A very nice feature article in this week’s edition of Les Affaires, by Dominique Beauchamp.
Actions privilégiées : à utiliser à petite dose
and
A very nice feature article in this week’s edition of Les Affaires, by Dominique Beauchamp.
Actions privilégiées : à utiliser à petite dose
and
ISDA has announced:
that J.P. Morgan has transferred to ISDA its CDS Analytical Engine. The CDS analytical engine, originally developed by the Quantitative Research group at J.P. Morgan, is widely used in the industry to price CDS contracts. ISDA will make the analytical engine available as open source code, thereby increasing transparency around CDS pricing.
“J.P. Morgan has invested a lot of intellectual capital in this analytical engine. Its willingness to assign this to ISDA for us to make it available as open source to the entire industry demonstrates our collective commitment to the integrity of the CDS product,” said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. “ISDA and its members are vigilant to public concerns around transparency. This is yet another measure of increased standardization in CDS.”
This is interesting, particularly given the politics that are swirling around the market. Making the code available to the public could be a first step towards listing some benchmark names on an exchange. As yet, though, the details of the open-source licence are not available.
Hat-tips: Alea via Dealbreaker.
I read this a while ago … was looking for it in my “notes” (as I refer to the Interesting External Papers category of PrefBlog … and couldn’t find it!
Anyway, Joe Nocera of the New York Times wrote an excellent feature article on Value at Risk: Risk Mismanagement.
The major point to be understood is that management of Goldman Sachs used VaR in an intelligent manner:
in December 2006, Goldman’s various indicators, including VaR and other risk models, began suggesting that something was wrong. Not hugely wrong, mind you, but wrong enough to warrant a closer look.
“We look at the P.& L. of our businesses every day,” said Goldman Sachs’ chief financial officer, David Viniar, when I went to see him recently to hear the story for myself. (P.& L. stands for profit and loss.) “We have lots of models here that are important, but none are more important than the P.& L., and we check every day to make sure our P.& L. is consistent with where our risk models say it should be. In December our mortgage business lost money for 10 days in a row. It wasn’t a lot of money, but by the 10th day we thought that we should sit down and talk about it.”
So Goldman called a meeting of about 15 people, including several risk managers and the senior people on the various trading desks. They examined a thick report that included every trading position the firm held. For the next three hours, they pored over everything. They examined their VaR numbers and their other risk models. They talked about how the mortgage-backed securities market “felt.” “Our guys said that it felt like it was going to get worse before it got better,” Viniar recalled. “So we made a decision: let’s get closer to home.”
Various other elements of VaR and its critiques have been referenced in An Early Debate on Value at Risk.
The main problem as I see it is that VaR does not – and cannot – account for trends. If, for instance, you measure your daily VaR based on data from, say, an environment of steadily increasing real-estate prices, that tells you nothing – NOTHING! – about what happens when they decline. Especially if they decline suddenly and interact with factors not in your model, such as “jingle mail”.
And the other problem is – as Taleb appears to have made a career out of saying – fat tails and black swans.
Pussycat, in a desperate attempt to sound tough, is putting What-Debt? on “probation”:
[Pussycat] said his party is prepared to “swallow hard” and support the Conservative government, provided they agree to table regular updates outlining how they are living up to their commitments outlined in the federal budget.
We have now officially forgotten the lesson of hitting the wall in 1994 – I confidently predict twenty years of deficits until we hit the wall again.
Rubin has spoken out against fair-value accounting:
“I spent my whole life at Goldman Sachs believing in mark- to-market accounting, and having said that, if you look at the experience from the last two years, I think mark-to-market accounting has led to terrible vicious cycles in asset prices,” Rubin, the former U.S. Treasury secretary, said during a discussion at the 92nd St. YMCA late yesterday.
Companies including Citigroup and American International Group Inc. say mark-to-market, also known as fair-value accounting, doesn’t work when few buyers are willing to trade assets like subprime mortgages. Proponents such as the U.S. Financial Accounting Standards Board say the rule adds to transparency and gives investors information about companies.
…
Under reserve accounting, assets like loans are carried at cost, offset by reserves for potential losses.
I have stated many times that the regulatory regime should differentiate between banks and investment firms. Fair value accounting is appropriate for investment firms, at which the default assumption is that they hold assets for a short period, then sell them. Reserve accounting is often (though not always) more appropriate for banks, at which the default assumption is that they hold assets until maturity.
The FOMC released its monetary policy statement today – no real surprises.
The BoC has released an analysis of bond auction formats by Olivier Armantier and Nourredine Lafhel, examining the methods by which bonds can be auctioned. Three systems are considered:
it appears that the ranking of the two auction formats may only be established on a case-by-case basis.3 As demonstrated by A&S (2005), the presence of asymmetries across participants is an important factor in ranking auction formats in terms of the revenues they generate. Indeed, A&S show that risk averse and/or less-informed bidders may become relatively more aggressive at uniform-price auctions, since they do not have to pay their bids.
…
Table 7 also indicates that, had the Canadian government conducted the 100 auctions in our sample under the Spanish format instead of the discriminatory format, it would have significantly increased its revenues by an average of 2:34%; or close to 52:71 million dollars, per auction. Furthermore, we can see in Table 8 that, given the assumptions underlying the model, Canadian government revenues would have been higher in roughly 62% of the auctions if it had conducted them under the Spanish format. Observe also that the Spanish format dominates in an additional dimension. Indeed, we can see in Table 7 that the standard deviation of the revenues generated across the 100 auctions is the smallest under the Spanish format. In other words, the stream of revenues generated by the Canadian government from one auction to the next would have been more stable than under the current pricing rule. Finally, Table 7 indicates that the additional revenues the Canadian government would generate by switching from the discriminatory to the Spanish format, would be almost equally spread across maturities. Indeed, we are unable to detect any clear pattern in the additional revenues generated at auctions for 30, 10, 5 or 2 years bonds.
…
In other words, as found by Armantier and Sbaï (2006), the Spanish format appears to provide an appropriate compromise between asking bidders to pay up to their bids, and promoting aggressive behaviour by o¤ering participants the guarantee that they will not have to pay more than the average winning bid.
SplitShares did well today, presumably on hopes that the bad-bank bailout plan will lead to a world of smiling bankers and bonuses for everybody. Well … I wouldn’t want to say it’s a completely insane hope. I’ll just say that every effort yet to persuade banks to sell their so-called toxic assets in bulk and at a politically acceptable price has failed. I think that Caballero’s plan has a better chance of success.
Fixed-Resets were down again today while PerpetualDiscounts were up, in a continuing fine reversal of their standard form in 2008. Volume continued high. The new RY Fixed-Reset 6.25%+450 will commence trading tomorrow with the symbol RY.PR.R.
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 | 6.90 % | 7.68 % | 23,690 | 13.50 | 2 | 0.5777 % | 849.4 |
FixedFloater | 7.47 % | 6.97 % | 162,003 | 13.83 | 8 | 0.8968 % | 1,385.2 |
Floater | 5.36 % | 4.51 % | 33,519 | 16.39 | 4 | 0.1534 % | 980.5 |
OpRet | 5.31 % | 4.86 % | 160,988 | 4.04 | 15 | 0.0167 % | 2,022.8 |
SplitShare | 6.19 % | 10.12 % | 76,556 | 4.10 | 15 | 1.5794 % | 1,799.9 |
Interest-Bearing | 7.09 % | 7.93 % | 36,657 | 0.88 | 2 | -0.9748 % | 1,994.3 |
Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3495 % | 1,558.3 |
Perpetual-Discount | 6.88 % | 6.93 % | 228,524 | 12.67 | 71 | 0.3495 % | 1,435.2 |
FixedReset | 6.09 % | 5.38 % | 743,735 | 14.37 | 22 | -0.1856 % | 1,779.2 |
Performance Highlights | |||
Issue | Index | Change | Notes |
BNS.PR.P | FixedReset | -2.87 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 21.93 Evaluated at bid price : 22.00 Bid-YTW : 4.72 % |
FIG.PR.A | Interest-Bearing | -2.63 % | Asset coverage of 1.1-:1 as of January 19, based on Capital Units NAV of 1.55 and 0.53 Capital Units per preferred. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-31 Maturity Price : 10.00 Evaluated at bid price : 7.41 Bid-YTW : 12.85 % |
TD.PR.C | FixedReset | -2.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 22.96 Evaluated at bid price : 23.00 Bid-YTW : 5.30 % |
TD.PR.A | FixedReset | -2.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 22.01 Evaluated at bid price : 22.05 Bid-YTW : 4.68 % |
ELF.PR.G | Perpetual-Discount | -1.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 14.25 Evaluated at bid price : 14.25 Bid-YTW : 8.45 % |
BAM.PR.J | OpRet | -1.51 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 17.63 Bid-YTW : 10.66 % |
TD.PR.Y | FixedReset | -1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 21.51 Evaluated at bid price : 21.51 Bid-YTW : 4.56 % |
RY.PR.I | FixedReset | -1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 22.02 Evaluated at bid price : 22.06 Bid-YTW : 4.79 % |
CU.PR.B | Perpetual-Discount | -1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 22.36 Evaluated at bid price : 22.54 Bid-YTW : 6.79 % |
BCE.PR.I | FixedFloater | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 25.00 Evaluated at bid price : 15.84 Bid-YTW : 6.97 % |
CM.PR.H | Perpetual-Discount | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 16.79 Evaluated at bid price : 16.79 Bid-YTW : 7.21 % |
TD.PR.P | Perpetual-Discount | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 6.61 % |
TCA.PR.X | Perpetual-Discount | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 43.98 Evaluated at bid price : 45.01 Bid-YTW : 6.24 % |
TCA.PR.Y | Perpetual-Discount | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 44.25 Evaluated at bid price : 45.50 Bid-YTW : 6.17 % |
PWF.PR.F | Perpetual-Discount | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 18.86 Evaluated at bid price : 18.86 Bid-YTW : 7.02 % |
CM.PR.K | FixedReset | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 21.82 Evaluated at bid price : 22.30 Bid-YTW : 4.95 % |
SBC.PR.A | SplitShare | 1.14 % | Asset coverage of 1.3-:1 as of January 22, according to Brompton Group. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-11-30 Maturity Price : 10.00 Evaluated at bid price : 8.00 Bid-YTW : 12.06 % |
W.PR.J | Perpetual-Discount | 1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 19.32 Evaluated at bid price : 19.32 Bid-YTW : 7.34 % |
POW.PR.B | Perpetual-Discount | 1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 19.22 Evaluated at bid price : 19.22 Bid-YTW : 7.04 % |
BMO.PR.J | Perpetual-Discount | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 17.01 Evaluated at bid price : 17.01 Bid-YTW : 6.76 % |
PWF.PR.H | Perpetual-Discount | 1.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 20.80 Evaluated at bid price : 20.80 Bid-YTW : 6.97 % |
DFN.PR.A | SplitShare | 1.60 % | Asset coverage of 1.7-:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.10 Bid-YTW : 7.21 % |
POW.PR.C | Perpetual-Discount | 1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 21.41 Evaluated at bid price : 21.41 Bid-YTW : 6.85 % |
LFE.PR.A | SplitShare | 1.64 % | Asset coverage of 1.5-:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.50 Bid-YTW : 6.77 % |
DF.PR.A | SplitShare | 1.64 % | Asset coverage of 1.4-:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.87 Bid-YTW : 7.74 % |
BCE.PR.R | FixedFloater | 1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 25.00 Evaluated at bid price : 15.78 Bid-YTW : 6.88 % |
BMO.PR.H | Perpetual-Discount | 1.87 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 6.52 % |
BNA.PR.A | SplitShare | 1.88 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2010-09-30 Maturity Price : 25.00 Evaluated at bid price : 23.80 Bid-YTW : 10.12 % |
FBS.PR.B | SplitShare | 2.01 % | Asset coverage of 1.0-:1 as of January 22 according to TD Securities. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-12-15 Maturity Price : 10.00 Evaluated at bid price : 7.61 Bid-YTW : 15.75 % |
WFS.PR.A | SplitShare | 2.11 % | Asset coverage of 1.1+:1 as of January 22 according to Mulvihill. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-06-30 Maturity Price : 10.00 Evaluated at bid price : 8.70 Bid-YTW : 11.87 % |
PWF.PR.G | Perpetual-Discount | 2.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 21.51 Evaluated at bid price : 21.51 Bid-YTW : 6.91 % |
POW.PR.A | Perpetual-Discount | 2.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 20.89 Evaluated at bid price : 20.89 Bid-YTW : 6.78 % |
SBN.PR.A | SplitShare | 2.69 % | Asset coverage of 1.6-:1 as of January 22 according to Mulvihill. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.15 Bid-YTW : 7.12 % |
BNA.PR.C | SplitShare | 2.75 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 11.57 Bid-YTW : 15.20 % |
NA.PR.N | FixedReset | 3.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 22.15 Evaluated at bid price : 22.20 Bid-YTW : 4.78 % |
PPL.PR.A | SplitShare | 3.13 % | Asset coverage of 1.4+:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.91 Bid-YTW : 8.35 % |
FFN.PR.A | SplitShare | 3.48 % | Asset coverage of 1.1+:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 7.51 Bid-YTW : 11.27 % |
BCE.PR.G | FixedFloater | 8.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 25.00 Evaluated at bid price : 15.21 Bid-YTW : 7.18 % |
Volume Highlights | |||
Issue | Index | Shares Traded |
Notes |
LFE.PR.A | SplitShare | 153,337 | Asset coverage of 1.5-:1 as of January 15 according to the company. Desjardins crossed 150,000 at 9.50. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.50 Bid-YTW : 6.77 % |
RY.PR.P | FixedReset | 121,757 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 6.13 % |
MFC.PR.A | OpRet | 108,010 | Desjardins crossed two blocks of 50,000 each, both at 24.72. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 24.48 Bid-YTW : 4.56 % |
SLF.PR.B | Perpetual-Discount | 91,650 | Nesbitt crossed 75,000 at 16.78. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 16.64 Evaluated at bid price : 16.64 Bid-YTW : 7.32 % |
SLF.PR.A | Perpetual-Discount | 83,368 | Nesbitt crossed 75,000 at 16.60. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-28 Maturity Price : 16.63 Evaluated at bid price : 16.63 Bid-YTW : 7.25 % |
TD.PR.M | OpRet | 77,700 | Scotia crossed 74,000 at 25.79. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-10-30 Maturity Price : 25.00 Evaluated at bid price : 25.86 Bid-YTW : 3.92 % |
There were 46 other index-included issues trading in excess of 10,000 shares. |
The International Monetary Fund has released its January 28 Update to the October Global Financial Stability Report:
Financial markets worldwide reflect ongoing deleveraging pressures amidst a deepening economic downturn. In spite of extensive policies, the global financial system remains under intense stress. Moreover, worsening economic conditions are producing new, large writedowns for financial institutions. In response, balance sheets are being cut back through asset sales and the retiring of maturing credits. These actions have increased downward pressure on asset prices and reduced credit availability. Restoring financial sector functionality and confidence are necessary elements of economic recovery. However, more aggressive actions by both policymakers and market participants are needed to ensure that the necessary deleveraging process is less disorderly. A broad three-pronged approach—including liquidity provision, capital injections, and disposal of problem assets—should be implemented fully and quickly so as to encourage balance sheet cleansing. At the same time, international cooperation will be required to ensure the policy coherence and consistency needed to re-establish financial stability.
They suggest:
International cooperation on a common framework for financial policies should receive high priority. The application of substantially different conditions when supporting financial institutions should be avoided in order to prevent unintended consequences that may arise from competitive distortions and regulatory arbitrage. International coordination is also needed to avoid excessive “national bias,” whereby domestic institutions are favored or local credit provision is encouraged, to the detriment of other countries. A more consistent insolvency framework for financial institutions would also help.
There will be a chance to see a milestone in the recovery of the credit market this week – commercial paper held by the Fed will mature:
About $245 billion of 90-day commercial paper that companies sold to the Federal Reserve starting in October will mature this week and next, central bank data show. As much as $50 billion to $70 billion of the debt may be rolled over and bought by investors, according to Barclays Capital in New York.
…
Rates on AA ranked financial commercial paper due in 90 days fell to a record low of 0.28 percent on Jan. 8, or 21 basis points more than the U.S. borrowing rate, Fed data show. They have since jumped to 1.04 percent, or 94 basis points more than the government yield on 90-day Treasury bills, as investors prepared to absorb at least $486 billion of overall paper coming due this week, according to Fed data. The gap peaked at 374 basis points on Oct. 15.The Fed demands 2.24 percent to own unsecured debt, including a one percentage point fee, under its Commercial Paper Funding Facility.
…
Fed purchases declined in the first two weeks of the year as investors picked up the slack, reducing government buying to $179 million. First-tier commercial paper assets in prime money- market funds increased 26 percent to $790.6 billion as of Jan. 13, iMoneyNet data show.Purchases jumped last week to $15.7 billion, the most since November, as some companies remained unable to sell 90-day commercial paper to investors at rates below the cost of issuing to the Fed.
…
Policy makers also may force companies to wean themselves from federal help by making it “increasingly expensive” to use the CPFF, said Louis Crandall, the chief economist at Jersey City, New Jersey-based Wrightson ICAP, a research unit of ICAP Plc, the world’s largest inter-dealer broker.
The Fed should indeed be increasing its spread to get the banks inter alia to pick up the slack. This would be an important step in removing the Fed from routine intermediation and shrinking the balance sheet. Across the Curve, however, cites some street chatter to the effect that the rollover will be a non-event. But … that’s what we like. Non-events. Aren’t they lovely?
There is an encouraging sign! $150-billion in 84-day TAF money attracted only $136-billion bids and went at 0.25%. This follows a bid-to-cover of 0.72 on January 12, 0.69 on Dec 29, 0.42 on Dec 15 and 0.44 on Dec 2. So this is good. Unfortunately, the Fed is having to purchase agencies in size so don’t celebrate too soon! On the other hand – any more hands and I’ll become an economist – today’s $40-billion 2-Year auction went well and lit up the Treasury market.
I will admit though, that I am becoming a little concerned. Across the Curve contains several ecstatic references to positive carry today – for example, here and here. I heard a lot of remarks about positive carry in 1993 … and we all know what happened in 1994, don’t we?
Carney gave a speech on deflation:
It is worth noting that our lower overnight rates have largely been passed through at shorter maturities. Since the easing cycle began in December 2007, we have lowered the overnight rate by 350 basis points. The prime rate has fallen by 325 basis points, Bankers Acceptance rates (key short-term financing instruments for corporations) have fallen by about 380 basis points, and variable rate mortgages by about 185 basis points.
At longer maturities, the declines have been more modest. In part, this reflects the typical pattern, as long-term rates tend to be less volatile than short-term rates over the business cycle. For example, five-year fixed-rate mortgages have fallen by just over one and a half percentage points. Corporate bond yields have been virtually flat, as a substantial increase in the risk premium charged by investors has offset the decline in government bond yields. While the widening of spreads at longer maturities is larger than usual, this partly reflects the fact that these spreads were unusually narrow to begin with.
The Bank has taken into consideration the higher risk premiums demanded in today’s markets in setting its overnight rate. As well, it has taken into account the effect on future Canadian inflation of the lower level of foreign demand that has resulted, in part, from financial difficulties in other countries. The policy rate is lower than it otherwise would be in the absence of these difficulties.
…
To conclude, let me say that the inflation target that has served Canada so well when inflation was above the 1 to 3 per cent control range, will also serve it well when inflation falls temporarily below that range. So let me leave no doubt, no uncertainty about the Bank’s commitment. Our focus is clear, our actions consistent, and our objective explicit: 2 per cent CPI inflation.
And the Bank published another working paper, What Accounts for the U.S.-Canada Education-Premium Difference?:
This paper analyzes the differences in wage ratios of university graduates to less than university graduates, the education premium, in Canada and the United States from 1980 to 2000. Both countries experienced a similar increase in the fraction of university graduates and a similar increase in skill biased technological change based on capital-embodied technological progress, but only the United States had a large increase in the education premium. Using a calibrated Krussel et al. (2000) model, the paper finds that the cross country difference is in equal proportion due to the effective stock of capital equipment, the growth in skilled labor supply relative to unskilled labor and the relative abundance of skilled population in 1980. Growth in the working age population is unimportant for the difference.
In other words, we don’t really need a lot more graduates; what we need is money to buy equipment for existing graduates to put their skills to use. I confidently predict that this nuance will be ignored in all future political debates.
Spend-Every-Penny introduced his pre-election budget today. There are some good things … some bad things. In summary:
After taking into account the cost of the measures proposed in Budget 2009 to support the economy, the Government is projecting deficits of $1.1 billion in 2008–09, $33.7 billion in 2009–10, $29.8 billion in 2010–11, $13.0 billion in 2011–12, $7.3 billion in 2012–13 and a surplus of $0.7 billion in 2013–14.
It will take many years of $0.7-billion surpluses to pay for the planned spending, but it didn’t stop him from cutting taxes, just like Mr. Bush:
Taxpayers will begin to benefit from the proposed personal income tax reductions as soon as the Canada Revenue Agency revises its tax withholding tables, in spring 2009.
It is estimated that, together, these measures will cost $470 million in 2008–09, $1,885 million in 2009–10 and $1,950 million in 2010–11.
There is funding for new infrastructure, but no indication that recipients must have a credible plan to pay for maintenance. The word “dividend” does not appear in the document, so I will assume that implications for preferred share investment are minor.
I will reserve special scorn for the “Extraordinary Financing Framework”, partially because it is doomed to be ignored by most. Essentially, the government will provide up to $200-billion worth of intermediation, taking assets onto its books financed by sale of Canada bonds. There’s nothing wrong with that, in principle. However:
To help manage the EFF, the Government will form the Advisory Committee on Financing. This committee will include users and suppliers of financing, along with other experts. The committee will advise on financing conditions and the design, scope and scale of initiatives under the EFF.
There’s already a competent body to administer the programme: it’s called the Bank of Canada. What-Debt’s politicization of monetary policy is absurd – but, after all, he’s the guy who went out of his way to politicize nuclear power regulation.
PerpetualDiscounts managed to eke out a marginal gain today, while FixedResets continued their recent decline.
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 | 6.93 % | 7.75 % | 43,115 | 13.35 | 2 | -0.4618 % | 844.5 |
FixedFloater | 7.46 % | 7.02 % | 161,551 | 13.73 | 8 | -1.6067 % | 1,372.9 |
Floater | 5.37 % | 4.51 % | 34,065 | 16.39 | 4 | 3.7676 % | 979.0 |
OpRet | 5.31 % | 4.82 % | 151,949 | 4.04 | 15 | -0.0446 % | 2,022.5 |
SplitShare | 6.28 % | 10.44 % | 77,090 | 4.11 | 15 | 0.6697 % | 1,772.0 |
Interest-Bearing | 7.02 % | 8.25 % | 36,212 | 0.89 | 2 | 1.6910 % | 2,014.0 |
Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0337 % | 1,552.9 |
Perpetual-Discount | 6.90 % | 6.95 % | 231,245 | 12.61 | 71 | 0.0337 % | 1,430.2 |
FixedReset | 6.08 % | 5.40 % | 774,565 | 14.34 | 22 | -0.4492 % | 1,782.6 |
Performance Highlights | |||
Issue | Index | Change | Notes |
BCE.PR.G | FixedFloater | -12.44 % | Not as bad as it looks! Closed at 14.01-16.20 (!) 13×13 after trading 7,700 shares in a range of 16.00-20. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 25.00 Evaluated at bid price : 14.01 Bid-YTW : 7.83 % |
IAG.PR.C | FixedReset | -3.32 % | Still struggling with the implications of the abortive Inventory Blow-out Sale. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 22.06 Evaluated at bid price : 22.10 Bid-YTW : 6.36 % |
LBS.PR.A | SplitShare | -2.76 % | Asset coverage of 1.2+:1 as of January 22 according to Brompton Group. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2013-11-29 Maturity Price : 10.00 Evaluated at bid price : 8.11 Bid-YTW : 10.44 % |
PWF.PR.F | Perpetual-Discount | -1.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 18.65 Evaluated at bid price : 18.65 Bid-YTW : 7.10 % |
TD.PR.Q | Perpetual-Discount | -1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 20.95 Evaluated at bid price : 20.95 Bid-YTW : 6.73 % |
BMO.PR.M | FixedReset | -1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 21.95 Evaluated at bid price : 22.00 Bid-YTW : 4.44 % |
W.PR.H | Perpetual-Discount | -1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 7.42 % |
SLF.PR.A | Perpetual-Discount | -1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 16.56 Evaluated at bid price : 16.56 Bid-YTW : 7.28 % |
BNA.PR.B | SplitShare | -1.16 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2016-03-25 Maturity Price : 25.00 Evaluated at bid price : 21.26 Bid-YTW : 7.91 % |
PWF.PR.G | Perpetual-Discount | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 21.06 Evaluated at bid price : 21.06 Bid-YTW : 7.06 % |
PWF.PR.H | Perpetual-Discount | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 20.50 Evaluated at bid price : 20.50 Bid-YTW : 7.07 % |
CIU.PR.A | Perpetual-Discount | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 16.81 Evaluated at bid price : 16.81 Bid-YTW : 6.99 % |
RY.PR.F | Perpetual-Discount | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 17.24 Evaluated at bid price : 17.24 Bid-YTW : 6.47 % |
TCA.PR.Y | Perpetual-Discount | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 43.94 Evaluated at bid price : 45.00 Bid-YTW : 6.24 % |
BNA.PR.A | SplitShare | 1.13 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2010-09-30 Maturity Price : 25.00 Evaluated at bid price : 23.36 Bid-YTW : 11.34 % |
SBN.PR.A | SplitShare | 1.14 % | Asset coverage of 1.6-:1 as of January 22 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.91 Bid-YTW : 7.67 % |
SBC.PR.A | SplitShare | 1.15 % | Asset coverage of 1.3-:1 as of January 22 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-11-30 Maturity Price : 10.00 Evaluated at bid price : 7.91 Bid-YTW : 12.40 % |
BNS.PR.K | Perpetual-Discount | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 19.08 Evaluated at bid price : 19.08 Bid-YTW : 6.34 % |
GWO.PR.F | Perpetual-Discount | 1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 21.70 Evaluated at bid price : 22.00 Bid-YTW : 6.79 % |
BAM.PR.K | Floater | 1.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 7.60 Evaluated at bid price : 7.60 Bid-YTW : 7.01 % |
BMO.PR.K | Perpetual-Discount | 1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 19.60 Evaluated at bid price : 19.60 Bid-YTW : 6.84 % |
POW.PR.A | Perpetual-Discount | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 20.38 Evaluated at bid price : 20.38 Bid-YTW : 6.95 % |
PPL.PR.A | SplitShare | 1.64 % | Asset coverage of 1.4+:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.68 Bid-YTW : 9.26 % |
ALB.PR.A | SplitShare | 1.66 % | Asset coverage of 1.1-:1 as of January 22 according to Scotia. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-02-28 Maturity Price : 25.00 Evaluated at bid price : 20.23 Bid-YTW : 15.80 % |
NA.PR.K | Perpetual-Discount | 1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 20.72 Evaluated at bid price : 20.72 Bid-YTW : 7.09 % |
BAM.PR.N | Perpetual-Discount | 1.75 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 12.22 Evaluated at bid price : 12.22 Bid-YTW : 9.91 % |
FTN.PR.A | SplitShare | 2.08 % | Asset coverage of 1.3+:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2015-12-01 Maturity Price : 10.00 Evaluated at bid price : 7.86 Bid-YTW : 9.77 % |
ELF.PR.F | Perpetual-Discount | 2.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 15.60 Evaluated at bid price : 15.60 Bid-YTW : 8.61 % |
TRI.PR.B | Floater | 3.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 11.75 Evaluated at bid price : 11.75 Bid-YTW : 4.51 % |
FIG.PR.A | Interest-Bearing | 3.96 % | Asset coverage of 1.1-:1 as of January 19, based on Capital Units NAV of 1.42 and 0.53 Capital Units per preferred. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-31 Maturity Price : 10.00 Evaluated at bid price : 7.61 Bid-YTW : 12.25 % |
DFN.PR.A | SplitShare | 4.05 % | Asset coverage of 1.7-:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.00 Bid-YTW : 7.53 % |
PWF.PR.A | Floater | 8.60 % | The bid came back after taking yesterday off. Closed at 12.00-99, 7×2, after trading 800 shares in one trade at 12.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 12.00 Evaluated at bid price : 12.00 Bid-YTW : 4.37 % |
Volume Highlights | |||
Issue | Index | Shares Traded |
Notes |
TRI.PR.B | Floater | 171,000 | Nesbitt crossed 169,500 at 11.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 11.75 Evaluated at bid price : 11.75 Bid-YTW : 4.51 % |
BCE.PR.A | FixedFloater | 153,500 | Nesbitt crossed 100,000 at 17.00, then another 50,000 at 16.99. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 25.00 Evaluated at bid price : 17.06 Bid-YTW : 6.65 % |
BCE.PR.F | FixedFloater | 153,000 | Nesbitt crossed 100,000 at 16.00, then another 50,000 at 15.99. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 25.00 Evaluated at bid price : 15.62 Bid-YTW : 6.36 % |
BAM.PR.K | Floater | 147,615 | Nesbitt crossed 140,000 at 7.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 7.60 Evaluated at bid price : 7.60 Bid-YTW : 7.01 % |
TD.PR.E | FixedReset | 131,115 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 24.94 Evaluated at bid price : 24.99 Bid-YTW : 6.27 % |
RY.PR.P | FixedReset | 116,833 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 24.96 Evaluated at bid price : 25.01 Bid-YTW : 6.14 % |
BNS.PR.T | FixedReset | 101,791 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 24.96 Evaluated at bid price : 25.01 Bid-YTW : 6.10 % |
There were 34 other index-included issues trading in excess of 10,000 shares. |
I have had occasion recently to look carefully at BMO.PR.J and CIU.PR.A and thought I’d pass along some of the data.
They’re very similar issues: both came out during the issuance rush of early 2007 (BMO.PR.J at the beginning, CIU.PR.A at the end … BMO.PR.J pays $1.125 p.a., while CIU.PR.A pays $1.15.
The major differences between them are:
CIU.PR.A should be analyzed as junior to the series second showing on their books.
I have previously compared BMO.PR.J with BMO.PR.H.
Both issues were added to TXPR in July 2007.
Anyway, with no further comment, here are some graphs:
I found the The Jorion-Taleb Debate from 1997 to be most interesting – particularly Taleb’s comment:
Banks have the ingrained habit of plunging headlong into mistakes together where blame-minimizing managers appear to feel comfortable making blunders so long as their competitors are making the same ones. The state of the Japanese and French banking systems, the stories of lending to Latin America, the chronic real estate booms and busts, and the S&L debacle provide us with an interesting cycle of communal irrationality. I believe that the VAR is the alibi bankers will give shareholders (and the bailing-out taxpayer) to show documented due diligence, and will express that their blow-up came from truly unforeseeable circumstances and events with low probability-not from taking large risks they did not understand. But my sense of social responsibility will force me to point my finger menacingly. I maintain that the due-diligence VAR tool encourages untrained people to take misdirected risk with shareholders’, and ultimately the taxpayers’, money.
There’s also a debate between David Einhorn & Aaron Brown from the summer of 2008 that is of great interest.
And straight line from CAPM through VaR to Basel II is drawn by Kaplanski, Guy and Levy, Haim,Value-at-Risk Capital Requirement Regulation and Asset Allocation: A Mean-Variance Analysis(August 2007). Available at SSRN: http://ssrn.com/abstract=1081288
The January edition of Canadian Moneysaver included my latest effort – “Where Are We Now?”, a review of 2008 … the most horrific year for preferreds in recent memory, at any rate.
Look for the research link!