PrefBlog

The day was enlivened somewhat by reports of excited groupies at the Financial Forum and by the closing quote of BNS.PR.S at 26.00-99.99. Whatever happened to the good old days of bid-without? There is still no indication of what SunLife wants to do with its holding; but surely at some point Sections 711 & 712 of the TSX Company Manual will become applicable:

Sec. 711.

TSX will normally consider the delisting of securities of a listed issuer if, in the opinion of TSX, it appears that the public distribution, price, or trading activity of the securities has been so reduced as to make further dealings in the securities on TSX unwarranted.

Sec. 712.

Specifically, participating securities may be delisted if:

(a) the market value of the listed issuer’s issued securities that are listed on TSX is less than $3,000,000 over any period of 30 consecutive trading days; or
(b) the market value of the listed issuer’s freely-tradable, publicly held securities is less than $2,000,000 over any period of 30 consecutive trading days; or
(c) the number of freely-tradable, publicly held securities is less than 500,000; or
(d) the number of public security holders, each holding a board lot or more, is less than 150.
Non-participating securities will be subject to (b) above as well as Section 711

Still and all, you know, I’m sorely tempted to buy 100 shares at 99.99, just so I can insist on delivery!

PerpetualDiscounts were off a bit today, closing to yield 6.85% dividends, equivalent to 9.59% interest at the standard 1.4x conversion factor. Long corporates are still at about 7.5%, so the pre-tax interest-equivalent spread remains at around the 210bp level achieved on January 9.

Another piece of history gone! Across the Curve notes that Treasury has called the 13.25 of May 2014:

I recall that bond as the last bond to trade at 14 percent. It was issued as a 30 year bond in May 1984. In those days the treasury issued callable long bonds but the call protection was 25 years. Anyway, on the settlement day May 15 1984 the owners threw up all over their shoes and the futures market was down limit. The new bond traded to 14 percent in the cash market. The rest is history as its successor sees nothing but buyers today in the 2.80s.

The New York Fed has endorsed the recent TMPG initiative to charge for fails:

The Federal Reserve Bank of New York endorses the Fails Charge Trading Practice published today by the Treasury Market Practices Group (TMPG) and strongly encourages its adoption by all market participants. The Fails Charge Trading Practice provides a feasible method for market participants to implement the TMPG’s previously announced recommendations for addressing widespread settlement fails in the U.S. Treasury market. The New York Fed is convinced that universal adoption of the trading practice is a crucial step in alleviating the chronic fails problem that currently threatens to constrain Treasury market liquidity and function. The New York Fed will adopt this new trading practice in its own market operations.

Accrued Interest provides some interesting colour on Agencies & MBS, observing:

MBS suffer from a severe negative convexity problem. MBS investors have essentially sold short an interest rate option to the underlying mortgage borrowers. Those borrowers are now almost universally in the money. Many borrowers will have difficulty actually refinancing (more on that below) but regardless, the price for MBS securities will have difficulty rising above $104 or so with an embedded in-the-money option with a $100 strike.

To see what I mean, notice the price spread across the coupon stack (using Fannie Mae 30-year MBS for February settlement):

4.5% Coupon: $101.938
5%: $102.750
5.5%: $103.203
6%: $103.656
6.5%: $104.500
This is the current dollar price for a mortgage security with the indicated coupon.

Tomorrow is the last day of trading of TXPR prior to its rebalancing, which is effective at the opening on Monday 19th. Those with an interest in some of the lower volume issues affected (e.g., ACO.PR.A, NSI.PR.C, NSI.PR.D) may wish to put in stink-bids and stink-offers,as it is possible (possible!) that CPD and other indexers may be willing (or forced!) to trade at a spread to market.

Another day of pretty good volume. PerpetualDiscounts were off again … but having survived 4Q08, I’m decidedly unimpressed by any overall move of less than a point.

Donato Masciandaro writes an opinion piece on VoxEU: Basel 3: Supervising the credit giants with progressive capital ratios:

The too big to fail rule therefore represents an authentic paradox – in the presence of risk of systemic crisis, the rule must be temporarily adopted to prevent the crisis from actually worsening, but if it is not credibly revoked, it pushes the system towards an unstable and inefficient oligopoly.

But can the too big to fail rule be revoked after the financial crisis ends? It may be difficult since the law has never been written, but it is always imminent in oversight procedure. But if government insurance against the insolvency of large banks is difficult to abolish, the government could try making them pay. Defining the correct plan for such a distinctive kind of insurance would not be simple, but the current situation could certainly be improved upon. Now, large banks could reasonably believe that they are covered by a subsequent implicit insurance in case of an insolvency risk. Banks do not pay a corresponding initial premium, however, as the prudent regulation plan does not mention bank size, at least from this point of view.
…
New ideas are needed: capital coefficients that, equal to other risks, consider the “irresponsibility risks” that could increase bank sizes out of proportions, for example. Thus, non-proportional capital coefficients which are progressive in relation to the activity volume are needed, possibly divided into size groups. In order to “put a price” on government insurance in favour of credit giants, non-conventional regulatory solutions need to be explored, striving to remain in line with the foundation of a market with prudent regulation. It is not simple, but it would be better than pretending that the problem did not exist.

I support the idea; particularly if it is paired with the idea of weighting risk-weighted-assets differently according to either the “trader” (investment bank, dealer) or “investor” (regular bank) regime chosen by the entity.

Action today was dominated by settlement of three new issues (bank fixed-resets), each of which made it into the volume tables, unsurprisingly. PerpetualDiscounts were off.