PrefBlog

Overall it was mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets up 5bp and DeemedRetractibles off 1bp. The averages concealed a lot of underlying volatility, however, as the Performance Highlights table is quite lengthy and features a number of BAM FixedReset losers. Volume was quite high.

This housing news is counter-intuitive:

Home repossessions in the U.S. jumped 11 percent in May after declining for the previous five months as rising prices and limited inventory for sale across the country spurred banks to complete foreclosures.

Lenders took back 38,946 homes, up from 34,997 in April, according to Irvine, California-based data firm RealtyTrac, which tracks notices of default, auction and seizures. Thirty-three states had increases in the number of homes repossessed, RealtyTrac said in a report today.

Banks are more willing to move to the final stage of foreclosure because there is sufficient demand and prices are improving, said Eric Workman of Tinley Park, Illinois-based Mack Cos., which aggregates single-family rental homes and resells them to individuals and institutional investors. U.S. home prices advanced almost 11 percent in the year through March, the biggest 12-month gain since April 2006, according to the S&P/Case-Shiller index of values in 20 cities.
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Private-equity firms, hedge funds and individuals are all buying foreclosed or distressed homes to turn into rental properties as prices remain 28 percent below their 2006 peak. Companies including Blackstone Group LP (BX), which has invested more than $5 billion to buy almost 30,000 homes, and Colony American Homes Inc., which owns more than 12,000 properties, are helping to increase prices in areas hit hard by the real estate crash by draining the market of inventory as low borrowing costs and improving employment fuel demand from buyers.

Guess who’s the latest big bankruptcy?:

Detroit (9845MF), on the brink of bankruptcy with $17 billion in liabilities, will suspend payments on $2 billion of unsecured debt, beginning with an installment due today, Emergency Manager Kevyn Orr said.

With today’s missed $39.7 million payment on debt issued to fund pensions, Detroit becomes the most populous U.S. city to default since Cleveland in 1978. Unsecured creditors may receive as much as 10 cents on the dollar under a deal Orr offered to more than 100 creditors and union representatives today.

The city would create a regional water agency to take the place of its municipally owned department, and active and retired workers would see their pensions reduced under the plan. Detroit also would spend $1.25 billion over a decade to improve services, eliminate blight and create a more livable community.

If our experience is any indication, a regional water agency is just another tax grab – rates in Toronto have soared, while personnel have unchecked power and huge arrogance.

Meanwhile, in the reaching for yield department:

Junk-rated borrowers from Rite Aid Corp. (RAD) to Atkins Nutritionals Holdings Inc. are raising a riskier type of loan that offers a lesser claim on their assets at a pace last seen before the financial crisis.

Second-lien loan issuance has climbed to $17.1 billion this year, versus $18.6 billion in all of last year and on pace to surpass the record $28.7 billion issued in 2007, according to data compiled by Bloomberg. Rite Aid, the third-largest U.S. drugstore chain, reduced the interest rate on its $500 million loan due to increased investor demand, while dieting company Atkins raised $355 million in loans, including second-lien debt, to fund a dividend.

Investors are turning to the junior-ranking loans that would shield them from an increase in interest rates and offer more protection than bonds, which have been pummeled as speculation increases the Federal Reserve (FDTR) will pare back its unprecedented stimulus. Second-lien loans have fallen just 0.3 percent since Fed Chairman Ben S. Bernanke said the central bank could reduce its asset purchases if the economy shows sustained improvement, while junk bonds have lost 9 times more.

The BoE is losing a good man:

Incoming Bank of England Governor Mark Carney will get an early chance to overhaul management of the U.K. central bank after Paul Tucker said he will step down as deputy governor.

Beaten by the Canadian to the governorship, Tucker said today he will end three decades in policy making later this year and work in U.S academia. Fellow deputy Charlie Bean is also scheduled to leave in the next year and other officials are nearing the ends of their terms. Carney has already left the Bank of Canada and formally starts work in London on July 1.

The UK’s loss is a US win. Tucker, by the way supported high trigger CoCos.

Nothing to do with economics, but this is alleged Medicare fraud too good to ignore:

Based in part on surreptitious tape recordings, an FBI affidavit lays out allegations that a Sacred Heart pulmonologist kept patients too sedated to breathe on their own, then ordered unneeded tracheotomies for them — enabling the for-profit hospital to reap revenue of as much as $160,000 per case.
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The affidavit contains an allegation that tracheotomy patients were lucrative for doctors as well as the hospital: The physician could bill $160 each time he visited a tracheotomy patient at the hospital, versus $32 for seeing a ventilator patient in a nursing home.

Today’s puzzle in included in the recent article Four tips for nervous bond investors:

Step 4: Understand the differences between individual bonds, bond funds and guaranteed investment certificates.
Bond fund prices move in the opposite direction of interest rates – they fall when rates are rising and rise when rates decline. With the exception of a fairly obscure category called the target date bond ETF, there is no maturity date where your original investment is handed back to you.

Individual bonds give you that maturity date, although investors may not get back exactly what they paid for their bonds. That’s because many bonds today sell with a price premium over their issue price. When they’re redeemed, it will be at the issue price.

GICs are a big problem-solver for investors worried about holding bonds in a rising rate world. GICs aren’t easily sold before maturity unless you buy a cashable version (which will mean a sacrifice in yield). But they can provide higher yields than government and many high quality corporate bonds, with the additional benefit of deposit insurance from either the federal Canada Deposit Insurance Corp. or credit union plans that vary from province to province. “I like GICs in a rising rate environment,” said [fixed income strategist at TD Wealth] Mr. [Sheldon] Dong. “They preserve your capital.”

Is the assertion that GICs have less interest rate risk than any other bond with the same cash-flows? If so, then I trust all readers will be aware that this is hogwash. You can’t eliminate risk by ignoring it.

It was a day of recovery (or sucker’s rally!) for the Canadian preferred share market today, with PerpetualPremiums (many of which should really be called PendingPerpetualDiscounts, until the month-end rebalancing of the indices!) winning 28bp, FixedResets gaining 18bp and DeemedRetractibles up 22bp. The very lengthy Performance Highlights table is dominated by winning Straight Perpetuals. Volume was above average.

Riding the tiger is easy … the hard part is getting off:

Federal Reserve Chairman Ben S. Bernanke has repeatedly said a reduction in the Fed’s $85 billion in monthly bond purchases wouldn’t mean an end to record easing. Investors are behaving as if they don’t believe him.

The yield on the 10-year Treasury note has risen to 2.19 percent, an almost 14-month high, from 1.63 percent on May 2 as investors bet the Fed will begin trimming bond buying. The surge is undermining Bernanke’s unprecedented effort to hold down borrowing costs and combat 7.6 percent unemployment.
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Investors interpret policy makers’ talk of reduced bond purchases as a signal the Fed will begin to increase its main interest rate as soon as next year. They see a 47 percent chance the Fed will raise the rate to at least 0.5 percent from zero to 0.25 percent by December 2014, according to prices for federal funds futures contracts.

That’s an increase from about 20 percent probability two months ago. It also contrasts with a majority of 14 Fed officials who forecast in March that the FOMC won’t increase the federal funds rate until 2015 or later. The Fed has held the rate banks charge one another for overnight loans near zero since December 2008.

I mentioned a pseudo-scandal in the FX market yesterday … naturally it is being used as an excuse for more regulation:

Global regulators may start overseeing currency rates in a widening response to benchmark-rate setting scandals that began with revelations on the manipulation of Libor, according to two people familiar with the matter.

The International Organization of Securities Commissions, a Madrid-based group known as Iosco that harmonizes market rules, may propose final guidelines improving transparency and oversight of benchmarks, including the WM/Reuters rates, as soon as next month, said the people, who asked not to be named because the talks aren’t finalized.

There was a bit of a rebound for the Canadian preferred share market today, with PerpetualPremiums winning 13bp, FixedResets up 10bp and DeemedRetractibles gaining 6bp. The lengthy Performance Highlights Table has more winners than losers, for a change, with BAM PerpetualDiscounts continuing to head the loser list. Volume was above average.

Apple’s CFO is doubtless celebrating his $1.5-billion trading win:

Investors are nursing losses of up to 9 per cent on Apple’s record-breaking $17bn bond offering, less than six weeks after the securities landed in their portfolios.

The technology giant tapped the white-hot bond market for the largest debt fundraising to date on April 30, but a sharp turn in interest rates has caused a sell-off in corporate bonds and wiped hundreds of millions of dollars off the value of the offering.

Apple sold $3bn of bonds maturing in 2043, locking in a low interest rate of 3.9 per cent for the next 30 years, but the market price of these bonds had fallen to 90.36 per cent of face value in late trading on Monday, according to Trace data.Investors in the offering paid 99.418 per cent of face value for the new bonds, but institutional and retail demand was so high that they traded as high as 101.97 in the secondary market.

So I have a question for the Europeans: how much bonus is appropriate for this man?

You know, some people just ask to be cheated (emphasis added):

Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.
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Companies and asset managers typically ask banks to buy or sell currencies at a specified WM/Reuters fix later in the day, most commonly the 4 p.m. London close. That arrangement is open to abuse, as it gives traders a window in which they can adjust their own positions and try to move the benchmark to boost their profit, three of the dealers said.

What a pack of idiots. Anybody who complains under those circumstances should simply lose his license. It should be obvious that you can only front-run if you have a fiduciary relationship, which is not generally the case in such circumstances; if you don’t, you are at perfect liberty to take advantage of the counterparty’s stupidity. More gently, it can be called ‘positioning prior to a trade’, in precisely the same way as government bond primary dealers short bonds of tenor X before an auction of tenor X. However, the clients will typically not want a fiduciary relationship, because then they wouldn’t be able to boast about what hard-nosed BSDs they are.

There is continued chatter about a takeover of CIT Group:

CIT Group Inc. (CIT) Chief Executive Officer John Thain, whose commercial lending firm has drawn takeover speculation, said the logic of selling to a larger bank is “obvious.”

“The big banks are awash in deposits and they can’t generate attractive assets,” Thain said today in a Bloomberg Television interview with Erik Schatzker and Sara Eisen. “We, in all our businesses, are able to generate very high-yielding, attractive assets, so the logic of that is obvious.”

I confess, I still don’t fully understand why the logic of this wasn’t obvious in 2008.

Inflation? What inflation?

Some Federal Reserve policy makers are citing the lowest inflation rate in at least five decades as an alarm bell for the economy. Economists at UBS Securities LLC say the figure isn’t as troubling as it appears.

Consumer prices climbed 1.1 percent in the 12 months through April, according to a measure watched by the Fed that excludes food and fuel — matching the smallest increase since records began in 1960. That’s down from 1.9 percent in the year ended April 2012.
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Fed officials meeting June 18-19 in Washington will weigh how much changes in inflation and the labor market will influence the pace of their $85 billion in monthly asset purchases. James Bullard, president of the St. Louis Fed, this week said inflation below the central bank’s 2 percent target may warrant prolonging bond buying.

DBRS placed Spectra Energy under Review-Negative:

This rating action follows the announcement that Spectra Energy Corp (Spectra Energy, Spectra Capital’s 100% owner and guarantor of all series of notes outstanding under the Senior Indenture of Spectra Capital) intends to drop down all of its remaining U.S. Transmission and Storage Assets to Spectra Energy Partners (SEP, a master limited partnership controlled by Spectra Energy) by the end of this year, subject to market conditions. By completing this drop-down, Spectra Energy expects to provide its investors with higher dividend growth of approximately 12 cents per year compared with the current rate of eight cents per year. Management expects to provide more details concerning this transaction in its Q2 earnings call scheduled for August 6, 2013.

Spectra is an American company and does not directly issue Canadian preferred shares, but it is the parent of Westcoast Energy, which does (W.PR.H & W.PR.J). Westcoast has heavy capex that will keep cash flows negative for a while, but DBRS did not explicitly state a dependence upon parental support in their last review. Still, it’s worth mentioning.

GMP Capital, proud issuer of GMP.PR.B, was confirmed at Pfd-3(low), Trend Negative by DBRS:

The Company’s risk exposures are somewhat mitigated by low capital and liquidity requirements, its strong market position in its chosen niches, its integrated business model and a flexible expense base accompanied by a strong entrepreneurial culture. Nevertheless, the market tone continues to be very negative and is particularly unfriendly for broker-dealers. Additionally, the Company is more aggressively capitalized than it had been in earlier cycles following the $115 million issue of preferred shares in Q1 2011 and over $72 million in share buybacks during 2011, resulting in a total debt-to-capitalization ratio of over 30%, which is in the upper range of what is acceptable in this rating category. Without strong earnings, total debt-to-cash flow is increasing, and fixed charge coverage ratios have fallen to levels that are in the lower bounds of what is perceived as acceptable for this rating category. DBRS does recognize that the current environment represents a low point in the cycle and thus metrics are expected to be in the weaker end of the ranges; however, an extended period of weakness without the Company being able to generate more positive results remains a concern. DBRS notes favourably the Company’s decision to preserve capital in the current uncertain environment by cutting its common share dividend in half in 2012 and not utilizing its share buyback program in the past year. DBRS expects GMP to continue a prudent approach to retaining capital given the tough market environment.

It was another unfriendly day for the Canadian preferred share market … on the bright side, the losses are slowing down! PerpetualPremiums were down 23bp (a lot of these are now PendingPerpetualDiscounts!), FixedResets gained 7bp and DeemedRetractibles were off 7bp. There is another lengthy performance highlights table but (brace yourselves!) there were a significant number of gains on this list. Volume was quite high.

PerpetualDiscounts now yield 5.11%, equivalent to 6.64% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.30%, so the interest-equivalent pre-tax spread (in this context, the “Seniority Spread”) is now about 235bp, a significant widening from the 225bp reported June 5.

The BAM Straight Perpetual 4.90% new issue closes tomorrow with the symbol BAM.PF.D. It will not be pretty.