Market Action

November 27, 2009

Credit Default Swaps are proving to be less predictable than hoped:

Thomson provided the first test of the procedures for settling contracts triggered by a restructuring in Europe when it said in August it was deferring payments on $72.5 million of 6.05 percent private notes due this year.

The system for restructurings uses multiple auctions that set different payouts based on swap expiration dates. Dealers couldn’t settle the Thomson contracts with simpler failure-to- pay procedures that produce one recovery value because they were unable to prove the electronics company defaulted.

Asked in a July conference call with investors whether Thomson still owed the money, Chief Executive Officer Frederic Rose responded, “Since I am not a qualified lawyer, I prefer not to answer that question.” Marine Boulot, a Thomson spokeswoman in Paris, declined to comment.

To determine the size of the payouts on contracts covering $2 billion in debt, bonds and loans were split by maturity date ranges into three so-called buckets and sold at auction.

Contracts that expired on June 20, 2012 — the first bucket’s latest date — sold for 96.25 percent of the face amount, meaning swap holders received 3.75 percent of the amount covered. Swaps expiring a day later paid 34.875 percent because the debt in that bucket went for 65.125 percent.

Holders of June 20 swaps covering 10 million euros in debt got 375,000 euros, while those with June 21 contracts received almost 3.5 million euros. Swaps that terminated after Oct. 24, 2014, paid the most, 36.75 percent.

The disparity was a result of too few securities in the first bucket to settle swaps, according to Matthew Leeming, a London-based strategist at Barclays. “An imbalance of supply and demand for the deliverables can affect the recovery rate,” he said in a note.

Because they were part of industry indexes, swaps referencing the company “dwarfed the amount of Thomson debt,” said Teo Lasarte, an analyst at Bank of America-Merrill Lynch in London.

Canadian preferred shares had a good day, with PerpetualDiscounts gaining 9bp and FixedResets up 7bp. Volume was moderate.

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 -0.6957 % 1,507.4
FixedFloater 6.02 % 4.14 % 41,212 18.62 1 0.5011 % 2,585.9
Floater 2.59 % 3.01 % 92,164 19.65 3 -0.6957 % 1,883.2
OpRet 4.80 % -6.69 % 122,560 0.09 14 0.0736 % 2,312.9
SplitShare 6.31 % -18.14 % 315,272 0.09 2 -0.1304 % 2,128.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0736 % 2,114.9
Perpetual-Premium 5.86 % 5.01 % 126,482 2.39 4 0.0889 % 1,877.0
Perpetual-Discount 5.82 % 5.88 % 183,705 14.03 70 0.0924 % 1,783.1
FixedReset 5.44 % 3.83 % 366,170 3.92 41 0.0727 % 2,146.9
Performance Highlights
Issue Index Change Notes
TRI.PR.B Floater -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-27
Maturity Price : 19.42
Evaluated at bid price : 19.42
Bid-YTW : 2.04 %
PWF.PR.E Perpetual-Discount 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-27
Maturity Price : 22.69
Evaluated at bid price : 23.50
Bid-YTW : 5.88 %
RY.PR.Y FixedReset 1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.55
Bid-YTW : 3.93 %
GWO.PR.F Perpetual-Discount 1.35 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 5.61 %
GWO.PR.I Perpetual-Discount 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-27
Maturity Price : 19.70
Evaluated at bid price : 19.70
Bid-YTW : 5.82 %
Volume Highlights
Issue Index Shares
Traded		 Notes
CM.PR.M FixedReset 185,750 Desjardins crossed blocks of 15,000 and 25,000 at 27.82, and another one of 10,600 at 27.80. TD crossed 124,100 at 27.82.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.82
Bid-YTW : 4.03 %
BNS.PR.Q FixedReset 123,750 TD crossed 120,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-24
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.99 %
BAM.PR.B Floater 52,150 Nesbitt crossed 44,300 at 13.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-27
Maturity Price : 13.20
Evaluated at bid price : 13.20
Bid-YTW : 3.01 %
BMO.PR.J Perpetual-Discount 29,999 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-27
Maturity Price : 20.13
Evaluated at bid price : 20.13
Bid-YTW : 5.63 %
TRP.PR.A FixedReset 20,785 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 4.33 %
BMO.PR.K Perpetual-Discount 20,100 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-27
Maturity Price : 22.93
Evaluated at bid price : 23.09
Bid-YTW : 5.72 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Interesting External Papers

Liquidity and Forced Sales

The Bank of England has released a working paper by Viral V Acharya, Hyun Song Shin and Tanju Yorulmazer titled Endogenous choice of bank liquidity: the role of fire sales:

Banks’ liquidity is a crucial determinant of the adversity of banking crises. In this paper, we consider the effect of fire sales and entry during crises on banks’ ex-ante choice of liquid asset holdings. We consider a setting with limited pledgeability of risky cash flows relative to safe ones and a differential expertise between banks and outsiders in employing banking assets. When a large number of banks fail, market for assets clears only at fire-sale prices and outsiders enter the market if prices fall sufficiently low. In such states, there is a private benefit of liquid holdings to banks from purchasing assets. There is also a social benefit since greater banking system liquidity reduces inefficiency from liquidation of assets to outsiders. When pledgeability of risky cash flows is high, for instance, in countries with well-developed capital markets, banks hold less liquidity than is socially optimal due to risk-shifting incentives; otherwise, banks may hold even more liquidity than is socially optimal to capitalise on fire sales. However, if there is a systemic cost associated with crises, for example, in the form of fiscal costs associated with provision of deposit insurance, then socially optimal liquidity may always be higher than the privately optimal one, and, in turn, regulation in the form of prudent liquidity requirements may be desirable. We provide some international evidence on banks’ liquid holdings that is consistent with model’s predictions.

Regretably, I don’t have a lot of time today to go into this further.

Regulation

OSFI Looking at Board Involvement

The Office of the Superintendent of Financial Institutions has released the text of a speech by Ted Price, Assistant Superintendent, Supervision Sector, to the 2009 Canada-UK Colloquium on Global Finance.

After the familiar puffery about Canadian banks (and the usual failure to address third party analysis of Canadian banks’ resilience), it gets more interesting:

As the financial services business becomes more and more complex, it is likely that we will see more frequent shocks to the system. In this environment, it is not enough for a board to give tacit approval to management in setting the risk profile; boards need to engage management, ask questions, demand answers, and not sign off until they are satisfied.

In the past, some boards have felt that it was inappropriate for directors to engage management regarding risk management. That it would require too much education and discussion. This implies that risk management is too complex for the board, and that it cannot be explained simply, or understood. If this is the case, then why be in that business? In any other industry it would not be ok for directors to say, “We don’t understand the risks, but let’s get into that business anyway”.

At OSFI, we believe that defining risk appetite is as important in an institution’s strategic planning as other production inputs, like budgets. It has been long accepted that major expenditures and budgets should be reviewed by the board, but when it comes to setting risk appetite, some boards have, incorrectly, abdicated that responsibility to management. We believe that boards have an essential oversight role in setting and limiting risk appetite in financial institutions.

Well, any board that made the statement that “it was inappropriate for directors to engage management regarding risk management” would get a roasting here on PrefBlog, if nowhere else! According to me, the board is elected by shareholders to supervise management – and supervision implies (or should imply) some degree of knowledge and the ability to over-rule.

Unfortunately, there is widespread feeling that the purpose of a board is to provide equal employment opportunities to minorities and traditionally disadvantaged sectors of the populace, as well as supporting diversity, the environment and fluffy little bunnies … yet another internal contradiction of the system that will, from time to time, blow up.

Market Action

November 26, 2009

Apparently, having the world’s most intrusive bonus rules is a Good Thing:

U.K. banks face the toughest bonus regime in the world if proposals outlined in a government- commissioned report are accepted, according to its author, Morgan Stanley Senior Adviser David Walker.

Banks should delay bonus payments for as much as five years and have the power to “claw back” awards, Walker, 69, said in his final report on improvements to U.K. corporate governance released today. The government strongly supports Walker’s recommendations “and will take steps to implement them as soon as possible,” according to a statement from Chancellor of the Exchequer Alistair Darling.

Meanwhile, Andrew Willis of The Globe and Mail speculates that the nudge-and-wink Canadian version might lead to new independent dealers:

As this bonus season begins, there are enormous tensions within the ranks of the six largest and most profitable houses. The bank-owned firms had great years. Yet it’s not at all clear the wealth will be shared with employees the way it was in the past. Bonus cheques may be trimmed, even chopped.

Bank executives, and the folks in HR departments, are taking a New England Patriots approach to talent: They are concluding it’s the franchise, the massive machine, that earns the profits, not any one individual. This attitude does not sit well with the more self-assured of bankers and traders.

To a large extent this is true; investment banking is simply the latest area of investment activities to get hit. The banks can, if they wish, create good products run by superb staff, but it doesn’t matter. Since moving into brokerage and wealth management, they have found that they can make just as much money with barely acceptable products run by high school students, such is their franchise.

I’m not sure where this will end – and it might not end. An internal contradiction can last a long time and either degrade slowly or spectacularly. It’s interesting to speculate just what might trigger a spectacular paradigm shift, but I haven’t got any answers for that one. Bre-X didn’t do it. Nortel didn’t do it. And small shops sell out to big shops when the proprietors retire, which takes care of the slow pathway.

Ultimately, a reversal of the process will occur only when performance actually becomes a selling feature – which isn’t going to happen any time soon. Avner Mandelman had a good piece in Saturday’s Globe regarding what is actually being sold. One thing that would be good would be increased regulatory emphasis on performance: investment managers are required to state their experience in prospectuses, but not performance. Many trading rules in UMIR are designed to protect morons – simply rescinding those would be a great leap forward. But guess which segment of the industry has captured the regulators – nothing will happen.

Some might argue that the consequences of an incompetent culture have already been felt, in the shape of the Credit Crunch. Maybe. It is very hard to read the SEC Inspector-General’s report on Bear Stearns and not get the feeling that the smiley-boys had taken over management completely and that they deserved to fail.

Not much action in the preferred share market on American Thanksgiving, but up-days are always welcome! PerpetualDiscounts gained 4bp and FixedResets were up 6bp.

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 0.5684 % 1,518.0
FixedFloater 6.06 % 4.17 % 41,842 18.59 1 0.0557 % 2,573.0
Floater 2.57 % 2.99 % 92,188 19.69 3 0.5684 % 1,896.4
OpRet 4.80 % -6.38 % 122,871 0.09 14 0.0734 % 2,311.2
SplitShare 6.30 % -17.93 % 317,814 0.09 2 0.5245 % 2,131.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0734 % 2,113.4
Perpetual-Premium 5.86 % 5.17 % 125,238 2.40 4 0.2375 % 1,875.4
Perpetual-Discount 5.83 % 5.91 % 184,225 13.99 70 0.0366 % 1,781.4
FixedReset 5.45 % 3.86 % 377,573 3.92 41 0.0572 % 2,145.4
Performance Highlights
Issue Index Change Notes
RY.PR.Y FixedReset -1.59 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.21
Bid-YTW : 4.21 %
PWF.PR.O Perpetual-Discount -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-26
Maturity Price : 24.30
Evaluated at bid price : 24.50
Bid-YTW : 6.01 %
TRI.PR.B Floater 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-26
Maturity Price : 19.65
Evaluated at bid price : 19.65
Bid-YTW : 2.02 %
ELF.PR.G Perpetual-Discount 1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-26
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 6.70 %
IGM.PR.A OpRet 1.38 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-12-26
Maturity Price : 26.00
Evaluated at bid price : 26.81
Bid-YTW : -34.83 %
CU.PR.B Perpetual-Premium 1.92 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 5.17 %
Volume Highlights
Issue Index Shares
Traded		 Notes
TD.PR.N OpRet 139,190 TD crossed blocks of 52,900 and 40,400 and 35,000 shares, all at 26.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-12-26
Maturity Price : 26.00
Evaluated at bid price : 26.24
Bid-YTW : -2.94 %
GWO.PR.E OpRet 49,168 Nesbitt crossed 41,300 at 25.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-12-26
Maturity Price : 25.50
Evaluated at bid price : 25.81
Bid-YTW : -1.57 %
BMO.PR.J Perpetual-Discount 41,700 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-26
Maturity Price : 20.15
Evaluated at bid price : 20.15
Bid-YTW : 5.62 %
MFC.PR.D FixedReset 37,194 Nesbitt bought 10,200 from CIBC at 27.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.74
Bid-YTW : 3.95 %
BMO.PR.L Perpetual-Discount 29,765 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-24
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 5.83 %
RY.PR.D Perpetual-Discount 24,985 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-26
Maturity Price : 20.25
Evaluated at bid price : 20.25
Bid-YTW : 5.60 %
There were 19 other index-included issues trading in excess of 10,000 shares.
Market Action

November 25, 2009

Connecticut is claiming that its pension fund portfolio managers are a pack of incompetent time-servers:

Connecticut plans to join Ohio in suing Standard & Poor’s, Moody’s Corp. and Fitch Ratings for their “negligent, reckless and incompetent work” in grading investments made by state pension funds, according to Attorney General Richard Blumenthal.

Connecticut and “a number of other states” are preparing legal action against the credit-rating companies, Blumenthal said today in a Bloomberg Television interview. Ohio Attorney General Richard Cordray sued the debt raters this month on behalf of five Ohio public employee retirement and pension funds, saying “improper” ratings cost the funds more than $457 million.

Geez, you know, sometimes I think I’d like to be a portfolio manager at a big firm. Nothing to do all day but suck arse and pass the blame …

The PerpetualDiscount winning streak came to an end today, albeit just barely. Its last down day was October 28, as it then rose for nineteen consecutive days, gaining 2.99% as yields fell from 6.05% to 5.88% (quick check: 299bp total return with 6.05% yield for 27 days including weekends implies price change of 299-45 = 254bp, on 17bp yield change, implies Modified Duration of 14.94 years, which in turn implies a yield of 6.69%. Well … close enough. I’m ignoring convexity and discussing an index, after all).

Anyway, PerpetualDiscounts now yield 5.90%, equivalent to 8.26% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.9%, so the pre-tax interest-equivalent spread (also called the seniority spread, around here, anyway) is now about 235bp, a modest but welcome tightening from the 240bp reported on November 19.

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 0.1094 % 1,509.4
FixedFloater 6.06 % 4.17 % 42,240 18.58 1 0.2793 % 2,571.6
Floater 2.58 % 3.02 % 92,864 19.63 3 0.1094 % 1,885.6
OpRet 4.80 % -7.86 % 123,040 0.09 14 0.1337 % 2,309.5
SplitShare 6.34 % -7.34 % 321,361 0.08 2 0.2190 % 2,119.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1337 % 2,111.8
Perpetual-Premium 5.88 % 5.55 % 124,199 2.39 4 0.0000 % 1,870.9
Perpetual-Discount 5.83 % 5.90 % 184,213 14.02 70 -0.0091 % 1,780.8
FixedReset 5.45 % 3.85 % 389,623 3.92 41 0.1007 % 2,144.1
Performance Highlights
Issue Index Change Notes
MFC.PR.E FixedReset -1.44 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.61
Bid-YTW : 4.09 %
MFC.PR.C Perpetual-Discount -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-25
Maturity Price : 18.92
Evaluated at bid price : 18.92
Bid-YTW : 5.96 %
SLF.PR.C Perpetual-Discount -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-25
Maturity Price : 18.72
Evaluated at bid price : 18.72
Bid-YTW : 5.95 %
POW.PR.D Perpetual-Discount 1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-25
Maturity Price : 21.52
Evaluated at bid price : 21.52
Bid-YTW : 5.90 %
MFC.PR.A OpRet 1.74 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-07-19
Maturity Price : 26.25
Evaluated at bid price : 26.35
Bid-YTW : 2.93 %
Volume Highlights
Issue Index Shares
Traded		 Notes
MFC.PR.D FixedReset 168,431 Nesbitt crossed 100,000 at 27.70; Scotia crossed 26,900 at the same price; TD crossed 11,000 at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.70
Bid-YTW : 3.98 %
BNS.PR.N Perpetual-Discount 82,790 RBC crossed 75,700 at 23.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-25
Maturity Price : 23.18
Evaluated at bid price : 23.35
Bid-YTW : 5.68 %
CM.PR.D Perpetual-Discount 72,100 RBC crossed 63,300 at 24.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-25
Maturity Price : 23.96
Evaluated at bid price : 24.29
Bid-YTW : 5.97 %
TRP.PR.A FixedReset 58,355 Nesbitt sold 10,000 to anonymous at 25.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.79
Bid-YTW : 4.08 %
BMO.PR.J Perpetual-Discount 53,395 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-25
Maturity Price : 20.14
Evaluated at bid price : 20.14
Bid-YTW : 5.62 %
ELF.PR.F Perpetual-Discount 51,400 Scotia crossed 50,000 at 20.05.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-25
Maturity Price : 20.05
Evaluated at bid price : 20.05
Bid-YTW : 6.72 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Issue Comments

Brookfield Renewable Power Issues 7-Year Bonds at 6.132%

DBRS has announced it has:

assigned a rating of BBB (high) with a Stable trend to the Brookfield Renewable Power Inc. (BRP) prospective issue of $300 million of 6.132% Series 6 notes due November 30, 2016 (the Notes).

The Notes are being offered pursuant to a Prospectus Supplement to BRP’s Short Form Base Shelf Prospectus dated July 28, 2008, and a related Prospectus Supplement to be filed before November 27, 2009. The Notes will rank equally with all other unsecured indebtedness of BRP. Proceeds from the offering will be used to repay BRP’s remaining $280 million of 4.65% Series 1 notes due in December 2009, and for general corporate purposes. The offering is expected to close on November 30, 2009.

DBRS notes that BRP has recently signed a long-term power sale contract with the Ontario Power Authority (rated A (high), with a Stable trend) for all of the output from 16 of BRP’s electric generating facilities in Ontario, representing 837 megawatts (MW). This is supportive of BRP’s credit profile as it will substantially increase its long-term contracted position and provide greater cash flow certainty.

BAM commented in its 3Q09 Shareholders’ Report:

Brookfield Renewable Power has $262 million of public term notes that mature in December 2009. The substantial cash flow generated within this business and the high quality of its asset base facilitates access to capital markets notwithstanding current volatility, and in that regard we completed a public offering of C$300 million (US$244 million) of three-year notes in February 2009.

In April 2009 we exchanged a further C$100 million (US$82 million) of the December maturity for three-year notes. The remaining borrowings consist of public notes that mature in 2018 and 2036.

The CAD 300-million three-year notes were done at 8.75%, with a step up feature if the company gets downgraded by DBRS or S&P with a Canada Call at +175bp. We’ve come a long way, baby!

Market Action

November 24, 2009

A good solid day for preferred shares with both PerpetualDiscounts and FixedResets gaining 10bp on moderate volume.

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 0.5059 % 1,507.7
FixedFloater 6.08 % 4.19 % 42,183 18.56 1 -0.4449 % 2,564.4
Floater 2.59 % 3.02 % 89,956 19.62 3 0.5059 % 1,883.6
OpRet 4.81 % -5.94 % 121,126 0.09 14 0.0273 % 2,306.4
SplitShare 6.35 % -3.04 % 325,499 0.08 2 0.0000 % 2,115.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0273 % 2,109.0
Perpetual-Premium 5.88 % 5.54 % 124,458 2.40 4 0.0000 % 1,870.9
Perpetual-Discount 5.83 % 5.88 % 184,808 14.04 70 0.1039 % 1,780.9
FixedReset 5.45 % 3.91 % 392,325 3.94 41 0.1035 % 2,142.0
Performance Highlights
Issue Index Change Notes
SLF.PR.C Perpetual-Discount -1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 18.95
Evaluated at bid price : 18.95
Bid-YTW : 5.87 %
MFC.PR.B Perpetual-Discount -1.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 19.42
Evaluated at bid price : 19.42
Bid-YTW : 6.00 %
PWF.PR.G Perpetual-Discount -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 24.64
Evaluated at bid price : 24.85
Bid-YTW : 6.00 %
RY.PR.Y FixedReset -1.19 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.42
Bid-YTW : 4.03 %
SLF.PR.F FixedReset -1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 4.05 %
HSB.PR.C Perpetual-Discount 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 22.35
Evaluated at bid price : 22.51
Bid-YTW : 5.76 %
ELF.PR.F Perpetual-Discount 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 20.05
Evaluated at bid price : 20.05
Bid-YTW : 6.72 %
CM.PR.P Perpetual-Discount 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 22.59
Evaluated at bid price : 23.26
Bid-YTW : 5.95 %
PWF.PR.F Perpetual-Discount 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 22.14
Evaluated at bid price : 22.54
Bid-YTW : 5.87 %
PWF.PR.K Perpetual-Discount 1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 21.16
Evaluated at bid price : 21.16
Bid-YTW : 5.92 %
Volume Highlights
Issue Index Shares
Traded		 Notes
CM.PR.L FixedReset 217,805 Nesbitt crossed 150,000 at 27.72; RBC crossed 50,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.72
Bid-YTW : 4.00 %
HSB.PR.E FixedReset 56,703 Nesbitt crossed 50,000 at 28.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 28.05
Bid-YTW : 4.02 %
RY.PR.X FixedReset 56,061 Desjardins crossed blocks of 11,700 and 15,000 shares, both at 27.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.55
Bid-YTW : 3.97 %
ELF.PR.G Perpetual-Discount 45,253 Scotia crossed 30,000 at 17.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 17.70
Evaluated at bid price : 17.70
Bid-YTW : 6.82 %
TD.PR.O Perpetual-Discount 39,457 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 21.51
Evaluated at bid price : 21.51
Bid-YTW : 5.70 %
BMO.PR.J Perpetual-Discount 36,759 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-24
Maturity Price : 20.30
Evaluated at bid price : 20.30
Bid-YTW : 5.58 %
There were 34 other index-included issues trading in excess of 10,000 shares.
Interesting External Papers

Monetary Policy and Housing Bubbles

The Bank of Canada has released a Working Paper by Hajime Tomura titled Optimal Monetary Policy during
Endogenous Housing-Market Boom-Bust Cycles:

This paper uses a small-open economy model for the Canadian economy to examine the optimal Taylor-type monetary policy rule that stabilizes output and inflation in an environment where endogenous boom-bust cycles in house prices can occur. The model shows that boom-bust cycles in house prices emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. These boom-bust cycles replicate the stylized features of housing-market boom-bust cycles in industrialized countries. In an environment where mortgage borrowers are occasionally over-optimistic, the central bank should be less responsive to inflation, more responsive to output, and slower to adjust the nominal policy interest rate. This optimal monetary policy rule dampens endogenous boom-bust cycles in house prices, but prolongs inflation target horizons due to weak policy reactions to inflation fluctuations after fundamental shocks.

As summarized in Section 2, cross-country data for industrialized countries indicate that the nominal policy interest rate and the CPI inflation rate have tended to decline during housing booms and rise after the peaks of housing booms. The model explains this observation as follows. When borrowers expect that future house prices will rise, they increase housing investments, which causes a housing boom. Since borrowers are credit-constrained, they work more to finance their housing investments during the boom. At the same time, when savers do not share the optimistic expectations of borrowers, they instead expect the boom to be temporary and increase savings for a future recession. The increases in labour supply and savings reduce real wages and the real interest rate, respectively. Given sticky prices, a resulting fall in the marginal cost of production lowers the inflation rate, and, in response to this, the central bank cuts the policy rate. When the optimistic expectations of borrowers are not realized ex-post, a housing bust occurs, and savings and labour supply decline. As a consequence, the inflation rate rises, inducing a monetary policy tightening.

Since borrowers are credit-constrained, they work more to finance their housing investments during the boom. sounds a little backwards to me. I would say that “Credit constrained borrowers can work more during the boom, which allows them to finance increased housing investments”. I don’t find the rest of the rationale very convincing, frankly.

The problem of the interplay between monetary policy and housing bubbles has been discussed on PrefBlog before; e.g. Taylor Rules and the Credit Crunch Cause, with David Pappell warning

The Fed should respond to inflation, not inflation forecasts, especially in an environment where large negative output gaps are causing forecasted inflation to fall.

… a conclusion supported by the KC Fed paper discussed in KC Fed: Monetary Policy Amidst Deflationary Pressures. The problem was also discussed on Econbrowser in the post The Taylor Rule and the Housing Boom, which discusses the paper Dr. Taylor presented at the 2007 Jackson Hole conference, Housing and Monetary Policy

It strikes me that the Taylor Rule’s greatest strength, simplicity, is also its greatest weakness. Policy failure can result from misestimation of either of the two input variables. For policy purposes, it might be worthwhile to see how well other estimations that measure approximately the same thing can be added into the mix so that, for instance, inflation could be estimated not just by the CPI, but also with raw housing prices; the output gap supplemented by raw unemployment figures, and so on. Hell, I use 23 valuation parameters to assess the value of a preferred share, each of them taking a slightly different look at the problem.

Market Action

November 23, 2009

Themis Trading has published another “mini white paper” by Sal L. Arnuk and Joseph Saluzzi, Why Institutional Investors Should Be Concerned About High Frequency Traders. Their second so-called “problem” is actually a highly desirable feature:

2. HFT volume can generate false trading signals.

This can cause other investors to buy at a higher price, or sell at a lower price, than they would otherwise. A spike in HFT volume can cause an institutional algorithm order based on a percentage of volume to be too aggressive. A spike can attract momentum investors, further exaggerating price moves. Seeing such a spike, options traders can start to build positions, which, in turn, can attract risk arbitrage traders who believe there’s potential news that could affect the stock.

As a fundamental, value based investor, I say “Super!”. The more that securities are moved off their fundamental value, the more opportunities I will have to take advantage of the difference and make some money for my clients.

From a policy perspective, the underperformance of morons – who pretend sophisitication due to their use of algorithms, a four-syllable word, or who are attracted by momentum, or who care to bet that there’s news coming, implicitly accepting and trading on the efforts of insider traders – will assist their exit from the workforce. Which is a Good Thing, to the extent that underperformance has an actual effect on employment prospects.

Today’s 2-Year Treasury auction set two records:

Treasuries remained lower after the government sold a record-tying $44 billion of two-year debt at the lowest yield ever, the first of three note sales this week totaling a record $118 billion.

The securities drew a yield of 0.802 percent, compared to the forecast of 0.786 percent in a Bloomberg News survey of eight of the Federal Reserve’s 18 primary dealers and below the 0.922 percent drawn at an auction in December. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.16, compared to 3.63 at the previous auction. The average at the last 10 auctions was 2.92.

HSBC Canada is calling some sub-debt:

HSBC Bank Canada today announced its intention to redeem all $100,000,000 of its 4.39% subordinated debentures due 21 January 2015 (the “Debentures”). In accordance with their terms, the Debentures will be redeemed at 100% of their principal amount plus accrued interest to the redemption date. The redemption will occur on 21 January 2010 and will be financed out of the general corporate funds of HSBC Bank Canada.

These debs are described as:

The interest rate is fixed at 4.39 per cent until January 2010 and thereafter the rate reprices at the 90 day average bankers’ acceptance
rate plus 1.00 per cent.

The market edged up a little today – PerpetualDiscounts up 9bp and FixedResets down 2bp – on slighly lower volume.

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 -0.8506 % 1,500.1
FixedFloater 6.05 % 4.16 % 41,630 18.59 1 -2.8108 % 2,575.9
Floater 2.60 % 3.04 % 90,413 19.57 3 -0.8506 % 1,874.1
OpRet 4.81 % -4.28 % 119,128 0.09 14 -0.0736 % 2,305.8
SplitShare 6.35 % -3.26 % 330,025 0.08 2 0.2635 % 2,115.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0736 % 2,108.4
Perpetual-Premium 5.88 % 5.54 % 125,290 2.40 4 0.1884 % 1,870.9
Perpetual-Discount 5.84 % 5.88 % 185,165 14.04 70 0.0918 % 1,779.1
FixedReset 5.46 % 3.90 % 391,330 3.94 41 -0.0238 % 2,139.8
Performance Highlights
Issue Index Change Notes
BAM.PR.G FixedFloater -2.81 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-23
Maturity Price : 25.00
Evaluated at bid price : 17.98
Bid-YTW : 4.16 %
CM.PR.P Perpetual-Discount -1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-23
Maturity Price : 22.41
Evaluated at bid price : 22.96
Bid-YTW : 6.03 %
TRI.PR.B Floater -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-23
Maturity Price : 19.41
Evaluated at bid price : 19.41
Bid-YTW : 2.04 %
TD.PR.S FixedReset -1.21 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.03
Bid-YTW : 3.87 %
CU.PR.B Perpetual-Premium 1.00 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 5.57 %
PWF.PR.G Perpetual-Discount 1.33 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-08-16
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 5.80 %
MFC.PR.C Perpetual-Discount 1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-23
Maturity Price : 19.28
Evaluated at bid price : 19.28
Bid-YTW : 5.85 %
SLF.PR.C Perpetual-Discount 1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-23
Maturity Price : 19.31
Evaluated at bid price : 19.31
Bid-YTW : 5.76 %
Volume Highlights
Issue Index Shares
Traded		 Notes
MFC.PR.D FixedReset 213,718 Nesbitt crossed 200,000 at 27.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.60
Bid-YTW : 4.07 %
TD.PR.G FixedReset 51,115 RBC crossed 30,000 at 27.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.66
Bid-YTW : 3.82 %
GWO.PR.X OpRet 42,979 Dundee crossed 34,500 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-10-30
Maturity Price : 25.67
Evaluated at bid price : 26.17
Bid-YTW : 3.32 %
PWF.PR.D OpRet 41,100 Nesbitt crossed 30,000 at 26.40; RBC crossed 10,600 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-12-23
Maturity Price : 25.60
Evaluated at bid price : 26.37
Bid-YTW : -25.38 %
BMO.PR.J Perpetual-Discount 33,801 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-23
Maturity Price : 20.25
Evaluated at bid price : 20.25
Bid-YTW : 5.59 %
BAM.PR.N Perpetual-Discount 32,092 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-11-23
Maturity Price : 17.52
Evaluated at bid price : 17.52
Bid-YTW : 6.92 %
There were 28 other index-included issues trading in excess of 10,000 shares.

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Seminars

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