PrefBlog

Interesting piece on Australian covered bonds:

Australia’s covered bond boom is waning less than two years after the market started as yield-hungry buyers more than double purchases of residential mortgage-backed securities.

Issuance of the debt, backed by the borrower and mortgages that stay on its balance sheet, fell 64 percent to $9.9 billion this year, data compiled by Bloomberg show. The decline in Australian offerings outpaced a 41 percent slump from banks worldwide, according to the data.

Renewed appetite for RMBS, as the market recovers after being decimated by the 2008 U.S. subprime collapse, has seen sales surge while banks reserve covered-bond allowances for when market conditions worsen. Commonwealth Bank of Australia (CBA)’s 2017 covered securities offered just 33 basis points more than swaps last month, compared with a 47 basis-point premium on shorter-dated unsecured notes sold by Westpac Banking Corp., Bloomberg-compiled data show. Global financial debt pays a 141 basis-point spread, Bank of America Merrill Lynch data show.

Does this sound familiar?

A one-bedroom, 55-square meter (592-square feet) apartment in Hoegalidsgatan, in the neighborhood where Larsson’s troubled heroine Lisbeth Salander grew up, sold last month for 3.75 million kronor ($569,000), 17 percent above the listing price, after a bidding war involving nine parties.

That level of demand is typical in the Swedish capital, where a shortage of construction, a population boom and mortgage rates below 3 percent have pushed prices in central Stockholm up 35 percent since early 2009. Borrowing for home purchases has in turn fueled record household debt across the country. That’s sparking concern among policymakers over potential damage to the economy and preventing the central bank from cutting rates, even as Sweden’s exporters say action must be taken to weaken the currency to protect thousands of jobs.

Another day, another slaughter for the Canadian preferred share market, with PerpetualPremiums down 48bp, FixedResets off 36bp and DeemedRetractibles losing 49bp. Naturally enough, the Performance Highlights table is again quite lengthy, comprised entirely of losers, dominated by Straight Perpetuals with a scattering of relatively low-reset FixedResets. BAM issues led the decline … their 4.90% Straight Perpetual new issue settles Friday … it won’t be pretty! Volume was extraordinarily high.

Last Friday we had good news regarding North American employment – now there is good news from the UK:

The pound had its biggest weekly gain versus the dollar in more than three years as U.K. manufacturing, services and home-price data beat economist forecasts, boosting confidence in the economy.

Sterling appreciated for the first week in six against the euro. It rallied to the strongest level in more than three months versus the greenback, as the U.S. currency dropped versus all but two of its 16 major counterparts. U.K. government bonds fell for a third week after Bank of England policy makers kept stimulus measures unchanged at Governor Mervyn King’s final meeting.

It will be interesting to see what happens to Treasury yields this week:

For the first time since 2009, U.S. bond yields are rising at the same time inflation is slowing, providing a cushion for investors in Treasuries whether or not the Federal Reserve slows the pace of its debt purchases.

While 10-year (USGG10YR) yields reached 2.23 percent May 29, the highest since April 2012, the personal consumption expenditure deflator, the Fed’s preferred gauge of inflation, rose 0.7 percent in April from a year earlier, the smallest increase since 2009. The yield gap between Treasury Inflation-Protected Securities, or TIPS, and non-indexed bonds show investors have cut their expectations for consumer price increases to the lowest level since July.

Ever get the feeling that you were in the wrong business?

To get at the heart of a hearing aid’s cost, we can turn to data data unearthed by a German regulator (PDF) studying the major manufacturers. Based on this information, it costs about $250 to make a device that will get sold to an audiologist retailer for $1,000. Hearing aid makers spend $75 per device on research and development and $250 on marketing and then chalk up $425 in profit. The retailers then mark up the price $2,000 to cover overheard and make a profit, resulting in a $3,000 price tag.

And, with respect to financial repression:

New collateral rules for hedge funds, insurers and others in the $633 trillion over-the-counter derivatives market are poised to boost demand for U.S. Treasuries, potentially slowing rising yields as the Federal Reserve considers scaling back unprecedented stimulus.

Swaps traders will need to come up with $800 billion to $4.6 trillion to meet Dodd-Frank Act regulations requiring that the derivatives be backed by clearinghouses that collect upfront collateral such as cash or Treasuries, according to estimates from the Treasury Borrowing Advisory Committee. The regulations take effect today for the second group of firms designated by the Commodity Futures Trading Commission in the market for interest-rate and credit-default swaps.

DBRS confirmed LCS.PR.A at Pfd-5(high):

On October 25, 2012, DBRS downgraded the ratings of the Preferred Shares to Pfd-5 (high) from Pfd-4 (low), due to the volatility in the NAV of the Company and the insufficient levels of downside protection in the months leading up to the rating action. Since then, the NAV of the Company has recovered, with downside protection available to holders of the Preferred Shares reaching 32.2% as of May 30, 2013. However, the Preferred Share dividend coverage ratio is rather low at 0.6 times and there is less than one year remaining until the Preferred Shares mature. While Canadian life insurance companies have recovered, the industry as a whole continues to experience stress as interest rates remain at all-time lows. As a result, the rating of the Preferred Shares has been confirmed at Pfd-5 (high).

E-L Financial has sold The Dominion to a US insurer:

One of Canada’s oldest insurance companies is being sold for $1.125-billion to a major U.S. insurer, in a deal that will see the business fall into foreign hands for the first time since it was founded by Sir John A. Macdonald in 1887.

Dominion of Canada General Insurance Co. is to be acquired by The Travelers Companies Inc.
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E-L Financial hasn’t yet decided what it will do with the cash left on its books after the sale closes in the last quarter of the year, pending regulatory approvals and other conditions.

There was carnage for the Canadian preferred share market today, with PerpetualPremiums down 55bp, FixedResets off 41bp and DeemedRetractibles losing 73bp. As might be expected, the Performance Highlights table is very lengthy, with only a single winner – ELF.PR.F, which merely recovered some of Friday’s extraordinary loss. Volume was quite high, though not – yet! – sufficient to indicate widespread panic.

There is more indication that, if Carney was Spend-Every-Penny’s lapdog, Poluz will be his parakeet:

The two previous Bank of Canada governors, Mr. Carney and David Dodge, were unafraid to engage on subjects that didn’t necessarily pertain to the Bank of Canada’s core mandate of keeping inflation at an annual rate of 2 per cent. This tendency brought both men attention that they might not have had otherwise, and could cause them to eclipse their political masters.

Mr. Poloz came across as inclined to mind his own business. He called the central bank a “team player” and “part of the family of the public service.” He told New Democratic finance critic Peggy Nash that he had no problem with a legislation that would give cabinet a veto over hiring decisions at Crown corporations, including the central bank. “I see quite a clean separation between, if you like, administrative independence versus monetary policy independence,” he said.

How can you run an enterprise if you don’t have total control over staff? Answer: you can’t.

There was a decent jobs number in the US:

American employers took on more workers than forecast in May as the world’s largest economy weathered the impact of higher taxes and federal spending cuts.

Payrolls rose 175,000 after a revised 149,000 increase in April that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast in a Bloomberg survey called for a gain of 163,000. The unemployment rate climbed to 7.6 percent from 7.5 percent as a surge in the number of people entering the labor force swamped the number of positions available.

The Canadian number was very good:

The Canadian economy churned out 95,000 jobs last month, the second-biggest monthly gain on record, mostly in full-time positions in the private sector.

The jump in job creation is the largest since August, 2002, and sent the country’s jobless rate down a notch to 7.1 per cent in May, Statistics Canada said Friday. The increase was eight times what economists had expected.
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Private companies led the way. The private sector added 94,600 positions while the public sector created 6,600 jobs. Self employment fell by 6,200. The construction sector added 42,700 jobs, the biggest gain on record.

Wage gains, though still modest, are running above the rate of inflation, with average hourly wages growing 2.3 per cent in May from last year.

Bloomberg has an interesting piece about high frequency trading:

For the first time since its inception, high-frequency trading, the bogey machine of the markets, is in retreat. According to estimates from Rosenblatt Securities, as much as two-thirds of all stock trades in the U.S. from 2008 to 2011 were executed by high-frequency firms; today it’s about half. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day. Speed traders aren’t just trading fewer shares, they’re making less money on each trade. Average profits have fallen from about a tenth of a penny per share to a twentieth of a penny.
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By the end of Aug. 2, Knight had spent $440 million unwinding its trades, or about 40 percent of the company’s value before the glitch.

Knight is being acquired by Chicago-based Getco, one of the leading high-frequency market-making firms, and for years considered among the fastest. The match, however, is one of two ailing titans. On April 15, Getco revealed that its profits had plunged 90 percent last year. With 409 employees, it made just $16 million in 2012, compared with $163 million in 2011 and $430 million in 2008. Getco and Knight declined to comment for this story.

Getco’s woes say a lot about another wound to high-frequency trading: Speed doesn’t pay like it used to. Firms have spent millions to maintain millisecond advantages by constantly updating their computers and paying steep fees to have their servers placed next to those of the exchanges in big data centers. Once exchanges saw how valuable those thousandths of a second were, they raised fees to locate next to them. They’ve also hiked the prices of their data feeds. As firms spend millions trying to shave milliseconds off execution times, the market has sped up but the racers have stayed even. The result: smaller profits. “Speed has been commoditized,” says Bernie Dan, CEO of Chicago-based Sun Trading, one of the largest high-frequency market-making trading firms.

It was a grim day for the Canadian preferred share market – for half of it, anyway! – with PerpetualPremiums losing 48bp, FixedResets gaining 4bp and DeemedRetractibles down 28bp. The lengthy Performance Highlights table is comprised almost entirely of losers, largely PerpetualPremiums. Volume was average.

NextEra’s legal tactics and understanding of the word “terror” terrify me.

The losing streak on the Canadian preferred share market continued today, with PerpetualPremiums losing 17bp, FixedResets down 14bp and DeemedRetractibles off 11bp. The performance highlights table is comprised entirely of losers, mostly Straight Perpetuals – but it’s only a little above average in length! Volume was high.

The SEC is continuing to tiptoe around Money Market Mutual Fund reforms in an effort to please their future employers at the fundcos:

The SEC’s proposal includes two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value (NAV) for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress. The proposal also includes additional diversification and disclosure measures that would apply under either alternative.
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The public comment period for the proposal will last for 90 days after its publication in the Federal Register.

Gating will accelerate runs, as investors rush to redeem before they are imposed. Similarly for liquidity fees, in which case it’s devil take hindmost.

What is gating? The 698-page full proposal (which I confess I have not read in its entirety) explains:

The second alternative proposal would require money market funds to impose a liquidity fee (unless the fund’s board determines that it is not in the best interest of the fund) if a fund’s liquidity levels fell below a specified threshold and would permit the funds to suspend redemptions temporarily, i.e., to “gate” the fund under the same circumstances.

It will be recalled, by those who retain the brains they were born with, that MMFs can only break the buck if there is a default and the only way to protect against such an occurrence is capital. However:

In the sections that follow, we discuss our evaluation of a NAV buffer requirement and an MBR requirement for money market funds. We also discuss comments FSOC received on these recommendations. For the reasons discussed below, the Commission is not pursuing these alternatives because we presently believe that the imposition of either a NAV buffer combined with a minimum balance at risk or a stand-alone NAV buffer, while advancing some of our goals for money market fund reform, might prove costly for money market fund shareholders and could result in a contraction in the money market fund industry that could harm the short-term financing markets and capital formation to a greater degree than the proposals under consideration.

One of the ‘reasons against’ is completely devoid of logic:

In addition, a NAV buffer does not protect shareholders completely from the possibility of heightened rapid redemption activity during periods of market stress, particularly in periods where the buffer is at risk of depletion. As the buffer becomes impaired (or if shareholders believe the fund may suffer a loss that exceeds the size of its NAV buffer), shareholders have an incentive to redeem shares quickly because, once the buffer fails, the fund will no longer be able to maintain a stable value and shareholders will suddenly lose money on their investment.504 Such rapid severe redemptions could impair the fund’s business model and viability.

Naturally, the buffer size most susceptible to these ill-effects is the buffer size of …. zero! So the SEC wants to maximize the incentive for shareholders to redeem shares quickly.

Equally moronic is:

The most significant direct cost of a NAV buffer is the opportunity cost associated with maintaining a NAV buffer. Those contributing to the buffer essentially deploy valuable scarce resources to maintain a NAV buffer rather than being able to use the funds elsewhere. The cost of diverting funds for this purpose represents a significant incremental cost of doing business for those providing the buffer funding. We cannot provide estimates of these opportunity costs because the relevant data is not currently available to the Commission.

The purpose of a market is to find a clearing price. The amount of buffer capital available will be determined by the excess yield it receives. The excess yield paid to buffer capital will determine the yield reduction to the normal unitholders. The yield reduction to the normal unitholders will determine the size of the fund. The size of the fund will determine the amount of buffer capital required.

It all works out, as long as you’re not afraid of free markets.

And then they get to the nub:

Taken together, the demand by investors for some yield and the incentives for fund managers to reduce portfolio risk may impact competition and capital formation in two ways. First, investors seeking higher yield may move their funds to other alternative investment vehicles resulting in a contraction in the money market fund industry.

Naturally, a contraction in the MMF industry would impair employment prospects for regulators.

In his opening statement Commissioner Troy A. Paredes demonstrated that it is possible to have lived through the Credit Crunch and not learnt a damned thing:

It has been suggested that some investors might redeem preemptively before a fee is imposed or a gate comes down. I think that this concern is overstated. Boards have discretion over whether a fee or gate will be instituted. Because fund investors do not know what the board will decide, they may find it difficult to redeem preemptively with any confidence that their timing is correct. In any event, to reduce the potential skittishness of investors, fund managers have an incentive to operate money market funds even more conservatively than Rule 2a-7’s risk-limiting conditions require. On the remote chance that preemptive redemptions are heavy enough to stress a fund, then the liquidity fee would be triggered and the board could decide to gate, the corrective effects of which I just described.

In the midst of a panic with several possible outcomes investors will (i) assign higher than realistic probabilities to their worst-case scenario and (ii) double it.

The basic theme is that MMFs should be allowed to endanger financial stability because a more conservative stance might harm their business.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums losing 21bp, FixedResets gaining 3bp and DeemedRetractibles down 20bp. The relatively lengthy performance highlights table is comprised entirely of losers, mostly straight perpetuals with a couple of low-coupon DeemedRetractibles thrown in. Volume was high.

PerpetualDiscounts now yield 4.98%, equivalent to 6.47% interest at the standard conversion factor of 1.3x. Long corporates now yield 4.21%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 225bp, unchanged from the figure reported May 29.

Europe is escalating the war on bankers, with proposed rules on fund manager bonuses and performance fees:

European Parliament lawmakers will delay voting on rules to curb fund manager bonuses as they continue to tussle over details of the plans.

Legislators are weighing changes to draft measures approved by the assembly’s economic and monetary affairs committee earlier this year that would ban managers of so-called UCITS funds from receiving bonuses worth more than their fixed pay and crack down on performance fees, Sven Giegold, the parliament’s lead lawmaker on the dossier, said today in an e-mail.
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UCITS, or Undertakings for Collective Investment in Transferable Securities, had more than 6 trillion euros ($7.8 trillion) under management as of April 2012, according to the European Commission. The funds are regulated at EU level and have the right to operate throughout the 27-nation bloc if they meet minimum oversight and investor-protection standards.

The big US exchanges can no longer compete in the marketplace, so they have come up with a bold, innovative strategy: outlaw competition:

Three large U.S. stock exchanges are lobbying for new limits on dark pools and other competitors, arguing that too much trading has become hidden on private venues that create more cost and volatility in public markets.

Chief executive officers of NYSE Euronext (NYX) Inc., Nasdaq OMX Group Inc (NDAQ) and Bats Global Markets Inc (BATS). have met in Washington over the past two months with lawmakers and the Securities and Exchange Commission. They’ve asked for a rule that could divert more orders to exchanges rather than trading in dark pools or within a broker’s inventory.

The exchanges say that more than a third of all stock transactions now occur without pre-trade prices being made public, up from 16 percent in January 2008. They are pressing the SEC to make market restructuring a priority as the agency resets under its new chairman, Mary Jo White.

“We are protecting the sanctity of the public quote, and you can expect us to continue to protect it with meetings we’ll be having and raising awareness of the issue in a very public way,” NYSE CEO Duncan Niederauer said in an interview.

I think it’s very noble of Niederauer to protect the sanctity of his fat salary.

DBRS has submitted a pugnacious comment letter to the SEC:

Section 939F of the Dodd-Frank Act directs the Commission, by rule, to establish a new system for the assignment of NRSROs to rate structured finance products as the Commission determines is necessary or appropriate in the public interest or for the protection of investors. In other words, the Commission must make a threshold determination regarding the public interest and the protection of investors before engaging in any new rulemaking on assigned credit ratings.[Footnote] If the threshold determination is made, the SEC must implement the system described in Exchange Act Section 15E(w) — a Dodd-Frank provision that was never enacted — unless the SEC determines that another system would better serve the public interest and the protection of investors.

While panelists at the Roundtable discussed many of the ways in which a Section 15E(w) system would not serve the public interest or the protection of investors, scant attention was paid to the threshold question as to whether any rulemaking is necessary and appropriate in this situation. DBRS continues to believe that the answer to this question is a resounding no.
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In order to cross the threshold to permissible rulemaking here, the Commission must find that the panoply of recently adopted and still-to-be-adopted NRSRO requirements is insufficient to protect investors, and that even with all of the publicly available information about rating methodologies and performance history, investors are incapable of evaluating the relative quality of NRSROs and their credit ratings and therefore, need the government to do it for them.
Since the last batch of proposed Dodd-Frank rules has yet to be implemented, DBRS submits that the Commission cannot make the required “necessary and appropriate” findings at this time.

Footnote reads: The consequences of neglecting threshold determinations in Dodd-Frank rulemaking are illustrated by International Swaps & Derivatives Ass’n. v. U.S. Commodity Futures Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 2012). In this case, the court vacated and remanded to the CFTC for further proceedings a derivatives position limits rule that the CFTC had adopted pursuant to the Dodd-Frank Act. In so doing, the court rejected the CFTC’s contention that its rulemaking was mandated by the statute without regard to whether such rulemaking was necessary or appropriate. Although the court found the phrasing of the Dodd-Frank amendment to the Commodity Exchange Act to be ambiguous (hence the reason for the remand), no such ambiguity exists in Section 939F. It is clear that the SEC is to adopt a rule establishing a system for the assignment of credit ratings only upon a determination that such a system is necessary and appropriate in the public interest or for the protection of investors.

It was a violently mixed day for the Canadian preferred share market, with PerpetualPremiums losing 17bp, FixedResets gaining 3bp and DeemedRetractibles down 13bp. Volatility was low. Volume was high.

Julie Dickson gave a speech to the Institute of Internal Auditors:

This is not due to any particular incident, but rather seems to reflect a range of factors. Audit firm regulators such as the Canadian Public Accountability Board (CPAB), – and its counterparts around the world – which were largely set up in reaction to Enron, are up and running. And as usually happens when there is someone looking over your shoulder, these audit regulators are finding issues in external audits that require attention, such as a lack of professional skepticism on the part of external auditors.

Isn’t that amazing? Hire some nit-pickers, and they’ll nit-pick. Incredible.

Another poor day for the Canadian preferred share market, with PerpetualPremiums losing 16bp, FixedResets down 15bp and DeemedRetractibles off 12bp. The performance highlights table is only of average size, but is comprised entirely of losers. Volume was on the high side of average.

During the Credit Crunch, I wondered why CIT Group wasn’t an attractive takeover target. Now, nearly five years later, the speculation is spreading:

A Canadian lender such as Toronto-Dominion Bank could profit by using low-cost deposits to fund CIT’s high-yielding commercial loans, Palmer said. Analysts including Bert Ely at
Ely & Co. have said CIT could be a good match with San Francisco-based Wells Fargo & Co. (WFC), given the bank’s involvement in similar markets such as factoring and small-business lending. Factoring involves buying receivables at a discount from manufacturers to provide them with cash.