the markets, lower fees and informational advantages. These advantages come at a substantial cost for all investors as they degrade competition and raise barriers to entry for new participants.”

Why market makers would be permitted to pay for these presumably valuable privileges with stub quotes is quite beyond me.

The pointless nature of financial journalism was well illustrated by two stories published back to back. The first was Fed Will Retain Policy on Assets, Low-Rate Pledge, Survey Shows:

The Federal Reserve next week is likely to affirm its pledge to keep interest rates low for an “extended period” and maintain the floor on its holdings of securities, say economists surveyed by Bloomberg News.

The Fed’s Open Market Committee at its Sept. 21 meeting will hold off from expanding the balance sheet by purchasing securities, according to 60 of 64 analysts surveyed Sept. 16-17. Fifty-four of 63 economists said the Fed will leave unchanged a sentence saying high unemployment and low inflation warrant “exceptionally low” rates for an “extended period.”

… and the second was Treasury Notes Gain on Bets Fed’s Statement Will Signal More Accommodation:

Treasury 10-year notes rose for the first time in four weeks as traders speculated the Federal Reserve will be more accommodative in its policy statement next week as the economic recovery showed signs of stalling.

A rally in two-year notes pushed yields down this week the most since May after the central bank bought shorter-maturity government debt and as investors bet that Japan’s purchases of securities will favor the front end of the U.S. yield curve after it sold the yen to weaken its currency. Notes climbed before the Sept. 21 Fed meeting as the annual rate of inflation excluding food and energy stayed at a 44-year low.

There’s a negative CDS basis in bank bonds:

Gaps between credit-default swaps and bonds have widened to 25 basis points from less than 2 basis points about three months ago, according to Citigroup Inc. Pimco, the manager of the world’s largest bond fund is finding as much as 1 percent of extra yield even after paying to insure bank debt, said Mark Kiesel, a managing director at the Newport Beach, California- based firm.

A rally that started in June may gain momentum as the divergence between swaps and yields gives investors extra incentive to own corporate debt. The increase in the so-called negative basis is attracting buyers that seek to profit by buying the debt while also purchasing credit swaps.
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The 100-basis-point gaps Pimco is identifying in bank bonds and 25 basis points in the broader market compare with the average difference of more than 250 basis points after the bankruptcy of Lehman Brothers Holdings Inc. two years ago, just before bonds posted a record rally. The all-time wide gaps emerged as credit markets seized up, causing bond spreads to soar while demand for swap protection failed to keep up.

“When capital is scarce, the basis becomes more negative,” said Alberto Gallo, a New York-based strategist at Goldman Sachs Group Inc. He said the basis should narrow as monetary policy and regulation reduce risk in the financial system and stabilize funding costs.

Negative-basis CDS spreads were discussed in Canadian Bond Liquidity Premia

I have sent the following communication to Canada Post and True North Public Affairs, where James Roche, Chairman of the Canada Post Foundation for Mental Health, has his day-job:

Sirs,

One of your clerks advised me that you were “collecting for mental health” today while I was purchasing stamps and requested a donation.

I strongly object to being importuned by beggars while going about my business and wish to advise you that I will have my first class mail serviced by your competitors in future.

I have often observed that precious little do-gooders tend to behave as thugs and therefore have a question: do you make it clear to your front-line staff that participation in this disgraceful exhibition of poor manners is entirely voluntary and there will be no repercussions on those who do not wish to humiliate themselves by begging? Or are they forced to participate as a condition of employment?

Sincerely,

Beggars! It’s enough to make a strong man go postal!

Hellzapoppin’ on the Canadian preferred share market today, with PerpetualDiscounts up 55bp and FixedResets gaining 12bp on heavy volume.

Ireland needs some green:

Treasuries rose while the cost to insure Irish government bonds jumped to a record amid concern that Europe’s debt crisis is worsening and American consumer confidence is slumping.
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The yield on the 10-year Irish bond surged 26 basis points to 6.29 percent in London. The spread with German bunds widened to as much as 389 basis points, or 3.89 percentage points, the most on record, according to Bloomberg generic data.
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Corporate creditworthiness in Europe is the best ever compared with governments, credit-default swap prices show, as companies cut debt while governments struggle with budget deficits.

The difference between the Markit iTraxx Europe Index of corporate credit-default swaps and the Markit iTraxx SovX Western Europe Index of contracts tied to government debt widened 1 basis point to a record 49, according to data from CMA and JPMorgan Chase & Co.

I don’t think there’s much need to worry. I think all those patriotic Americans who funded the IRA back in the eighties will be overjoyed to cut cheques to help out the old country.

Speaking of Europe, there’s a very good article on Greece, with the obligatory “It’s all Goldman Sachs’ fault” paragraph in the middle, by Michael Lewis, titled Beware of Greeks bearing bonds (hat tip: Financial Webring Forum).

A day of big volume on the Canadian preferred share market, with very strong returns: PerpetualDiscounts were up 45bp and FixedResets gained 12bp.

Nothing happened today.

Volume was very good on the Canadian preferred share market, while PerpetualDiscounts were up 9bp and FixedResets gained 10bp – although the vagaries of the index calculations meant that the reported yield for FixedResets crept up 2bp (returns are a mean; YTW is a median). MFC issues were, for a change, missing from both the performance and volume highlights.