PrefBlog

Well, holy smokes:

With more than half the results counted, Britons appear to be choosing to withdraw from the European Union.

Several polls published at the end of a bitter campaign suggested the Remain forces would win and leaders of the Leave campaign initially said there were many signs they had lost.

But with more than 200 of the 382 voting areas reporting, Leave was increasing its lead over Remain — 51.5 per cent to 48.5 per cent. The margin between the two sides was about 500,000 votes at that point.
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The pound first soared in Asian markets as the polls were announced, then collapsed when Leave took an early lead. The loss of more than 5 per cent was even larger than during the global financial crisis.

So it’s an interesting night:

Global markets buckled, with stocks plunging from Tokyo to London and Chicago, after early results from Britain’s referendum on membership of the European Union put the “Leave” campaign ahead. The pound fell the most on record, while haven assets jumped.

Sterling tumbled as much as 8.3 percent, the euro retreated from a six-week high and the yen surged. South Africa’s rand led losses among the currencies of commodity-exporting nations, sliding more than 5 percent as oil sank toward $48 a barrel and industrial metals slumped. Gold soared with U.S. Treasuries as investors piled into haven assets. Futures on the FTSE 100 Index plunged with S&P 500 Index contracts as benchmark stock gauges slid across Asia.

and:

The pound is making history as the chances of a Brexit grow.

The U.K. currency is headed for its biggest drop on record as results from Britain’s European Union referendum showed a stronger-than-expected vote for the “Leave” campaign. Volatility accelerated as the results from the referendum filtered through, with sterling trading in a range of more than 13 U.S. cents as an index of betting odds compiled by Oddschecker put the vote to exit the EU at 88 percent, from 23 percent on Thursday.

The 7.8 percent plunge on Friday compares with the 4.1 percent drop on 1992’s Black Wednesday, when the pound was forced out of Europe’s exchange-rate mechanism — the previous worst daily drop on record. The pound’s biggest-ever intraday decline has already been surpassed – a 5.9 percent decline on Oct. 24, 2008 — when stock markets crashed around the world during the Great Financial Crisis.

To date, the most interesting day of my career was fairly early on; September 16, 1992 – when the UK was forced out of the European Exchange Rate Mechanism.

There’s a pretty good chance that tomorrow will be the second most interesting day of my career!

But who knows? Maybe even these shattering events will be Trumped in November!

All this is happening when liquidity in the Canadian preferred share market is getting a little spotty … look at the quotes today, f’rinstance, on AIM.PR.B (10.06-21.50):

Click for Big

and HSE.PR.B (10.65-22.00)

Click for Big

HSE.PR.B was also featured on May 31. I have not checked whether this lamentable state of affairs is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers.

Canada Post is looking at drones:

The post office is quietly exploring the possibility of small, unmanned aerial vehicles one day helping get the mail to where it needs to go, said Jon Hamilton, a Canada Post spokesman.
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Canada Post declined to release documents through the Access to Information Act about its interest in drones, citing sensitivities such as trade secrets and financial, commercial, scientific or technical data.

But Mr. Hamilton insists there are no drone prototypes in the post office laboratory – at least not yet.

He characterized the effort as a “paper exercise” at the very early exploratory stages, aimed at “examining what’s out there today.”

I wonder, I wonder … I wonder if current technology would allow for a cheap dumb mechanical system to be added to community mailboxes – so a drone could deliver the mail to a hopper on a community mailbox and a sorter would put the individual letters in their proper boxes …

PerpetualDiscounts now yield 5.43%, equivalent to 7.06% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 310bp, a significant narrowing from the 320bp reported June 15.

A day like today needs a little light relief; it seems that the Big Banks’ darling Visa is shocked, shocked, that:

“They [Walmart] are using their size and scale to give themselves an unfair advantage,” it says.

I’ll tell you guys one thing … once some fintech company comes up with a payment mechanism that is reasonably widespread and cheap, I’ll start taking it for PrefLetter. The day can’t come soon enough!

Another good joke – although rather old and too frequently told – is investors’ return expectations:

The average expectation in a recent survey: 9.1 percent. Americans and millennials set the bar highest, at 11.1 percent and 10.2 percent, respectively.

The average stock market yield globally: 3.8 percent. And benchmark interest rates in major developed markets are at 0.5 percent or lower—or negative.

The expectations of financial advisers also appear high, according to the new global investor study by asset manager Schroders. The study, which surveyed 20,000 investors across 28 countries, found that advisers around the globe wanted to generate a minimum of 7.9 percent a year for clients—lower than what the investors wanted but still high given the low interest rates. U.S advisers cited 5 percent as their target for annual investment income.

There’s been a lot of noise lately about housing prices in Vancouver and Toronto; foreign money has come in for a great deal of opprobrium; low mortgage rates and easy credit also take a lot of blame. I contend that another culprit is the lousy returns and extreme volatility experienced in the markets since the turn of the century – why invest in the stock market when you can buy a house? We won’t get rid of that attitude until we see a lot more underwater mortgages … which, unlike American mortgages, have recourse to the borrower.

As noted by Assiduous Reader prefobsessed in the comments to June 15, the day began with a sharp decline of over 2% for TXPR. There was a significant recovery, but the market still ended the day down a lot. As far as I can make out, this resulted from a sharp decline in Treasury yields:

Treasury 10-year note yields fell five basis points to 1.524 percent as of 10:02 a.m. in New York, the lowest level since August 2012, according to Bloomberg Bond Trader data.

This decline was was subsequently reversed:

Treasuries erased gains after 10-year note yields touched the lowest level since 2012, amid shifting bets on the outcome of next week’s U.K. vote on membership in the European Union.

Benchmark 10-year note yields climbed after a U.K. Labor Party lawmaker was killed Thursday, leading to a suspension of campaigning before the June 23 Brexit referendum. Treasuries had gained as part of a rally in global government securities that pushed benchmark 10-year yields in Germany and Japan further below zero.

Demand for Treasuries rose after Federal Reserve Chair Janet Yellen on Wednesday said slow productivity growth and aging societies may depress interest rates, and also cited the risk of Brexit as a reason to keep rates steady. Polls in recent days have shown the “Leave” camp leading. The Guardian newspaper reported police are investigating reports saying the suspect in the U.K. incident had shouted “Britain First,” the name of a group that campaigns against immigration and membership in the EU.

… but nobody told the Canadian preferred share market:

Click for Big

The GOC-5 closed at 0.57% and who knows? Maybe we’re back to the days when all changes in GOC-5 would be reflected in FixedReset prices (with a high negative duration!) as the market attempts to keep yields constant … which makes no sense, but since when is the preferred share market supposed to make sense?

The Fed held the line on policy rates today:

Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

This news, while expected, had immediate effect:

The dollar weakened, touching a 20-month low versus the yen, after the Federal Reserve held off on raising interest rates and suggested the pace of future increases will be slower than previously predicted.

The U.S. currency fell against most of its major peers as policy makers pared back rate-hike expectations, dimming the outlook for policy divergence from increased monetary stimulus in Europe and Japan. The number of officials who see just one increase in 2016 rose to six from one in the previous forecasting round in March, according to projections released by the Federal Open Market Committee.

Yellen is pointing at structural factors:

Yellen in the past has ascribed the low level of rates mainly to lingering headwinds from the financial crisis — tight mortgage credit, for instance — and suggested that they would dissipate over time.

On Wednesday, though, she also pointed to more permanent forces that could depress rates for longer, namely, slow productivity growth and aging societies, in the U.S. and throughout much of the world.

In a press conference after the Fed held policy steady, Yellen spoke of a sense that rates may be depressed by ”factors that are not going to be rapidly disappearing, but will be part of the new normal.”

The potential for Brexit was also mentioned:

Britain’s June 23 referendum on membership of the European Union was also “one of the uncertainties that we discussed and that factored into today’s decision,” Chair Janet Yellen said after the Federal Open Market Committee voted unanimously to leave rates steady at the end of a two-day meeting on Wednesday in Washington.

“It is a decision that could have consequences for economic and financial conditions in global financial markets,” she told a press conference following the meeting. “If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy.”

Fears of Brexit are so strong that the UK government it trotting out its mouthpieces to parrot the party line:

At first, Mark Carney seemed willing to leave the Brexit debate to others.

What followed instead was a bout of verbal intervention that made the Bank of England governor a target of ire by exit proponents and a key figure in the intensifying campaign for Britain to remain in the European Union.

And all this comes on the heels of increasingly negative Euro rates:

The yield on Germany’s 10-year government bund, Europe’s benchmark security, fell below zero for the first time on record, as investors’ seemingly insatiable demand for haven assets created another bond-market milestone.

The nation joined Japan and Switzerland in having 10-year bond yields of less than zero. The plunge in yields, which has been driven by European Central Bank’s policy of negative interest rates and asset purchases, has accelerated amid a weakening global economic outlook and as polls indicate the “Leave” campaign in Britain’s European Union referendum is gaining momentum.
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The German 10-year securities join the more than 40 percent of the $6.4 trillion of euro-region debt that already has yields below zero, according to the Bloomberg Eurozone Sovereign Bond Index, meaning investors who buy the bonds now and hold its to maturity will receive less than they paid.

PerpetualDiscounts now yield 5.42%, equivalent to 7.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.85%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a widening from the 310bp reported June 8.