PrefBlog

“Markets, schmarkets!” says the US consumer, “Where can I spend what I just saved on gas?“:

Retail sales in the U.S. climbed for a second straight month, a sign consumers may be looking past recent volatility in financial markets.

The 0.2 percent increase in August followed a 0.7 percent gain in July that was larger than previously reported, Commerce Department figures showed Tuesday in Washington. The median forecast of 84 economists surveyed by Bloomberg called for a 0.3 percent advance.

Although confidence has taken a hit from stock-market turmoil and global-growth concerns, the data show households are still putting their savings from cheap energy to work. More jobs and higher pay would go a long way in supporting household spending, which Federal Reserve policy makers are watching as they consider raising interest rates as soon as this week.

The news whacked Treasuries:

Treasuries tumbled, lifting the two-year note yield to the highest since April 2011, as gains in U.S. retail sales prompted investors to retreat from the securities that would be most affected if the Federal Reserve raises interest rates.

Sell orders in two- and five-year Treasury futures helped accelerate the move higher in yields amid investors’ concern that the Fed may raise rates as soon as Thursday for the first time since 2006. Yields rose the most in almost three weeks after data showed retail sales increased 0.2 percent in August while July’s gain was larger than previously reported. The figures signal consumers may be looking past recent financial-market volatility.
…
Treasury two-year note yields rose eight basis points, or 0.08 percentage point, to 0.80 percent as of 5 p.m. in New York, based on Bloomberg Bond Trader data. The price of the 0.625 percent security due in August 2017 fell 5/32, or $1.56 per $1,000 face amount, to 99 21/32.

Benchmark 10-year note yields rose 10 basis points to 2.29 percent.

Futures contracts show a 28 percent probability that the Fed will boost rates when it meets Sept. 16-17, according to data compiled by Bloomberg.The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, versus the current target of zero to 0.25 percent.

It was a mostly lousy day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets down 58bp and DeemedRetractibles off 14bp. The Performance Highlights table is comprised almost entirely of losers. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 20.00 to be $0.79 rich, while TRP.PR.C, resetting 2016-1-30 at +164, is $1.05 cheap at its bid price of 13.35.

Click for Big

Another good fit today for MFC, with Implied Volatility falling a bit today.

Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 24.41 to be 0.48 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 19.95 to be 0.29 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.90 to be $1.37 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 22.44 and appears to be $0.99 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.50, looks $0.57 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.74 and is $0.69 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.08%, with no outliers. The distribution is no longer bimodal. There are no junk outliers below -2.00%, but two above 0.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

It’s nice to see an intelligently run bond ETF:

The Market Vectors Fallen Angel High Yield Bond ETF (ANGL) is up 28 percent since its April 2012 inception, which is double the performance of the SPDR Barclays High Yield Bond ETF (JNK) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), as seen in the chart below.
…
Generally speaking, it really comes down to a value factor in bonds that ANGL has tapped into. When these bonds — typically issued by large companies such as Alcoa, Sprint, and Nokia — get downgraded from investment grade to high-yield, they tend to get oversold leading up to the downgrade. Much of this selling is from active managers and institutions getting rid of these bonds that they owned to keep up with their investment-grade benchmarks. This means extra selling pressure.

It was a poor day for the Canadian preferred share market today, with PerpetualDiscounts down 24bp, FixedResets losing 43bp and DeemedRetractibles off 1bp. There is a fairly long Performance Highlights table dominated by losing FixedResets, but three TRP issues did well. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 20.05 to be $0.61 rich, while TRP.PR.C, resetting 2016-1-30 at +164, is $0.91 cheap at its bid price of 13.50.

Click for Big

Another good fit today for MFC, with Implied Volatility falling a bit today.

Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 24.36 to be 0.34 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 19.83 to be 0.63 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.90 to be $1.40 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 22.64 and appears to be $1.11 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.48, looks $0.41 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.75 and is $0.80 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.14%, with no outliers. Note that the distribution is bimodal, with NVCC non-compliant bank issues averaging -1.28% and the unregulated issues averaging -0.95%. There are no junk outliers below -2.00%, but two above 0.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Civil Forfeiture writ large! There can no longer be any doubt but that the War On Banks is nothing more than a populist tax-grab:

The Manhattan district attorney is sending $38 million taken in civil forfeiture from international banks in New York to cities and counties across the country to pay for testing 56,000 rape kits that have been collecting dust in police storage rooms for years.
…
The money comes from large settlements Mr. Vance’s office reached with international banks charged with violating United States sanctions, among them BNP Paribas, HSBC and Standard Chartered Bank. The office has amassed more than $800 million from these settlements, and Mr. Vance so far has used about $240 million to pay for local criminal justice programs, like providing computerized tablets to police officers and upgrading security in housing projects.

I’m pleased to learn that TSFA limits are becoming a campaign issue:

Just how much Canadians should be allowed to stash in their tax-free savings accounts is expected to become an election issue, after NDP Leader Tom Mulcair and Liberal Leader Justin Trudeau repeated promises this week to roll back a Conservative budget measure that nearly doubled the contribution limit on such accounts.

In interviews with CBC’s Peter Mansbridge broadcast this week, both opposition leaders confirmed they would scrap the Conservative move, unveiled in this year’s federal budget, to increase the limit for a tax-free savings account (TFSA) from $5,500 to $10,000.

“The doubling of it is irresponsible,” Mr. Trudeau said. “It’s only the wealthiest Canadians who have $10,000 laying around at the end of the year that they can put into that.”

I just wish our economically illiterate chatteratti had a more coherent plan than ‘soak the rich’, but if we insist on enthroning politicians whose greatest achievement in life was being born, then we have to take what we get.

I have long been of the view that contribution limits are ridiculously high; the lifetime limit for all tax-advantaged savings should be set so that an annuity purchased at age 65 will replace 75% of the median Canadian family income of about $75,000. So that’s an income requirement of about $56,000, which requires about $1.1-million in capital right now, which implies annual contributions totalling about $23,000 with a constant 3% real growth rate over thirty years. And all this includes CPP!

If you don’t like those numbers, suggest your own and we can talk. But I see no reason why somebody with expectations exceeding these levels should be subsidized.

And, just as some light relief, here’s the latest installment of Spy vs. Spy:

When the Justice Department arrested the chairman of Temple University’s physics department this spring and accused him of sharing sensitive American-made technology with China, prosecutors had what seemed like a damning piece of evidence: schematics of sophisticated laboratory equipment sent by the professor, Xi Xiaoxing, to scientists in China.

The schematics, prosecutors said, revealed the design of a device known as a pocket heater. The equipment is used in semiconductor research, and Dr. Xi had signed an agreement promising to keep its design a secret.

But months later, long after federal agents had led Dr. Xi away in handcuffs, independent experts discovered something wrong with the evidence at the heart of the Justice Department’s case: The blueprints were not for a pocket heater.

It was a reasonably good day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets up 46bp and DeemedRetractibles gaining 31bp. MFC FixedResets were notable on the good side of a relatively subdued Performance Highlights table. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 20.30 to be $0.89 rich, while TRP.PR.C, resetting 2016-1-30 at +164, is $1.36 cheap at its bid price of 13.15.

Click for Big

Another good fit today for MFC, with Implied Volatility edging up a bit today.

Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 21.75 to be 0.42 rich, while MFC.PR.J, resetting at +261bp on 2018-3-19, is bid at 22.00 to be 0.38 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.08 to be $1.24 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 22.50 and appears to be $0.96 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.85, looks $0.59 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.98 and is $0.76 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.11%, with no outliers. Note that the distribution is bimodal, with NVCC non-compliant bank issues averaging -1.26% and the unregulated issues averaging -0.90%. There is one junk outlier below -2.00% and two above 0.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?