PrefBlog

The Yellen – Summers race is over:

Summers said that the storm around his possible nomination pointed to a difficult confirmation process that could hurt the President’s economic agenda and the institution, and decided to pull back.

“I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the administration or, ultimately, the interests of the nation’s ongoing economic recovery,” Summers said in a letter to Obama.

Initial reaction was positive:

Treasury futures rose the most in six weeks after former Treasury Secretary Lawrence Summers dropped out of contention to head the Federal Reserve, ending speculation his ascendancy to the post would lead to a faster exit from the central bank’s bond-buying policy.

Mohamed El-Erian, the chief executive and co-chief investment officer at Pacific Investment Management Co., said the decision increases the probability of policy continuity at the Fed. “This would be seen as being particularly supportive for the front end of the Treasury curve,” El-Erian wrote in a commentary posted on the Business Insider website.

The next governor – whoever it is – might have to rebuild Fed credibility:

Bond investors are losing confidence in the Federal Reserve’s pledge to keep benchmark interest rates at about zero into 2015 as the U.S. economy accelerates.

Concern the Fed will increase its target rate for overnight loans between banks next year is showing up in wider price swings for shorter-term securities. Volatility in five-year Treasuries rose above 10-year (USGG10YR) notes for the first time since 2011 and yields on two-year notes more than doubled in the past four months. Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., reiterated today his recommendation to buy debt with short maturities.

While speculation the Fed will reduce its $85 billion of monthly bond purchases as soon as this week has left bond investors with the worst losses since 1994, JPMorgan Chase & Co. financial models show the end to the central bank’s zero-rate policy would have an even bigger impact.

I am pleased to see that at least one person agrees with me that settlements without admission of guilt are counterproductive:

SEC Chairman Mary Jo White, a former prosecutor, can demand only civil reparations, yet she holds a trump card: She can refuse to let JPMorgan settle cases without admitting or denying guilt. Then private litigants can piggyback off any SEC settlement, adding to the penalties.

Another example of single point failure in centralized systems:

Some U.S. options exchanges shut after reporting a malfunction with the industry data feed for disseminating prices, days after securities regulators told market operators to find ways to improve systems.

CBOE Holdings Inc. (CBOE), NYSE Euronext (NYX), Nasdaq OMX Group Inc. and Bats Global Markets Inc. all reported shutdowns on their websites. Exchanges said they were experiencing issues with the OPRA data feed. CBOE later said it had resumed transactions.
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The Options Price Reporting Authority, or OPRA, administers the dissemination of trade and quote information to brokers, investors and market-data vendors such as Thomson Reuters Corp. and Bloomberg LP, the parent of Bloomberg News. It’s managed by U.S. options exchanges and charges users for its data.

Shared responsibility means no responsibility!

It was a very good day for the Canadian preferred share market, with PerpetualDiscounts up 35bp, FixedResets gaining 18bp and DeemedRetractibles winning 40bp. The Performance Highlights table is suitably lengthy. Volume was extremely high.

There is a continuous stream of tapering chatter!

U.S. stocks rose, with the Dow Jones Industrial Average capping its best week since January, as disappointing economic data fueled bets that any Federal Reserve stimulus cuts this month would be moderate.
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Fifty-seven percent of those surveyed say they don’t expect a sudden change in the markets because investors already anticipate tapering action.

A Commerce Department report today showed retail sales in the U.S. rose 0.2 percent, the smallest increase in four months and below the 0.5 percent advance seen in Bloomberg survey. Wholesale prices in the U.S. rose more than forecast in August, adding 0.3 percent on higher costs for food and some fuels.

A separate report showed inventories at companies increased more than forecast in July, trailing a gain in sales that signals a pickup in factory orders. The Thomson Reuters/University of Michigan preliminary September index of consumer sentiment fell to 76.8 from 82.1 last month, which was the lowest since April.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 1bp and DeemedRetractibles down 3bp. A fairly lengthy Performance Highlights table is heavily skewed towards winners, led by TCA.PR.X, which got called today. Volume was average.

In the latest installment of Fed Governorship chatter, Bloomberg has released a poll of its subscribers, which can be taken as a reasonable proxy for ‘the market’:

Thirty-five percent of investors, analysts and traders who are Bloomberg subscribers say Summers may provide less stimulus than Bernanke, whose chairmanship ends in January, compared with 13 percent who see Summers with looser policy and 22 percent saying it’d be the same. Forty-seven percent see Yellen presiding over the same policy, with 17 percent saying it’d be looser and 8 percent saying tighter. The rest said they don’t know how it would change.
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The poll, conducted Sept. 10, showed 40 percent of respondents see Summers getting the job, compared with 33 percent for Yellen, the Fed’s vice chairman. Three percent see Obama opting for former Fed Vice Chairman Donald Kohn, while the remainder said they didn’t know or expected Obama to pick someone else.

In a May 14 poll of investors, Yellen was seen as the most likely selection by 34 percent of investors, more than any other candidate. Twenty-seven percent of investors thought that Bernanke would be reappointed. Summers was seen as a long-shot, with only 4 percent of investors saying he was likely to be Obama’s pick.

It was a mixed day for the Canadian preferred share market today, with PerpetualDiscounts up 12bp, FixedResets off 1bp and DeemedRetractibles gaining 7bp. Volatility was much lower than current standards imply, but still above the average of the first five months of this year. Volume was a little above average.

The revolving door revolved again:

The former chief of staff to federal finance minister Jim Flaherty has left Ottawa to take on a new role at the Bank of Nova Scotia.

Kevin McCarthy will become a director in Scotiabank’s Canadian banking unit starting in November.

It always pays to remind the political hacks of what you can do for them – you never know when you’re going to have to kowtow. Three cheers for the Crony Capitalist Snivel Servants’ Superannuation Scheme!

Who wants to buy some bonds?

Verizon Communications Inc. (VZ) is poised to pay investors a premium on an unprecedented $49 billion of bonds, a cost Apple Inc. (AAPL) escaped during its then-record $17 billion offering four months ago.

The telephone company may sell $11 billion of 10-year bonds today at a yield that’s 225 basis points more than Treasuries, according to a person with knowledge of the issue. The yield is 47 basis points more than investors demand to own bonds with similar maturities and BBB ratings, according to data compiled by Bloomberg.
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Along with $4 billion of floating-rate debt due in 2016 and 2018, Verizon also plans to sell $4.25 billion of three-year, fixed-rate notes that may yield 165 basis points more than Treasuries; $4.75 billion of five-year debt with a spread of 190 basis points; $4 billion of seven-year securities that pay 215; $6 billion of 20-year bonds yielding 250 more than benchmarks; and a $15 billion, 30-year portion with a spread of 265, the person said.

DBRS considers that the GMP – Richardson – Macquarie dance has no effects on the creditworthiness of GMP.PR.B:

Richardson-GMP, which is roughly one third owned by GMP, announced last night an agreement to purchase MPW for $132 million. Richardson-GMP will be issuing $60 million of preferred shares, half of which will be purchased by GMP, and $30 million of common shares of which GMP will purchase roughly $10 million. GMP will use existing cash resources to fund its net $40 million incremental investment in Richardson-GMP.

While Richardson-GMP has not been contributing much to GMP’s bottom line, it has been modestly profitable recently. With MPW adding nearly $13 billion in assets under administration to Richardson-GMP’s existing $15 billion, the incremental scale will improve Richardson-GMP’s profitability. DBRS views the private wealth business as a diversifying influence in GMP’s profitability profile, but this acquisition does not overcome the fundamental capital market weakness challenges which are the primary reason for the existing Negative trend.

IGM, proud issuer of IGM.PR.B, was confirmed at Pfd-2(high) by DBRS:

With the help of its unique exclusive consultant network, IG has returned to positive net sales during the first half of 2013, after experiencing net redemptions of $149 million during the same period in 2012. The IG distribution model – which relies on close communication between consultants and customers – yields a lower redemption rate (9.8% twelve-month trailing redemption rate on long-term mutual funds at June 30, 2013) than that of the industry (16.5% industry average, provided by IGM).

By contrast, the Mackenzie business model, which caters to third-party distribution, is more vulnerable to underlying fund performance and investor sentiment, which is reflected in the higher redemption rate of 16.2% for the twelve months trailing Q2 2013. Overall assets under management (AUM) is up, helped by favourable equity market performance and modest net sales so far in 2013. When investor sentiment towards equities stabilizes, Mackenzie funds should fare well versus its peers.
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In addition to strong profitability, the Company’s credit rating also benefits from strong cash flows (which easily cover the upfront distribution costs of mutual fund sales), strong liquidity and a conservative financial profile. Debt plus preferred shares-to-EBITDA was 1.1 times (x) in 2012 and for H1 2013, which is conservative. The Company’s ratio of debt plus preferred shares-to-total capitalization remains appropriate for the rating, at just over 25%, down noticeably from 2010.

The Canadian preferred share market came back a little today, with PerpetualDiscounts winning 23bp, FixedResets gaining 5bp and DeemedRetractibles up 12bp. Volatility continues to be high, with another lengthy Performance Highlights table heavily skewed towards winners, with BAM PerpetualDiscount issues prominent. Volume was slightly above average.

PerpetualDiscounts now yield 5.78%, equivalent to 7.51% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.0%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 250bp, a sharp decline from the 270bp reported September 4, as PerpetualDiscounts are, overall, unchanged while long corporates got thumped for 20bp.

Jayson Horner, chief executive officer, president, and co-founder of CanDeal, writes a piece in the Globe on electronic bond trading:

As regulators seek to enact change, they must balance their transparency objectives with the needs of market participants, respecting the unique properties and characteristics of each market and its participants.

An optimally transparent solution will facilitate price discovery, but should not compromise an investor’s ability to successfully execute a trade strategy, or obstruct liquidity providers looking to prudently manage their risk. Interestingly, the knock-on effect of excessive transparency can ultimately also harm the retail investor to the extent that institutional investors act as fiduciaries for their benefit – through for example third-party asset management, pension plans and insurance.

That’s certainly the right idea, but harm to retail investors doesn’t stop there. Harm is also caused when dealers can’t make money out of corporate debt in the public markets, so they become reluctant to finance inventory, which in turn encourages issuers to go the private placement route. This is happening in the States; I have often railed in this blog about the harm that TRACE is doing to all participants in the US corporate bond market.

As I have also said before, regulators must ask themselves: what is the market for? Specifically, what is this market for? Is it something that, ideally, will allow grandma to invest her $5,000 at a so-called fair price? Or is it something that, ideally, will allow Very Big Manufacturing, Inc., to issue $500-million in debt with entirely reasonable prospects of rolling it on maturity?

Grandma’s got the alternative of mutual funds and ETFs which, for most people, make more sense than individual bond purchases anyway. Very Big Manufacturing, Inc.’s alternatives are to look for money abroad (at much higher risk and expense), or issue as a private placement (reducing investor choice), or simply not to expand due to financing difficulties.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets down 20bp and DeemedRetractibles losing 23bp. The Performance Highlights table is surprisingly lengthy and comprised almost entirely of losers. Volume was extremely high.

Tapering chatter continues…:

[PNC Financial Services Group chief economist Stuart] Hoffman’s forecast is in line with the median estimate in a Bloomberg survey of 34 economists after yesterday’s jobs report showing the Fed is likely to reduce asset purchases to $75 billion this month. The Federal Open Market Committee will slow Treasury purchases to $35 billion from $45 billion while maintaining mortgage-bond buying at $40 billion, according to the survey. That pace was unchanged from an Aug. 9-13 poll.
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Kansas City Fed President Esther George, who has consistently dissented against additional stimulus, yesterday called for a tapering of $15 billion at this month’s meeting.

“An appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion per month,” George said in a speech in Omaha, Nebraska. She said doing so at the next meeting is “appropriate” and future purchases could be split evenly between Treasuries and mortgage-backed securities.

Chicago Fed President Charles Evans, who has consistently supported record stimulus, said in a speech yesterday in Greenville, South Carolina, that the central bank shouldn’t taper until inflation and economic growth pick up.

Evans, who votes on FOMC policy this year, later told reporters he has an “open mind” on whether to taper buying this month.

There’s a lot of corporate debt being issued in Canada:

Proceeds from new issuance of investment grade corporate debt are up 29 per cent year-to-date, compared to the same period last year, according to figures from Thomson Reuters.
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High yield or investment grade, Canadian companies are expected to keep pumping out debt for the rest of the year. RBC raised its Canadian Corporate bond issuance target by $5-billion to $105-billion by the end of the year thanks to two main factors in this increase: strong issuance so far, prospective issuance in the pipeline. Retail, financial and utilities are all expected to contribute to supply.

Regulators come up with many ideas, but this one is special:

Canada’s popular mortgage investment funds are facing pressure to convert into public companies because securities regulators have proposed new rules that would bar them from investing in mortgages without government loan guarantees.

Timbercreek Asset Management, which manages two publicly traded mortgage investment corporations with over $3-billion of assets under management, will hold a shareholder vote Sept. 12 to seek approval to convert both from closed-end investment funds into publicly traded companies.

The firm says it is making the move to conform with proposed new rules from the Canadian Securities Administrators (CSA) – an umbrella group for Canada’s provincial securities commissions – that would prohibit closed-end funds from investing in mortgages that are not guaranteed by a government insurer such as Canada Mortgage and Housing Corp.
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In a notice earlier this year, regulators said the emergence of MICs raises questions about whether their active business strategies are appropriate for the closed-end fund model, which was traditionally intended to hold more passive investments. Closed-end funds have historically been aimed at retail investors who may not understand the business model of a fund that has an actively managed operating business.

Let’s not have a day go by without some new tapering chatter:

The good news may be bad news for the Federal Reserve as it considers when to begin scaling back its stimulus.

While unemployment dropped last month to 7.3 percent, the lowest level since December 2008, the decline occurred because of contraction in the workforce, not because more people got jobs. Labor-force participation — the share of working-age people either holding a job or looking for one — stands at a 35-year low.
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The jobless rate is important because Chairman Ben S. Bernanke and his colleagues have established it as the lodestar for policy. Bernanke has said he expects the Fed to complete its asset-purchase program in the middle of next year when unemployment is around 7 percent.

So long as inflation remains contained, the central bank has said it won’t even consider raising its benchmark interest rate until unemployment falls to 6.5 percent. The Fed cut its target for the overnight interbank rate effectively to zero in December 2008 and has held it at that record low.

A key question facing policy makers is how much of the decline in the participation rate is structural and long-lasting and how much is cyclical and temporary.
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A July 2013 paper by Boston Fed economists Michelle Barnes, Fabia Gumbau-Brisa and Giovanni Olivei concluded that a significant portion of the drop since the start of the last recession results from demographic and other developments that probably will persist.

“About two-thirds of the decline has been trend” due to secular forces, Olivei said. He reckons the participation rate now is about three-quarters of a percentage point below where it otherwise would be because of temporary forces stemming from the 2007-09 recession and the muted recovery since then.

His estimate contrasts with research by Julie Hotchkiss, a senior adviser at the Atlanta Fed. In a paper with Georgia State University’s Fernando Rios-Avila that was published in March, she argues that cyclical influences are all-important in explaining the shrinkage in the labor force.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 23bp, FixedResets gaining 2bp and DeemedRetractibles off 7bp. The Performance Highlights table was lengthy, but there was no clear pattern other than a preponderance of winners. Volume was below average.