PrefBlog

Today’s whining over liquidity focusses on investor homogeneity and the victory of deep pockets:

The size of the U.S. corporate-bond market has ballooned by $3.7 trillion during the past decade, yet almost all of that growth is concentrated in the hands of three types of buyers: mutual funds, foreign investors and insurance companies, according to Citigroup. That combination could lead to more selling than the market can absorb when the Federal Reserve raises interest rates for the first time since 2006, [Citigroup Inc. strategist Stephen] Antczak said.

“All the money is going to the same place, and when something adversely impacts one, chances are the same factor adversely impacts everyone else, and there’s nobody there to take the other side,” Antczak said in a telephone interview. “We used to have 23 types of investors in the market. Now we have three. In my mind, that’s the key driver.”

The three investor groups hold almost two-thirds of total corporate debt, Citigroup data show. Mutual funds, which are forced to sell when investors redeem cash, grew the fastest, more than doubling their share to 22 percent in 10 years. Overseas investors now hold almost a quarter of the market. Wells Fargo & Co. analysts warned last month that those buyers may be prompted to exit if the dollar weakened at the same time bond yields rose.

Hedge funds, government pension funds and securities brokers are among 20 other groups that hold 37 percent.
…
“A couple of investors have been acting like brokers, thinking about being a source of liquidity to the Street,” Antczak said. “They are big and able to hold less-liquid positions because they don’t have to mark it against the market and can hold until maturity.”

That’s what New York Life Insurance Co.’s investment arm, which oversees $215 billion of policyholder money, did during the so-called taper tantrum of 2013. The Fed’s move to end its unprecedented stimulus measures that year triggered a selloff that wiped out 5 percent from U.S. speculative-grade corporate bonds in less than two months.

The declines were “exaggerated because the need for liquidity was in excess of what the dealer community could provide,” Tom Girard, head of fixed-income investments at NYL Investors, said in a telephone interview. The firm stepped in to buy both investment-grade and speculative-grade securities, he said.

“New York Life acquired significant amounts of bonds at very attractive spreads and yield levels because we were able to provide liquidity,” he said. “If we get another situation similar to that taper tantrum, then from my perspective it starts to shift from a challenge to an opportunity.”

And there is chatter that junk bond investors are getting nervous:

After providing a haven from the global bond-market selloff, speculative-grade securities have now joined the rout, tumbling almost 1 percent since the end of May. Investors are starting to flee, yanking $1.5 billion from the two biggest high-yield bond exchange-traded funds over the past week, according to data compiled by Bloomberg.
…
High-yield debt markets have “shown a degree of resiliency here to the shift in the inflation outlook,” Jeffrey Rosenberg, a managing director at BlackRock Inc.’s, said in a Bloomberg radio interview Tuesday. “That resilience could be challenged if we follow up this bout of higher rates with a shift in” expectations for when the Federal Reserve will lift rates.

Case in point: BlackRock’s $14.3 billion high-yield bond ETF plunged 1.6 percent in the six days through Monday as $940.5 million exited the fund, Bloomberg data show. State Street Corp.’s $10.7 billion junk-debt ETF dropped 1.7 percent, with $571.7 million of withdrawals.

Leveraged-loan investors aren’t too happy either:

Leveraged loans dropped to their lowest level in four months amid a pullback by buyers stung by borrowers such as Dollar Tree Inc. and Goodyear Tire & Rubber Co., who have taken advantage of a paucity of new deals by seeking to lower payments on existing debt. Barclays Plc last week cut its 2015 forecast for U.S. leveraged-loan issuance to as little as $250 billion as regulatory scrutiny slows the pace of buyout financings.

Investors who buy leveraged loans are caught in a bind. A push by regulators to curb risky underwriting practices has left them with fewer deals to chase, while the interest they earn on the loans they hold falls. Sentiment has also been weighed down by a global bond rout that has sent Treasury yields to levels not seen since October.

“Buyers are pulling back from paying a premium due to the fear they will be hurt by a refinancing in very short order,” said Jason Rosiak, head of portfolio management at Newport Beach, California-based Pacific Asset Management. “That weighs on the overall market.”

Loans prices dropped to 95.9 cents on the dollar on Wednesday, after falling each of the past three weeks in the longest such stretch since the fourth quarter, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. The debt lost 0.36 percent this month, after gaining just 0.05 percent in May, the smallest monthly return of the year.

But at least there’s less debt with negative yield:

Everyone knew it defied logic to pay for the privilege of lending trillions of dollars to European governments.

But two months ago, that didn’t stop investors from doing exactly that, causing the pool of European bonds with negative yields to soar to almost 3 trillion euros ($3.4 trillion) as of mid-April, Bank of America Corp. data show.

That trade is now dying quickly. The amount of such securities in the market has shrunk nearly in half, to 1.6 trillion euros as of June 9.

The Lapdog’s boss has told him to step up the war on banks:

Bank of England Governor Mark Carney ordered the finance industry to observe new rules on market conduct and threatened an even tougher regime if traders and bankers fail to comply.

His comments came as the BOE published the Fair and Effective Markets Review in London Wednesday, which recommends a new code of practice and longer jail terms for infractions. He said individuals must be “held to account” and firms must also take greater responsibility.

“This is a major opportunity for the industry to establish common standards of market practice,” Carney said. “If firms and their staff fail to take this opportunity, more restrictive regulation is inevitable.”
…
The markets review was announced by Chancellor of the Exchequer George Osborne at the same event a year ago. In his comments, Carney said revelations of misconduct have appeared with a “depressing frequency.” Bankers’ “ethical drift” has led to higher borrowing costs and falling confidence, while the $150 billion in fines levied on global banks has reduced their lending capacity by $3 trillion.

I love the bit where the banks are being blamed for the effects of their payment of $150-billion in fines. Very Jesuitical.

Naturally, Osborne has a valuable ally in his campaign for eternal re-election:

The Justice Department has begun an examination of trading in the U.S. Treasury market, following the outlines of its successful cases against Wall Street’s illegal practices in foreign currencies and other businesses, said three people familiar with the inquiry.

The government is also continuing to look into possible collusion in gold and silver markets and in trading around certain oil benchmarks, the people said.

Though the latest inquiry into Treasury trading is in its earliest stages, investigators are said to be probing whether information is being shared improperly by financial institutions. Some of the world’s biggest banks and their subsidiaries pleaded guilty after traders were shown to be using chat rooms, which functioned as cartels, to coordinate positions on foreign-exchange markets. These practices violated federal antitrust laws. Some of the same banks were among those that settled fraud and antitrust investigations into manipulating key interest rates.
…
It remains unclear where in the Treasury markets prosecutors aim to find wrongdoing, or if any specific allegations against Wall Street banks prompted the inquiries.

The best part of that story is that individual traders will be blamed for liquidity problems:

The Treasury Market Practices Group, an advisory committee backed by the New York Fed, finalized additions to its best practices guidelines Wednesday. For example, on a list of trading practices to avoid, it now includes “those that give a false impression of market price, depth or liquidity.”

It also added an updated recommendation “that market participants who employ trading strategies that involve high-trading volume or quoting activity should be mindful of whether a sudden change in these strategies could adversely affect market liquidity and should seek to avoid changes likely to cause such disruption,” the TMPG wrote in a statement.

And the regulators are very concerned about ‘banging the close’:

It was a simple process, according to the CFTC: Barclays traders told their brokers to buy or sell as many interest-rate swaps as needed just before 11 a.m. New York time to push the benchmark in the desired direction.
…
Here’s how a broker described the process to a trader in 2007, according to the CFTC: “If you want to affect it at 11, you tell me which way you want to affect it we’ll, we’ll attempt to affect it that way.”

Another time that year, a Barclays trader told his broker to buy as much as $400 million worth of swaps to move the benchmark, according to the complaint.
…
For example, on June 25, 2007, the Barclays options desk in New York had a $635 million swaption contract that was coming due, according to the CFTC. “Barclays traders on multiple desks coordinated to employ three methods of manipulation in an attempt to maximize the amount paid to Barclays in the swaption cash settlement,” the CFTC said in the complaint.

At 10:50 a.m. that day, the trader told his broker, “Don’t let ’em go down. For the eleven o’clock fix I need to lift 5s up,” he said, referring to the five-year swap spread trade. This is the trader who told the broker he could buy as much as $400 million in notional value of the swaps to move the benchmark.
…
That’s also known as banging the close — or, as a Barclays trader put it on March 7, 2007: “What happens at 11 is the bloody thing moves like half a basis point up and down because everybody’s trying to bang the screen.”

The obvious solution to the problem – if there is indeed a problem, which is by no means clear – is to lengthen the period of time over which the fix is calculated … if indeed a fix is really required at all. Another excellent option is to ensure that expiring contracts can be exchanged for physicals, rather than automatic cash settlement. But this isn’t about logic; this is all about asshole regulators and politicians making names for themselves.

You don’t believe me? Then I must assume you also don’t believe in proportionality:

Jamie Forese, head of the Citigroup Inc. unit that houses trading and investment banking, said fines the firm paid for rigging foreign-exchange markets dwarfed the amount generated by the illegal conduct.

Revenue from the trades amounted to about $1 million, while Citigroup paid out $2.5 billion in fines and penalties, Forese estimated Wednesday at an investor conference in New York.

However, one guy has been brave enough to bite back:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon took aim at U.S. Senator Elizabeth Warren, a critic of large banks, as he expressed broad concerns about leadership in Washington.

“I don’t know if she fully understands the global banking system,” Dimon, speaking Wednesday at an event in Chicago, said of the Massachusetts Democrat. Still, he said he agrees with some of her concerns about risks.

It looks like Lagarde isn’t the only one who wants to be a Fed governor:

The World Bank joined the IMF in urging the Federal Reserve to hold off raising rates until next year, citing an uneven U.S. recovery and the risks to emerging markets of tightening policy any sooner.

“My concern is that the signals coming out of the U.S. economy have been mixed,” World Bank Chief Economist Kaushik Basu told reporters Wednesday in Washington on a conference call to discuss the bank’s semiannual global economic forecasts.

A premature move by the Fed could cause the dollar to strengthen, which may slow the U.S. economy and sideswipe emerging and developing countries, he said.

The Washington-based development bank lowered its forecast for U.S. growth this year to 2.7 percent, from 3.2 percent in January. The bank also expects the U.S. to expand at a 2.8 percent pace next year, down from 3 percent in January.

And many sets of entrails are being examined:

Economists surveyed June 5-9 put the probability of a September increase in the benchmark federal funds rate at 50 percent, according to the median estimate. The odds were nine percent for October, 20 percent for December and 10 percent for some time in 2016.

Some investors making bets on interest-rate futures have a more hawkish view. The market-implied probability of liftoff by September is somewhere between 93 percent and 100 percent, according to Stan Jonas, who has been trading fed funds futures since he helped create them in 1988.

The Federal Open Market Committee gathers on June 16-17, and Chair Janet Yellen will hold a press conference after the meeting. Fed officials will also publish updated quarterly economic and interest-rate forecasts.

And, as some comic relief, Bloomberg presents a good story on medical billing:

Dealing with medical bills, like waiting for the cable guy or buying a used car, has become a cliché of consumer exasperation. Everything from electricity and phone bills to tax returns and parking tickets migrated to electronic payments years ago, but America’s $2.9 trillion health-care economy remains stubbornly stuck in the 1990s. The number of medical bills paid by paper check through the U.S. mail has even increased while payments for all other services have decreased dramatically. Medical payments are the only category to register an increase in paperwork since the start of the 21st century: [Chart]

It’s not just consumers who are paying by mail. Just 15 percent of commercial insurers make payments to medical providers electronically, according to a report last month from PricewaterhouseCoopers Health Research Institute. The largest insurers are usually the best at going digital, but Cigna, with 14.5 million customers, sends only 39 percent of payments electronically. That’s because many doctors aren’t signed up to receive electronic transfers, according to spokesman Joe Mondy. Aetna and UnitedHealth Group, in contrast, both say around 80 percent of payments are paperless.

Hospitals, medical offices, and insurance companies need an army of workers to push all that paper1increase click area, which is also frequently shuffled through middlemen like billing agencies2increase click area and clearinghouses3increase click area. One claims clearinghouse, Emdeon, which handles paper billing for many of its health plan clients, spent $87 million4increase click area on postage alone in the first three months of 2015—nearly a quarter of its total revenue—according to financial filings. All this bureaucracy pushed the cost of administering private insurance to $173 billion5increase click area in 2013, according to federal data.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets off 15bp and DeemedRetractibles up 6bp. The Performance Highlights table is of average length – given recent standards – and features ENB FixedReset losers and BAM FixedReset winners. Volume was on the high side of average.

PerpetualDiscounts now yield 5.09%, equivalent to 6.62% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.1%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, a slight (and perhaps spurious) narrowing from the 255bp reported June 3.

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:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.52 to be $1.19 rich, while TRP.PR.B, which will reset June 30 at 2.152% (+128), is $0.85 cheap at its bid price of 14.60

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 23.27 to be $0.63 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.46 to be $0.54 cheap.

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.73 to be $0.42 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.88 and appears to be $0.70 rich.

FTS.PR.H, with a spread of +145bp, and bid at 16.20, looks $0.89 cheap and resets 2020-6-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 24.40 and is $0.35 rich.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.45%, with no ridiculous outliers. On the junk side, four out of the six pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -1.22%; AIM.PR.A / AIM.PR.B at -0.09%; BRF.PR.A / BRF.PR.B at -0.48%; and DC.PR.B / DC.PR.D at -1.37%.

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

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.0233 %	2,197.4
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.0233 %	3,842.1
Floater	3.49 %	3.54 %	60,205	18.35	3	-0.0233 %	2,336.0
OpRet	4.44 %	-12.44 %	28,675	0.08	2	0.0000 %	2,782.9
SplitShare	4.60 %	4.86 %	71,862	3.30	3	-0.1073 %	3,241.4
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,544.7
Perpetual-Premium	5.46 %	4.86 %	62,784	4.94	19	0.1495 %	2,513.3
Perpetual-Discount	5.07 %	5.09 %	113,344	15.34	15	0.0056 %	2,762.0
FixedReset	4.47 %	3.86 %	248,669	16.46	87	-0.1460 %	2,366.4
Deemed-Retractible	5.01 %	3.33 %	110,958	0.70	34	0.0597 %	2,620.4
FloatingReset	2.50 %	2.89 %	56,762	6.13	9	0.4783 %	2,341.4

Performance Highlights
Issue	Index	Change	Notes
ENB.PF.A	FixedReset	-2.68 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 19.95 Evaluated at bid price : 19.95 Bid-YTW : 4.87 %
FTS.PR.K	FixedReset	-2.31 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 21.15 Evaluated at bid price : 21.15 Bid-YTW : 3.85 %
BAM.PR.K	Floater	-2.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 13.93 Evaluated at bid price : 13.93 Bid-YTW : 3.62 %
ENB.PF.G	FixedReset	-2.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 20.16 Evaluated at bid price : 20.16 Bid-YTW : 4.87 %
ENB.PR.J	FixedReset	-1.68 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 19.86 Evaluated at bid price : 19.86 Bid-YTW : 4.76 %
MFC.PR.N	FixedReset	-1.43 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.51 Bid-YTW : 4.34 %
ENB.PF.E	FixedReset	-1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 20.12 Evaluated at bid price : 20.12 Bid-YTW : 4.85 %
SLF.PR.G	FixedReset	-1.17 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.11 Bid-YTW : 7.75 %
BMO.PR.W	FixedReset	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 22.45 Evaluated at bid price : 23.25 Bid-YTW : 3.57 %
TRP.PR.G	FixedReset	1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 23.07 Evaluated at bid price : 24.81 Bid-YTW : 3.86 %
BAM.PR.X	FixedReset	1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 18.28 Evaluated at bid price : 18.28 Bid-YTW : 4.21 %
BAM.PR.B	Floater	1.52 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 14.66 Evaluated at bid price : 14.66 Bid-YTW : 3.44 %
BAM.PF.E	FixedReset	1.77 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 22.29 Evaluated at bid price : 23.00 Bid-YTW : 4.13 %
BAM.PF.G	FixedReset	2.60 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 23.12 Evaluated at bid price : 24.88 Bid-YTW : 3.99 %
FTS.PR.I	FloatingReset	3.90 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 16.00 Evaluated at bid price : 16.00 Bid-YTW : 3.22 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.M	Deemed-Retractible	142,980	Nesbitt crossed 28,800 at 25.47, then another 109,200 at 25.49. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-27 Maturity Price : 25.25 Evaluated at bid price : 25.45 Bid-YTW : 2.18 %
RY.PR.A	Deemed-Retractible	139,529	RBC crossed 50,000 at 25.18; Nesbitt crossed 85,000 at 25.23. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-10 Maturity Price : 25.00 Evaluated at bid price : 25.21 Bid-YTW : -3.21 %
TD.PF.C	FixedReset	98,165	Desjardins crossed 95,000 at 23.05. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 22.30 Evaluated at bid price : 23.00 Bid-YTW : 3.66 %
GWO.PR.Q	Deemed-Retractible	65,906	Nesbitt crossed 62,000 at 25.05. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 5.14 %
RY.PR.N	Perpetual-Discount	63,295	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 24.55 Evaluated at bid price : 24.94 Bid-YTW : 4.92 %
GWO.PR.I	Deemed-Retractible	55,410	Nesbitt crossed 54,600 at 22.86. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.81 Bid-YTW : 5.69 %
There were 38 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PR.K	Floater	Quote: 13.93 – 14.51 Spot Rate : 0.5800 Average : 0.3775 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 13.93 Evaluated at bid price : 13.93 Bid-YTW : 3.62 %
MFC.PR.M	FixedReset	Quote: 23.90 – 24.40 Spot Rate : 0.5000 Average : 0.3374 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.90 Bid-YTW : 4.21 %
VNR.PR.A	FixedReset	Quote: 23.71 – 24.28 Spot Rate : 0.5700 Average : 0.4250 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 22.94 Evaluated at bid price : 23.71 Bid-YTW : 4.11 %
IFC.PR.C	FixedReset	Quote: 24.20 – 24.59 Spot Rate : 0.3900 Average : 0.2988 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.20 Bid-YTW : 4.28 %
TRP.PR.C	FixedReset	Quote: 16.60 – 16.97 Spot Rate : 0.3700 Average : 0.2929 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 16.60 Evaluated at bid price : 16.60 Bid-YTW : 3.98 %
ENB.PR.B	FixedReset	Quote: 18.31 – 18.62 Spot Rate : 0.3100 Average : 0.2395 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-10 Maturity Price : 18.31 Evaluated at bid price : 18.31 Bid-YTW : 4.79 %

There’s an interesting trend in US bank accounting:

Big U.S. banks have been shifting huge chunks of their securities portfolios from AFS to HTM as they seek to offset the coming impact of a rate rise. Bloomberg News reported last year that the share of securities that the five biggest banks keep in the HTM bucket jumped to 8.4 percent, the highest in almost two decades. The trend appears to have accelerated in the ensuing months, with almost a third of the MBS on bank balance sheets now classified as HTM, according to new research from JPMorgan.
…
As JPMorgan analysts note: “… [B]anks have shifted nearly a third of their MBS into HTM accounts, thanks to concern about capital volatility driven by recent regulatory changes. This means that banks should ultimately be less sensitive to rate moves, since fewer securities are being marked to market.” The shift makes some sense in the face of declining bank profit margins and the need to hold more lower-yielding assets that are considered super-liquid under other new banking rules.

Buying longer duration MBS and then stuffing them in HTM portfolios can help banks offset some of the lower returns on offer from investing in things such as shorter-term U.S. Treasuries.

It is interesting that the freeze on trading implied by Hold-to-Maturity status for these liquidity buffers will make MBS less liquid as a group; this is just another one of the inherent contradictions of capitalism.

Matt Levine explains:

If you own that bond for investment purposes, and you don’t have any “intent of selling it within hours or days,” you have an investment loss on paper, but you get to treat it a bit more gently. (This is called “available for sale,” or AFS.) The loss doesn’t flow through your net income; instead it flows through a different place called “other comprehensive income,” and everyone agrees to treat that as somewhat less important than net income.3 Everyone except Basel III bank capital regulation: Last year, regulators ungallantly decided to require you to treat those unrealized investment losses as reducing your capital.

If you have the “positive intent and ability” to hold the bond until it matures, then you can just ignore the economic loss until maturity. (This is called “held to maturity,” or HTM.) You just keep the bond on your books at the price you paid for it,[4] and at maturity you get back par and your loss vanishes.5 You ignore the loss in net income, other comprehensive income, your balance sheet, your capital, whatever.

Footnote 4: Amortized cost, but let’s not split hairs

Footnote 5: Which makes a sort of sense: If you never sell the bond in the market, you never realize the loss in the form of getting fewer dollars for your bond than you paid for it. Your loss becomes just an opportunity cost: Instead of getting 5 percent interest and your money back, you got 4 percent interest and your money back. But you got your money back. Everything is fine.

So it would seem that banks are now doing with long-term MBS what retail loves to do with GICs – carry the position at historical cost and blithely ignore market marks.

So, as Mr. Levine points out, one immediate problem is:

First, one reaction to a rising interest rate environment might be to reduce one’s holdings of long-dated fixed-income securities. One might say “hmm, I should maybe sell my trillions of dollars of very liquid Fannie Mae bonds that I expect to lose value in the next few years.” Or not, I mean, I’m not advising anyone to predict the timing of interest rate rises. The point is though that banks seem to be reacting to their expectations of rising interest rates with the opposite of the economically rational strategy: Not “sell bonds to avoid losses later,” but rather “reclassify bonds as hold-forever to avoid recognizing losses later.” The accounting provides opposite incentives from the economics.

Another obvious problem is that, in a scenario of higher interest rates, there will be a good chunk of unrealized and unrecognized losses on the books. Therefore, in a crisis when bank investors change their valuation paradigm from ‘going-concern’ to ‘break-up value’ we might just see some problems!

As we’ve learned in Ontario with respect to gender quotas on boards of public companies, protecting the interests of investors is BORING. So US regulatory agencies have now become soldiers in the great battle of social change:

The OCC, Board, FDIC, NCUA, CFPB, and SEC are issuing a final interagency policy statement establishing joint standards for assessing the diversity policies and practices of the entities they regulate, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

My favourite part is:

In addition, entities’ prime contractors often use subcontractors to fulfill the obligations of various contracts. The use of minority-owned and women-owned businesses as subcontractors provides valuable opportunities for both the minority-owned and women-owned businesses and the prime contractor. Entities may encourage the use of minority-owned and women-owned subcontractors by incorporating this objective in their business contracts.

Just like South Africa, that paragon of economic development!

SEC Commissioner Luis A. Aguilar doesn’t like it:

For example, the Final Policy Statement fails to address the following concerns raised by commenters:

• • First, that allowing the voluntary disclosure of information by regulated entities is prohibited under Section 342 of the Dodd-Frank Act because it renders the statute ineffective and fails to achieve the Congressional intent of advancing diversity in the financial services industry.
• • Second, that voluntary self-assessments are ineffective because, without specific obligations and requirements, few regulated entities will conduct assessments or share assessment information.
• • Third, that failing to include standard criteria and uniform metrics for assessing the diversity and inclusion practices at regulated entities will make it very difficult, if not impossible, to assess diversity at different firms.
• • Fourth, that a purely voluntary requirement, and one without a reporting timeline, lacks transparency and accountability. Firms can therefore decide not to conduct any assessment and treat any OMWI oversight as optional or irrelevant.
• • Fifth, that OMWI would fail to satisfy its Congressional mandate under Section 342 by simply monitoring voluntary reports that may or may not be filed by regulated entities.
• • Finally, that a definition of “diversity” that is too narrow would fail to accomplish the goals of Section 342. In fact, the Final Policy Statement’s definition of “diversity” excludes people with disabilities and excludes the entire LGBT community.

It was a mostly negative day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets down 27bp and DeemedRetractibles off 26bp. The Performance Highlights table is fairly lengthy, with a mixed bag of entries, mostly losers. Volume was average.

But, I mean, Holy Smokes! Here’s a picture of CPD total returns for the past month. Don’t these damn things ever go up?

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:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.50 to be $1.21 rich, while TRP.PR.B, which will reset June 30 at 2.152% (+128), is $0.71 cheap at its bid price of 14.73

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 24.10 to be $0.49 rich, while MFC.PR.F, resetting at +141bp on 2016-6-19, is bid at 25.00 to be $0.50 cheap.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.00 to be $0.20 cheap. BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 21.50 and appears to be $0.24 rich.

FTS.PR.H, with a spread of +145bp, and bid at 16.15, looks $0.99 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.65 and is $0.41 rich.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.45%, with no ridiculous outliers now that the awful performance of FTS.PR.I today has brought the FTS.PR.H / FTS.PR.I pair into the fold. On the junk side, five out of the six pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -1.23%; AIM.PR.A / AIM.PR.B at -0.41%; BRF.PR.A / BRF.PR.B at -0.36%; DC.PR.B / DC.PR.D at -0.47%; and FFH.PR.C / FFH.PR.D at +1.14%.

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

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.2793 %	2,198.0
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.2793 %	3,843.0
Floater	3.49 %	3.54 %	61,028	18.34	3	-0.2793 %	2,336.6
OpRet	4.44 %	-12.59 %	28,214	0.08	2	0.0988 %	2,782.9
SplitShare	4.59 %	4.78 %	70,975	3.31	3	-0.2142 %	3,244.9
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0988 %	2,544.7
Perpetual-Premium	5.47 %	5.09 %	63,766	4.25	19	-0.0270 %	2,509.6
Perpetual-Discount	5.07 %	5.05 %	112,689	15.40	15	0.0197 %	2,761.9
FixedReset	4.47 %	3.87 %	250,660	16.34	87	-0.2703 %	2,369.9
Deemed-Retractible	5.01 %	3.41 %	108,469	0.70	34	-0.2597 %	2,618.8
FloatingReset	2.51 %	2.90 %	57,234	6.13	9	-0.1280 %	2,330.3

Performance Highlights
Issue	Index	Change	Notes
FTS.PR.I	FloatingReset	-3.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 15.40 Evaluated at bid price : 15.40 Bid-YTW : 3.34 %
MFC.PR.L	FixedReset	-2.65 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.12 Bid-YTW : 4.48 %
BAM.PF.G	FixedReset	-2.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 22.88 Evaluated at bid price : 24.25 Bid-YTW : 4.12 %
GWO.PR.I	Deemed-Retractible	-1.95 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.66 Bid-YTW : 5.77 %
GWO.PR.R	Deemed-Retractible	-1.84 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.95 Bid-YTW : 5.36 %
NA.PR.W	FixedReset	-1.71 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 22.61 Evaluated at bid price : 23.60 Bid-YTW : 3.56 %
CM.PR.O	FixedReset	-1.67 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 22.63 Evaluated at bid price : 23.55 Bid-YTW : 3.64 %
HSE.PR.E	FixedReset	-1.59 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 23.11 Evaluated at bid price : 24.80 Bid-YTW : 4.50 %
MFC.PR.B	Deemed-Retractible	-1.51 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.80 Bid-YTW : 5.87 %
TRP.PR.C	FixedReset	-1.42 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 16.63 Evaluated at bid price : 16.63 Bid-YTW : 3.98 %
PWF.PR.P	FixedReset	-1.35 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 18.30 Evaluated at bid price : 18.30 Bid-YTW : 3.72 %
HSE.PR.C	FixedReset	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 22.94 Evaluated at bid price : 24.32 Bid-YTW : 4.27 %
ENB.PF.G	FixedReset	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 20.58 Evaluated at bid price : 20.58 Bid-YTW : 4.76 %
POW.PR.G	Perpetual-Premium	1.25 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-15 Maturity Price : 25.00 Evaluated at bid price : 25.89 Bid-YTW : 5.09 %
MFC.PR.F	FixedReset	2.42 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.20 Bid-YTW : 6.47 %
GWO.PR.N	FixedReset	3.50 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.45 Bid-YTW : 6.73 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.Y	FixedReset	116,300	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 23.04 Evaluated at bid price : 24.68 Bid-YTW : 3.69 %
BMO.PR.S	FixedReset	85,217	Desjardins crossed blocks of 50,000 and 20,000, both at 24.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 22.98 Evaluated at bid price : 24.28 Bid-YTW : 3.50 %
FTS.PR.M	FixedReset	77,297	RBC crossed 74,000 at 24.40. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 22.98 Evaluated at bid price : 24.40 Bid-YTW : 3.63 %
RY.PR.N	Perpetual-Discount	72,757	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 24.52 Evaluated at bid price : 24.91 Bid-YTW : 4.93 %
RY.PR.F	Deemed-Retractible	71,310	Desjardins crossed two blocks of 34,000 each, both at 25.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-09 Maturity Price : 25.25 Evaluated at bid price : 25.35 Bid-YTW : 1.93 %
BAM.PR.R	FixedReset	58,306	RBC crossed 50,000 at 21.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 4.17 %
There were 31 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
GWO.PR.S	Deemed-Retractible	Quote: 26.05 – 27.00 Spot Rate : 0.9500 Average : 0.6415 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.05 Bid-YTW : 4.69 %
BAM.PF.G	FixedReset	Quote: 24.25 – 24.81 Spot Rate : 0.5600 Average : 0.3198 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 22.88 Evaluated at bid price : 24.25 Bid-YTW : 4.12 %
MFC.PR.F	FixedReset	Quote: 18.20 – 18.90 Spot Rate : 0.7000 Average : 0.4866 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.20 Bid-YTW : 6.47 %
MFC.PR.B	Deemed-Retractible	Quote: 22.80 – 23.21 Spot Rate : 0.4100 Average : 0.2504 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.80 Bid-YTW : 5.87 %
MFC.PR.L	FixedReset	Quote: 23.12 – 23.43 Spot Rate : 0.3100 Average : 0.1932 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.12 Bid-YTW : 4.48 %
CM.PR.O	FixedReset	Quote: 23.55 – 23.90 Spot Rate : 0.3500 Average : 0.2425 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-09 Maturity Price : 22.63 Evaluated at bid price : 23.55 Bid-YTW : 3.64 %

Nothing happened today … well, equities got banged up.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets losing 25bp and DeemedRetractibles down 11bp. The lengthy Performance Highlights table is dominated by losing FixedResets. Volume was low.

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:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.50 to be $1.14 rich, while TRP.PR.B, which will reset June 30 at 2.152% (+128), is $0.62 cheap at its bid price of 14.77

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.75 to be $0.94 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.00 to be $0.70 cheap.

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.75 to be $0.40 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.77 and appears to be $0.50 rich.

FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $1.03 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.81 and is $0.56 rich.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.45%, including FTS.PR.H / FTS.PR.I at 0.91%. On the junk side, five out of the six pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -1.22%; AIM.PR.A / AIM.PR.B at -0.35%; BRF.PR.A / BRF.PR.B at -1.05%; DC.PR.B / DC.PR.D at -0.61%; and FFH.PR.C / FFH.PR.D at +1.24%.

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

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.5381 %	2,204.1
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.5381 %	3,853.8
Floater	3.48 %	3.52 %	62,049	18.39	3	0.5381 %	2,343.1
OpRet	4.45 %	-10.51 %	28,215	0.08	2	0.0198 %	2,780.2
SplitShare	4.59 %	4.71 %	70,391	3.31	3	0.2012 %	3,251.9
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0198 %	2,542.2
Perpetual-Premium	5.47 %	4.86 %	63,976	3.19	19	-0.2671 %	2,510.3
Perpetual-Discount	5.07 %	5.08 %	113,951	15.36	15	-0.0310 %	2,761.3
FixedReset	4.46 %	3.87 %	259,834	15.87	87	-0.2472 %	2,376.3
Deemed-Retractible	5.00 %	3.36 %	109,184	0.70	34	-0.1059 %	2,625.7
FloatingReset	2.51 %	2.91 %	56,279	6.13	9	-0.1917 %	2,333.3

Performance Highlights
Issue	Index	Change	Notes
GWO.PR.N	FixedReset	-1.98 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.86 Bid-YTW : 7.15 %
MFC.PR.F	FixedReset	-1.82 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.77 Bid-YTW : 6.77 %
POW.PR.G	Perpetual-Premium	-1.80 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-04-15 Maturity Price : 25.25 Evaluated at bid price : 25.57 Bid-YTW : 5.47 %
HSE.PR.A	FixedReset	-1.75 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 16.26 Evaluated at bid price : 16.26 Bid-YTW : 4.36 %
IFC.PR.A	FixedReset	-1.43 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.75 Bid-YTW : 5.66 %
TD.PF.A	FixedReset	-1.35 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 22.53 Evaluated at bid price : 23.40 Bid-YTW : 3.61 %
GWO.PR.I	Deemed-Retractible	-1.32 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.11 Bid-YTW : 5.51 %
TD.PF.B	FixedReset	-1.31 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 22.57 Evaluated at bid price : 23.44 Bid-YTW : 3.59 %
TD.PF.C	FixedReset	-1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 22.41 Evaluated at bid price : 23.20 Bid-YTW : 3.62 %
BAM.PF.A	FixedReset	-1.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 23.14 Evaluated at bid price : 24.49 Bid-YTW : 4.08 %
CM.PR.P	FixedReset	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 22.46 Evaluated at bid price : 23.30 Bid-YTW : 3.59 %
GWO.PR.H	Deemed-Retractible	-1.04 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.85 Bid-YTW : 5.46 %
BAM.PF.F	FixedReset	-1.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 23.03 Evaluated at bid price : 24.50 Bid-YTW : 4.06 %
PWF.PR.P	FixedReset	1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 18.55 Evaluated at bid price : 18.55 Bid-YTW : 3.67 %
SLF.PR.G	FixedReset	1.43 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.35 Bid-YTW : 7.56 %
BAM.PR.K	Floater	1.85 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 14.31 Evaluated at bid price : 14.31 Bid-YTW : 3.52 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.Y	FixedReset	187,430	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 23.02 Evaluated at bid price : 24.65 Bid-YTW : 3.70 %
RY.PR.N	Perpetual-Discount	121,736	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 24.42 Evaluated at bid price : 24.80 Bid-YTW : 4.95 %
RY.PR.C	Deemed-Retractible	53,530	Scotia crossed 33,500 at 25.25; TD crossed 20,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-11-24 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 2.82 %
MFC.PR.A	OpRet	50,585	Called for redemption effective June 19. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-19 Maturity Price : 25.00 Evaluated at bid price : 24.99 Bid-YTW : 3.38 %
BAM.PF.G	FixedReset	36,202	RBC crossed 25,000 at 24.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 23.08 Evaluated at bid price : 24.77 Bid-YTW : 4.01 %
CU.PR.G	Perpetual-Discount	31,960	Scotia crossed 30,000 at 22.70. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 22.26 Evaluated at bid price : 22.60 Bid-YTW : 4.99 %
There were 19 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
POW.PR.G	Perpetual-Premium	Quote: 25.57 – 26.31 Spot Rate : 0.7400 Average : 0.5109 YTW SCENARIO Maturity Type : Call Maturity Date : 2020-04-15 Maturity Price : 25.25 Evaluated at bid price : 25.57 Bid-YTW : 5.47 %
GWO.PR.N	FixedReset	Quote: 16.86 – 17.57 Spot Rate : 0.7100 Average : 0.5030 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.86 Bid-YTW : 7.15 %
IFC.PR.A	FixedReset	Quote: 20.75 – 21.26 Spot Rate : 0.5100 Average : 0.3345 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.75 Bid-YTW : 5.66 %
ELF.PR.G	Perpetual-Discount	Quote: 23.17 – 23.72 Spot Rate : 0.5500 Average : 0.3884 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-08 Maturity Price : 22.87 Evaluated at bid price : 23.17 Bid-YTW : 5.19 %
GWO.PR.R	Deemed-Retractible	Quote: 24.40 – 24.89 Spot Rate : 0.4900 Average : 0.3322 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.40 Bid-YTW : 5.11 %
GWO.PR.S	Deemed-Retractible	Quote: 26.05 – 26.50 Spot Rate : 0.4500 Average : 0.3033 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.05 Bid-YTW : 4.69 %

Jobs, jobs, jobs!

The American jobs machine has produced a spring spurt to banish the winter weakness.

Employers added 280,000 jobs in May, the most in five months, further dispelling fears that a first-quarter slowdown would take hold, figures from the Labor Department showed Friday. That followed a revised 221,000 April advance.

Hourly earnings climbed from a year ago by the most since August 2013, while an increase in the number of people entering the labor force caused the unemployment rate to creep up to 5.5 percent from 5.4 percent
…
The Bloomberg Dollar Spot Index added 0.8 percent, with the greenback rising to 125.64 yen at 4:03 p.m. in New York. The yield on the 10-year Treasury note climbed to 2.40 percent from 2.31 percent late Thursday. The Standard & Poor’s 500 Index fell 0.1 percent at the close.

The world’s largest economy shrank at a 0.7 percent annualized rate in the first quarter, according to the Commerce Department’s latest report on gross domestic product.
…
The Labor Department said average hourly earnings increased 0.3 percent in May from the prior month, the biggest gain since January. They were up 2.3 percent from May 2014, exceeding the 2 percent gain on average since the current expansion began six years ago.

The agency’s survey of households, used to derive the unemployment figure, showed the participation rate, which indicates the share of working-age people in the labor force, increased to a four-month high of 62.9 percent from 62.8 percent in April.

There were jobs in Canada, too:

The Canadian economy saw a burst in hiring last month as private-sector firms, such as factories, added to head count.

Employers created a stronger-than-expected 58,900 jobs in May, the most in seven months. The country’s jobless rate stayed at 6.8 per cent, Statistics Canada said Friday, as more people entered the labour market in search of work.
…
Average hourly wage growth accelerated to 3.1 per cent, year over year, from less 2 per cent as recently as March, BMO noted – well above the rate of inflation.
…
Productivity was a soft spot for Canada. Labour productivity fell in the first quarter, Statscan said in a separate release, the first drop in a year as output declined for the first time since 2011.

So the US derivatives market incorporated higher expectations of a 2015 hike:

U.S. bond traders had a very clear message for Christine Lagarde on Friday morning: Your advice to the Federal Reserve is wrong.

Lagarde, managing director of the International Monetary Fund, advised the Fed on Thursday to wait until 2016 before hiking interest rates.

Bond traders don’t think the U.S. central bank will heed that recommendation. On Friday, they quickly pulled forward their expectations for a rate increase — assigning better than even odds of a move in September after a jobs report showed American payrolls climbed the most in May in five months. That’s up from a 46 percent probability on Thursday, according to Bloomberg calculations.

Naturally, this caused great excitement among the Fed and its watchers:

The 280,000 rise in payrolls in May suggests that the central bank is making progress toward its goal of maximum employment, William C. Dudley, president of the Federal Reserve Bank of New York, said on Friday. The gains were widespread and were accompanied by a bit higher wages, he added.

“It is likely that conditions will be appropriate to begin monetary policy normalization later this year,” Dudley, who is vice chairman of the central bank’s policy-making Federal Open Market Committee, said in a speech in Minneapolis.

While Dudley hedged his forecast by saying a move wasn’t certain, his assertion was more definitive than comments earlier in the week by some other officials who voiced doubts about the strength of the economy. Fed watchers consider Dudley a confidant of Chair Janet Yellen and thus see his views as more indicative of where the central bank is heading.

Traders of money-market derivatives lifted the chance of the Fed raising rates this year following the jobs data. Futures show a 50 percent chance the Fed will increase interest rates by its October meeting, up from 43 percent Thursday, according to CME Group data.

So Treasuries got whacked:

Yields on 10-year notes climbed 10 basis points to 2.41 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.43 percent, the highest since Oct. 6. The low yield for the year was 1.64 percent on Jan. 30.

“It’s sell, sell, sell,” said Thomas Simons, a government-debt economist at Jefferies Group LLC, a primary dealer. “This alleviates a lot of the concern that the economy was not going to bounce back in the second half.”

Matt Levine writes an interesting column on activist investor communication:

If corporate America thinks that activist investors have too much power to affect corporate policies and cause short-term thinking and other bad results, and if the SEC agrees, then it might want to just make it harder and riskier for activists to discuss companies with each other, and to solicit support from other investors. Here’s Phil Goldstein of Bulldog Investors, one of the targets of the SEC’s inquiries:

Scrutiny from the SEC could chill legal discussions between investors, he said, adding that it isn’t surprising that underperforming companies would draw interest from several activists.

“If you go to a Grateful Dead concert, you’re going to find a lot of Grateful Dead fans,” he said. “They’re not a group. They just like the same music.”

Activists make their living by being persuasive, and the less they can talk to other investors, the less opportunity they have to persuade. Cutting down on those opportunities is a little weird for corporate democracy: Shareholders can vote, but they’re afraid to talk to each other about how they’ll vote. But if you worry that activists have too much influence, this is a pretty direct way to fix that.

Meanwhile, the war on banks is having an effect:

Britain’s largest banks are urging the U.K. Treasury to start a formal review of taxes on the industry, amid concern HSBC Holdings Plc and Standard Chartered Plc could move overseas to avoid a levy on balance sheets.
…
A review of taxation could persuade HSBC CEO Stuart Gulliver to keep Europe’s largest bank based in London, after it started a formal evaluation of its domicile in response to a rising U.K. levy and tougher regulation. The tax on balance sheets, imposed after the financial crisis and which applies to banks’ assets globally, cost HSBC 750 million pounds ($1.1 billion) last year, more than any other bank.

Standard Chartered, which like HSBC makes most of its earnings in Asia, has said it’s also keeping its London headquarters under review and it’s one of the first issues shareholders have said they want new CEO Bill Winters to examine after he starts next week.

Matt Levine has a nice column on communication between activist investors:

If corporate America thinks that activist investors have too much power to affect corporate policies and cause short-term thinking and other bad results, and if the SEC agrees, then it might want to just make it harder and riskier for activists to discuss companies with each other, and to solicit support from other investors. Here’s Phil Goldstein of Bulldog Investors, one of the targets of the SEC’s inquiries:

Scrutiny from the SEC could chill legal discussions between investors, he said, adding that it isn’t surprising that underperforming companies would draw interest from several activists.

“If you go to a Grateful Dead concert, you’re going to find a lot of Grateful Dead fans,” he said. “They’re not a group. They just like the same music.”

Activists make their living by being persuasive, and the less they can talk to other investors, the less opportunity they have to persuade. Cutting down on those opportunities is a little weird for corporate democracy: Shareholders can vote, but they’re afraid to talk to each other about how they’ll vote. But if you worry that activists have too much influence, this is a pretty direct way to fix that.

TransCanada Corporation, proud issuer of TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F and TRP.PR.G, was confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the ratings of TransCanada Corporation (TCC or the Company) and its wholly owned subsidiary, TransCanada PipeLines Limited (TCPL), both with Stable trends. The preferred share rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the strength of TCPL and the expectation that no debt will be issued at TCC. The ratings primarily reflect (1) expected improvement in TCC’s overall business risk profile over the medium term, (2) potential medium-term pressure on its credit metrics and (3) environmental, regulatory and political risks with respect to its natural gas and liquids pipelines segments.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 27bp, FixedResets gaining 12bp and DeemedRetractibles off 16bp. TRP FixedResets are notable winners on the Performance Highlights table. Volume was very low.

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:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.70 to be $1.28 rich, while TRP.PR.G, which resets 2020-11-30 at +296, is $0.60 cheap at its bid price of 24.77.

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.75 to be $0.84 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.08 to be $0.60 cheap.

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.86 to be $0.46 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.94 and appears to be $0.53 rich.

FTS.PR.H, with a spread of +145bp, and bid at 16.07, looks $0.96 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.65 and is $0.50 rich.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.50%, including FTS.PR.H / FTS.PR.I at 1.00%. On the junk side, four pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -1.03%; AIM.PR.A / AIM.PR.B at -0.35%; BRF.PR.A / BRF.PR.B at -0.80%; and DC.PR.B / DC.PR.D at -1.64%.

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

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	1.7377 %	2,192.3
FixedFloater	0.00 %	0.00 %	0	0.00	0	1.7377 %	3,833.2
Floater	3.50 %	3.55 %	62,857	18.33	3	1.7377 %	2,330.6
OpRet	4.45 %	-10.96 %	27,597	0.08	2	-0.1185 %	2,779.7
SplitShare	4.59 %	4.78 %	71,422	3.32	3	-0.0670 %	3,245.4
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1185 %	2,541.7
Perpetual-Premium	5.45 %	4.22 %	64,066	0.40	19	0.0539 %	2,517.0
Perpetual-Discount	5.07 %	5.05 %	115,119	15.38	15	-0.2747 %	2,762.2
FixedReset	4.45 %	3.74 %	263,166	16.65	87	0.1163 %	2,382.2
Deemed-Retractible	4.99 %	3.32 %	110,127	0.71	34	-0.1556 %	2,628.4
FloatingReset	2.48 %	2.85 %	55,433	6.15	9	-0.1962 %	2,337.7

Performance Highlights
Issue	Index	Change	Notes
SLF.PR.G	FixedReset	-2.36 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.12 Bid-YTW : 7.58 %
FTS.PR.I	FloatingReset	-2.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 16.02 Evaluated at bid price : 16.02 Bid-YTW : 3.18 %
GWO.PR.N	FixedReset	-1.43 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.20 Bid-YTW : 6.77 %
BNS.PR.Y	FixedReset	-1.15 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.11 Bid-YTW : 3.14 %
MFC.PR.F	FixedReset	1.12 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.10 Bid-YTW : 6.41 %
MFC.PR.H	FixedReset	1.18 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 2.66 %
TD.PF.B	FixedReset	1.19 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 22.73 Evaluated at bid price : 23.75 Bid-YTW : 3.44 %
TRP.PR.A	FixedReset	1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 19.60 Evaluated at bid price : 19.60 Bid-YTW : 3.74 %
TD.PF.C	FixedReset	1.51 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 22.56 Evaluated at bid price : 23.50 Bid-YTW : 3.47 %
TRP.PR.C	FixedReset	1.52 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 16.75 Evaluated at bid price : 16.75 Bid-YTW : 3.78 %
BAM.PR.C	Floater	1.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 14.20 Evaluated at bid price : 14.20 Bid-YTW : 3.55 %
TRP.PR.B	FixedReset	1.92 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 14.88 Evaluated at bid price : 14.88 Bid-YTW : 3.69 %
BAM.PR.B	Floater	2.77 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 14.49 Evaluated at bid price : 14.49 Bid-YTW : 3.48 %

Volume Highlights
Issue	Index	Shares Traded	Notes
RY.PR.N	Perpetual-Discount	497,115	New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 24.37 Evaluated at bid price : 24.75 Bid-YTW : 4.96 %
BMO.PR.Y	FixedReset	472,715	New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 23.02 Evaluated at bid price : 24.65 Bid-YTW : 3.61 %
ENB.PR.D	FixedReset	320,984	Desjardins crossed 312,700 at 18.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 18.41 Evaluated at bid price : 18.41 Bid-YTW : 4.62 %
ENB.PF.C	FixedReset	307,450	Desjardins crossed 300,000 at 20.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 20.41 Evaluated at bid price : 20.41 Bid-YTW : 4.64 %
BNS.PR.L	Deemed-Retractible	110,300	TD crossed two blocks of 50,000 each, both at 25.40. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-04-27 Maturity Price : 25.00 Evaluated at bid price : 25.37 Bid-YTW : 3.32 %
PWF.PR.T	FixedReset	100,206	Nesbitt crossed 100,000 at 25.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 23.34 Evaluated at bid price : 25.15 Bid-YTW : 3.32 %
There were 17 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
TRP.PR.C	FixedReset	Quote: 16.75 – 17.50 Spot Rate : 0.7500 Average : 0.5029 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 16.75 Evaluated at bid price : 16.75 Bid-YTW : 3.78 %
TRP.PR.B	FixedReset	Quote: 14.88 – 15.38 Spot Rate : 0.5000 Average : 0.3598 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 14.88 Evaluated at bid price : 14.88 Bid-YTW : 3.69 %
CU.PR.G	Perpetual-Discount	Quote: 22.51 – 22.94 Spot Rate : 0.4300 Average : 0.3119 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 22.18 Evaluated at bid price : 22.51 Bid-YTW : 5.01 %
PVS.PR.C	SplitShare	Quote: 25.05 – 25.40 Spot Rate : 0.3500 Average : 0.2478 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2017-12-10 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 4.78 %
GWO.PR.H	Deemed-Retractible	Quote: 24.10 – 24.34 Spot Rate : 0.2400 Average : 0.1550 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.10 Bid-YTW : 5.32 %
ENB.PR.F	FixedReset	Quote: 18.91 – 19.15 Spot Rate : 0.2400 Average : 0.1614 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-05 Maturity Price : 18.91 Evaluated at bid price : 18.91 Bid-YTW : 4.67 %

I have reiterated to the point of boredom (some might say past it) that exchange trading will give you tight spreads, sure, but thin brittle markets. And yet people keep trying:

The $7.8 trillion U.S. corporate bond market has yet to figure out how to trade large chunks of debt electronically, according to industry executives.

Alerting other investors that you want to buy or sell a certain security is the problem, said Robert Douglass, chief operating officer of U.S. corporate debt trading at Barclays Plc. Once that’s done, your competitors can steal a potentially profitable trade by executing an order ahead of yours.

“There is so much sensitivity about information leakage,” Douglass said Wednesday during a panel discussion at a Sandler O’Neill & Partners LP conference in New York. Being able to show the market a desire to buy or sell a large amount of an illiquid bond without the price immediately moving against you “would be a great market for everyone,” he said.

I mentioned the ding-dong Avon investors on May 14 … profits from their hair-trigger idiocy have been frozen:

The Securities and Exchange Commission today announced an emergency asset freeze of two U.S. brokerage accounts connected to schemes to manipulate Avon and other stocks, thwarting any ability to cash in on ill-gotten proceeds.

According to an SEC complaint filed in federal court in Manhattan, the agency has tracked a filing on its EDGAR system last month about a false Avon tender offer to a foreign entity using an IP address located in Sofia, Bulgaria. A Bulgarian trader named Nedko Nedev controlled at least one of the two now-frozen brokerage accounts, and his account held a substantial position in Avon contracts-for-difference (CFDs) that were losing value in recent months. The SEC alleges that Nedev generated approximately $5,000 in excess profits by selling almost half of the account’s Avon CFDs at inflated prices after the EDGAR filing led to a 20-percent increase in the value of Avon stock on May 14.

The court issued an order at the SEC’s request freezing the two accounts, which contain approximately $2 million in assets.

Can there possibly be a misprint there? “$5,000 in excess profits”? Really?

David Parkinson of the Globe passes on some poor Canadian economic news:

The merchandise trade report released by Statistics Canada on Wednesday was, in a word, grim. The April trade deficit of $2.97-billion was the second-biggest on record – trailing only the March deficit, which was revised to $3.85-billion from the originally reported $3.02-billion. That’s a $6.8-billion trade hole in just two months; for the year to date, the cumulative trade deficit is nearly $11-billion.
…
Yes, exports to the U.S. rose 1.6 per cent in April, but that comes after eight consecutive months of declines. Over the past 12 months, exports to the U.S. are down 4.3 per cent. While April’s upturn in U.S. shipments may provide a glimmer of hope, it appears largely driven by a rebound, from great depths, of the energy sector.

Several key non-energy sectors that were supposed to benefit from an accelerating U.S. economy this year have gone AWOL. Exports of metal ores fell 5.8 per cent in April; metal products fell 1.4 per cent. Building and packaging materials dropped 5.8 per cent. Consumer goods slumped 6 per cent. Industrial machinery and equipment flatlined in the month, after slipping 1.2 per cent in March.
…
There’s little question that the elements in trade for an economic recovery remain missing in action. Bank of Canada Governor Stephen Poloz has remained optimistic about a brighter second quarter and a strong second half, but with each new economic release, the doubts creep in. Maybe the cavalry won’t arrive on time; maybe reinforcements, in the form of another interest rate cut, might need to be called in.

And the IMF’s Lagarde has appointed herself a Fed governor, but it remains to be seen whether anybody’s listening:

The Federal Reserve should delay raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time this year.

The lender also said that the dollar was “moderately overvalued” and a further marked appreciation would be “harmful,” in a statement released in Washington on Thursday on its annual checkup of the U.S. economy.

“We still believe that the underpinnings for continued expansion are in place,” IMF Managing Director Christine Lagarde said at a press briefing in Washington. “The inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months.”

That means the Fed should wait until early 2016, even if there’s a risk of “slight overinflation” relative to the central bank’s 2 percent target, Lagarde said.
…
The fund’s latest U.S. monetary-policy advice is among its most explicit on record. In 2012, for instance, IMF staff suggested that further easing might be warranted if the outlook worsened, while in the crisis of 2008 they said rates “should stay on hold” until a recovery is established.

“The IMF is making a pronouncement on the Fed because the U.S. economy is still so important to the globe,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who expects a September rate increase. “The question is: Will the Fed listen and does it have any bearing on monetary policy decision-making? And my guess is no.”

And there’s more chatter about the global bond rout:

It all started with German government bonds. Yields on 10-year bunds, which move inversely to price, jumped as much as 51 basis points over the week to touch the highest in more than eight months on Thursday as investors reacted to signs of inflation in the eurozone. Mario Draghi, President of the European Central Bank, helped fuel the sell-off by saying investors should “get used” to bond market volatility thanks to very low interest rates that can exacerbate price swings on the debt.

Yields on U.S. 10-year Treasuries followed suit, rising about 30 basis points to the highest since October. With the rout spreading, traders cancelled meetings and rushed back to the office to deal with the swings.

“Traders” in the last sentence was a misnomer. Clearly, from the fact that these guys had meetings as a matter of routine and had to rush back to the office, they are “salesmen”. Salesmen with authority to trade, to be sure, but basically salesmen.

However, Lisa Abramowicz of Bloomberg mocks the idea that this decline can be called a rout:

Yes, German and U.S. bond yields have soared to their highest levels this year. And, yes, more than $626 billion of value has simply evaporated from an index of global sovereign bonds since the end of March.

But all bond owners aren’t racing to the exits just yet. Investors have actually poured almost $1 billion into fixed-income exchange-traded funds over the past week, just one proxy showing sustained demand for debt, according to data compiled by Bloomberg. While trading volumes are somewhat higher than average in Treasuries this year, they’re pretty typical for corporate bonds and not what you’d expect in the case of a wholesale exodus.

“Volume has been significant but not frenetic given the move in yields,” wrote Jim Vogel, an interest-rate strategist at FTN Financial, in a note Thursday. “It is still not clear to most market participants what is driving the intense sale” of European bonds.
…
Without a significant change in the fundamental backdrop of central-bank stimulus and relatively slow growth worldwide, big investors are showing they’re not quite ready to part ways with their bonds. When they are, that’s when the drama will really ensue.

That was a very good article, that was, and introduced me to the paper Investor Flows and Fragility in Corporate Bond Funds.

Brian Milner of the Globe comments:

The Canadian market has so far avoided the worst of the upheaval experienced in Europe and the U.S. But RBC sees longer-term yields climbing another 50 basis points in both Canada and the U.S. by the end of the year.

“We won’t quickly get back to yields of 4 to 5 per cent,” [head of Canadian fixed income and currency strategy at RBC Dominion Securities Inc.] Mr. [Mark] Chandler said. “But to expect us to rewind what we saw in the last six to eight weeks is wrong.”

Central banks have been “complicit” in the selloff, he said, because several took advantage of lower world oil prices and higher headline inflation to cut interest rates.

“For them to have piled on as they did exacerbated the rally that we saw in the first couple of months this year. Now that oil has sort of stabilized and turned the other way, they’re almost living by the sword and dying by the sword.”

Assiduous Readers will remember that Bernanke took some shots at the Wall Street Journal regarding fiscal and monetary policy, as reported April 30. Kevin Carmichael blames fiscal policy for the current woes:

The recovery from the financial crisis has been painfully slow for two reasons. One is private debt, which has weighed on households’ propensity to spend. The other is that governments have contributed almost nothing to gross domestic product since before the crisis.

Remember the 2010 Toronto G20 Summit? Canadian Prime Minister Stephen Harper used his influence as chairman to get the Group of 20 to endorse a pledge to quickly reduce budget deficits and pay debt. In retrospect, it was a bad idea. Mr. Harper and the G20 mistakenly assumed that the passing of the storm meant things would get back to normal. But the sun refused to shine. Private demand remained weak, forcing central banks to get ever more creative. Most governments carried on as if nothing was the matter. They restrained spending, exacerbating the situation.

Back to Canada. The country’s politicians accept no blame for the poor state of the economy. For many, this spring was a moment of triumph, for – in the face of that devastating oil shock – the federal government and some provincial ones were able to keep their budgets in check.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 12bp, FixedResets flat and DeemedRetractibles off 8bp. The Performance Highlights table is quite short, by this year’s standards. 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:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.50 to be $1.23 rich, while TRP.PR.G, which resets 2020-11-30 at +296, is $0.76 cheap at its bid price of 24.56.

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule). It is clear that the lowest spread issue, MFC.PR.F, is well off the relationship defined by the other issues, but this doesn’t resolve the conundrum – it just makes it more conundrous.

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.75 to be $0.88 rich, while MFC.PR.F, resetting at +141bp on 2016-6-19, is bid at 17.90 to be $0.75 cheap.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 24.54 to be $0.36 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.93 and appears to be $0.62 rich.

FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $0.90 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.61 and is $0.42 rich.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.55%, including FTS.PR.H / FTS.PR.I at 1.34%. On the junk side, three pairs are outside the range of the graph: FFH.PR.E / FFH.PR.F at -0.78%; AIM.PR.A / AIM.PR.B at -0.89%; and BRF.PR.A / BRF.PR.B at -1.27%.

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

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-1.4081 %	2,154.9
FixedFloater	0.00 %	0.00 %	0	0.00	0	-1.4081 %	3,767.7
Floater	3.56 %	3.61 %	62,517	18.20	3	-1.4081 %	2,290.8
OpRet	4.44 %	-13.79 %	26,594	0.09	2	0.0000 %	2,782.9
SplitShare	4.59 %	4.85 %	72,091	3.32	3	-0.5201 %	3,247.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,544.7
Perpetual-Premium	5.46 %	4.72 %	64,303	4.96	19	-0.1159 %	2,515.6
Perpetual-Discount	5.07 %	5.05 %	115,225	15.38	14	-0.1176 %	2,769.8
FixedReset	4.46 %	3.78 %	256,541	16.62	86	0.0047 %	2,379.4
Deemed-Retractible	4.99 %	3.36 %	109,308	0.71	34	-0.0760 %	2,632.5
FloatingReset	2.48 %	2.86 %	54,549	6.15	9	-0.0686 %	2,342.3

Performance Highlights
Issue	Index	Change	Notes
TRP.PR.F	FloatingReset	-1.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 3.32 %
BAM.PR.K	Floater	-1.69 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 13.96 Evaluated at bid price : 13.96 Bid-YTW : 3.61 %
BAM.PR.B	Floater	-1.40 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 14.10 Evaluated at bid price : 14.10 Bid-YTW : 3.58 %
PVS.PR.C	SplitShare	-1.23 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2017-12-10 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 4.89 %
BMO.PR.T	FixedReset	-1.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 22.63 Evaluated at bid price : 23.57 Bid-YTW : 3.44 %
BAM.PR.C	Floater	-1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 13.95 Evaluated at bid price : 13.95 Bid-YTW : 3.61 %
ENB.PR.H	FixedReset	-1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 17.56 Evaluated at bid price : 17.56 Bid-YTW : 4.58 %
BNS.PR.Y	FixedReset	1.12 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.38 Bid-YTW : 2.95 %
ENB.PR.T	FixedReset	1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 19.40 Evaluated at bid price : 19.40 Bid-YTW : 4.58 %
GWO.PR.N	FixedReset	2.05 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.45 Bid-YTW : 6.59 %

Volume Highlights
Issue	Index	Shares Traded	Notes
HSE.PR.C	FixedReset	129,952	TD crossed blocks of 80,600 and 19,000, both at 25.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 23.07 Evaluated at bid price : 24.65 Bid-YTW : 4.10 %
ENB.PR.F	FixedReset	67,412	Scotia bought blocks of 10,000 and 10,400 at 19.00, then another 10,000 at 18.95, all from National. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 18.95 Evaluated at bid price : 18.95 Bid-YTW : 4.66 %
ENB.PR.Y	FixedReset	63,177	TD crossed 40,000 at 18.54. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 18.52 Evaluated at bid price : 18.52 Bid-YTW : 4.69 %
MFC.PR.B	Deemed-Retractible	33,665	RBC crossed 30,000 at 23.23. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.12 Bid-YTW : 5.68 %
BMO.PR.M	FixedReset	31,600	Scotia crossed 30,000 at 25.12. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.12 Bid-YTW : 2.92 %
ENB.PF.A	FixedReset	29,383	Scotia crossed 20,000 at 20.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 20.59 Evaluated at bid price : 20.59 Bid-YTW : 4.60 %
There were 24 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
RY.PR.K	FloatingReset	Quote: 24.40 – 25.00 Spot Rate : 0.6000 Average : 0.4111 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.40 Bid-YTW : 2.86 %
BMO.PR.T	FixedReset	Quote: 23.57 – 23.95 Spot Rate : 0.3800 Average : 0.2530 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 22.63 Evaluated at bid price : 23.57 Bid-YTW : 3.44 %
TRP.PR.G	FixedReset	Quote: 24.56 – 24.90 Spot Rate : 0.3400 Average : 0.2343 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 22.98 Evaluated at bid price : 24.56 Bid-YTW : 3.83 %
CU.PR.F	Perpetual-Discount	Quote: 22.57 – 22.99 Spot Rate : 0.4200 Average : 0.3166 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 22.22 Evaluated at bid price : 22.57 Bid-YTW : 4.99 %
TRP.PR.F	FloatingReset	Quote: 18.75 – 19.12 Spot Rate : 0.3700 Average : 0.2707 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 3.32 %
RY.PR.H	FixedReset	Quote: 23.85 – 24.19 Spot Rate : 0.3400 Average : 0.2546 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-06-04 Maturity Price : 22.77 Evaluated at bid price : 23.85 Bid-YTW : 3.41 %