PrefBlog

There’s a bit of news regarding high-trigger CoCo issuance:

Nykredit Realkredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, is planning to use its first sale of contingent convertible notes to bolster its rating after meeting capital requirements.

The Copenhagen-based lender, which is preparing a 500 million euro ($685 million) issue of Tier 2 CoCos that will be written down and canceled if a 7 percent capital adequacy requirement is breached, will use the securities “to get the best possible issuer rating relative to costs,” Chief Financial Officer Soeren Holmsaid in an interview.

What? Cancelled if 7% capital adequacy is breached? Yes, it’s true:

The notes are subordinated Tier 2 instruments without a coupon deferral feature and subject to a 7% capital adequacy trigger. On breach of the trigger, the notes will be automatically written down to zero and the notes cancelled, resulting in loss of principal and future interest for investors. The capital adequacy trigger is based on Nykredit Realkredit’s individual or consolidated common equity Tier 1 (CET1) ratio or Nykredit Holding’s consolidated CET1 ratio. The notes are rated three notches below Nykredit Realkredit’s ‘a’ Viability Rating (VR) in accordance with Fitch’s criteria for “Assessing and Rating Bank Subordinated and Hybrid Securities” dated 31 January 2014 at www.fitchratings.com. The notes are notched twice for loss severity to reflect the principal write-down feature, and once for non-performance risk, to reflect the moderate incremental risk due to the 7% CET1 ratio trigger, partly offset by the large capital buffer above this trigger point, compared with the risk reflected in the bank’s VR.

The interesting part is that they’re cheaper to issue than Innovative Tier 1 Capital (the cool guys are now calling this AT1):

Nykredit Realkredit A/S said it won’t follow its biggest Danish competitor in using additional Tier 1 instruments to refinance hybrid debt as contingent convertible bonds offer a cheaper path to supporting ratings.

“The rating impact outranks the need for regulatory capital for now,” Soeren Holm, chief financial officer at Copenhagen-based Nykredit, said in a phone interview on Friday. “We plan to use CoCo instruments for the refinancing. Standard & Poor’s includes all of them in full when setting our capital ratio.”

Well, Fitch can say what it likes, but I find the reliance on definitions of regulatory capital to be very alarming. There’s lots of room there for management discretion and regulatory discretion in times of trouble, and that means things can get pretty tricky when trying to analyze these things in a chaotic environment. We’ve seen regulatory discretion in Canada (albeit in the other direction) when OSFI solved MFCs problem by agreeing to pretend there wasn’t a problem during the recent credit crisis.

Aren’t you glad you don’t have these neighbors?

[1] The parties to this action live across the road from each other in Toronto’s tony Forest Hill neighbourhood. The video footage played at the hearing shows that both families live in stately houses on a well-manicured, picturesque street. They have numerous high end automobiles parked outside their homes.

[2] The Plaintiff, John Morland-Jones, is an oil company executive; the Defendant, Gary Taerk, is a psychiatrist. They do not seem to like each other, and neither do their respective spouses, the Plaintiff, Paris Morland-Jones and the Defendant, Audrey Taerk.

[3] In this motion, the Plaintiffs seek various forms of injunctive relief on an interlocutory basis. It all flows from the Plaintiffs’ allegation that the Defendants have been misbehaving and disturbing their peaceful life in this leafy corner of paradise.
…
[23] In my view, the parties do not need a judge; what they need is a rather stern kindergarten teacher
…
[27] There is no serious issue to be tried in this action. The Plaintiff’s motion is therefore dismissed.

It would appear that John Morland-Jones is an old UCC-boy who lives at the corner of Burton Road & Vesta. A nice neighborhood indeed! I see that Dr. Gary Taerk is with Toronto General Hospital which, given my experience with TGH personnel, sounds about right.

My suggestion to the TMX that they start reporting closing quotes (mentioned yesterday) has garnered twenty-five votes, so it looks like all eight of my Assiduous Readers have helped me out. Thanks! The Official Response is:

Hello,

This issue around Closing Prices on our 15-minute delayed website is currently under investigation. We hope to have it resolved as quickly as possible.

The problem is related to our use of Canadian Consolidated Quotes (“CCQ”) as a default when retrieving a quote. This view consolidates traded from all Canadian markets.

To correct this problem in the short-term, please check quotes on Toronto Stock Exchange or TSX Venture Exchange markets only instead of the CCQ. You can do this by adding TSX or TSXV suffix (:TSX or :TSV) in the “Get Quote” box when you enter a ticker.

Example: http://web.tmxmoney.com/quote.php?qm_symbol=RY:TSX
http://web.tmxmoney.com/quote.php?qm_symbol=PMI:TSV

Thanks again for your patience.

If you have any suggestions for new functionality/features, please feel free to use the “Suggest an Idea” box on TMXmoney.com.

I posted a comment but it has been deleted – perhaps because it included links. So I’ve sent them an eMail:

Sirs,

As of December, 2010, quotes accessed after market hours could be affected by order cancellations on the Toronto Stock Exchange after 4pm. See the discussion of the GWO.PR.J on 2010-12-2 at http://prefblog.com/?p=13456 (more information at http://prefblog.com/?p=13796 ).

In addition, this problem has also affected the historical information available via tmxdatalinx.com

Has there been a change in procedures in the interim? If so, just precisely what is the source of closing quotations provided via tmxmoney.com and tmxdatalinx.com?

Sincerely,

More on the junk bond liquidity premium:

It’s getting harder to trade bonds. Hours, sometimes days can go by before investors can complete a transaction. That’s not dissuading them from piling into the most-illiquid debt out there.

Junk-bond investors are earning practically nothing extra to own older, smaller bond issues that don’t typically trade as often as bigger, newer debt offerings, according to Barclays Plc (BARC) data. The gap has collapsed to almost zero from a 1.05 percentage point premium for the less-liquid notes in the fourth quarter of 2011.

That means bondholders aren’t really being compensated for the risk that there might be no one who wants to buy their obscure securities if demand dries up and they’re forced to sell. They’re not worrying about that now, though, with volatility at historic lows and cash flowing into credit markets amid a sixth year of unprecedented Federal Reserve stimulus.
…
Unlike stocks, junk bonds are traded over the phone away from exchanges. Wall Street’s biggest banks have traditionally facilitated corporate-debt trades using their own money. They’re reducing this role now in the face of regulations making them hold more capital against debt holdings.

In the past, dealers would purchase bigger clumps of bonds than they could immediately sell, allowing investors to get out of positions even if a broker didn’t have a client on the other side looking to buy. That’s changed, and junk-debt trading has fallen as a proportion of the total amount outstanding.

The amount of below investment-grade bonds in the market has swelled by 54 percent since 2009, yet trading volumes have only increased by 34 percent in that period, according to Bank of America (BAC) Merrill Lynch and Financial Industry Regulatory Authority data.

It was a day of small gains for the Canadian preferred share market, with PerpetualDiscounts up 4bp, FixedResets gaining 3bp and DeemedRetractibles winning 5bp. Average volatility was augmented by some good bouncing by Floaters. Volume was average.

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	0.6887 %	2,487.6
FixedFloater	4.50 %	3.75 %	31,758	17.91	1	0.1900 %	3,811.8
Floater	2.93 %	3.03 %	50,631	19.62	4	0.6887 %	2,685.9
OpRet	4.37 %	-10.75 %	34,435	0.12	2	0.0973 %	2,715.3
SplitShare	4.81 %	4.22 %	61,608	4.19	5	0.0318 %	3,109.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0973 %	2,482.9
Perpetual-Premium	5.51 %	-7.47 %	96,916	0.09	15	-0.0599 %	2,404.3
Perpetual-Discount	5.30 %	5.33 %	107,909	14.91	21	0.0405 %	2,543.1
FixedReset	4.53 %	3.48 %	195,447	4.32	75	0.0251 %	2,559.0
Deemed-Retractible	4.97 %	-3.74 %	147,160	0.09	42	0.0540 %	2,526.6
FloatingReset	2.66 %	2.33 %	156,824	4.03	6	0.0330 %	2,495.7

Performance Highlights
Issue	Index	Change	Notes
PWF.PR.A	Floater	-1.96 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 19.51 Evaluated at bid price : 19.51 Bid-YTW : 2.70 %
MFC.PR.F	FixedReset	-1.30 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.61 Bid-YTW : 3.84 %
PWF.PR.L	Perpetual-Discount	-1.27 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 23.81 Evaluated at bid price : 24.09 Bid-YTW : 5.33 %
BAM.PR.X	FixedReset	1.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 22.28 Evaluated at bid price : 22.77 Bid-YTW : 3.92 %
FTS.PR.J	Perpetual-Discount	1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 23.29 Evaluated at bid price : 23.62 Bid-YTW : 5.03 %
BAM.PR.K	Floater	1.65 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 17.29 Evaluated at bid price : 17.29 Bid-YTW : 3.06 %
BAM.PR.B	Floater	1.70 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 3.05 %
BAM.PR.C	Floater	1.80 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 17.49 Evaluated at bid price : 17.49 Bid-YTW : 3.03 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.S	FixedReset	392,113	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.55 Bid-YTW : 3.60 %
RY.PR.Z	FixedReset	190,555	Nesbitt crossed 50,000 at 25.58. Scotia crossed blocks of 49,800 and 50,000, both at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-24 Maturity Price : 25.00 Evaluated at bid price : 25.57 Bid-YTW : 3.51 %
TRP.PR.A	FixedReset	152,778	Nesbitt crossed 139,100 at 23.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 23.30 Evaluated at bid price : 24.00 Bid-YTW : 3.67 %
RY.PR.C	Deemed-Retractible	146,648	Desjardins crossed 142,900 at 25.69. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-20 Maturity Price : 25.50 Evaluated at bid price : 25.68 Bid-YTW : -4.46 %
HSB.PR.E	FixedReset	81,906	Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.38 Bid-YTW : 0.96 %
TRP.PR.C	FixedReset	73,976	Nesbitt crossed 50,000 at 23.34. Scotia crossed 15,200 at 23.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 22.77 Evaluated at bid price : 23.15 Bid-YTW : 3.45 %
There were 30 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PR.G	FixedFloater	Quote: 21.09 – 22.45 Spot Rate : 1.3600 Average : 0.8239 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 21.63 Evaluated at bid price : 21.09 Bid-YTW : 3.75 %
PWF.PR.A	Floater	Quote: 19.51 – 20.30 Spot Rate : 0.7900 Average : 0.5880 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 19.51 Evaluated at bid price : 19.51 Bid-YTW : 2.70 %
MFC.PR.C	Deemed-Retractible	Quote: 22.46 – 22.90 Spot Rate : 0.4400 Average : 0.3015 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.46 Bid-YTW : 5.77 %
ENB.PR.A	Perpetual-Premium	Quote: 25.42 – 25.74 Spot Rate : 0.3200 Average : 0.1962 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-20 Maturity Price : 25.00 Evaluated at bid price : 25.42 Bid-YTW : -16.12 %
PWF.PR.L	Perpetual-Discount	Quote: 24.09 – 24.47 Spot Rate : 0.3800 Average : 0.2646 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 23.81 Evaluated at bid price : 24.09 Bid-YTW : 5.33 %
MFC.PR.F	FixedReset	Quote: 23.61 – 23.89 Spot Rate : 0.2800 Average : 0.2088 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.61 Bid-YTW : 3.84 %

So I was talking to a guy on the weekend who said he’d worked out that his house value had multiplied forty times since he bought it in 1967. Pretty good, eh? How does it compare to other things?

So the S&P 500 beat my buddy’s house over the period, but only by about 1.7% annually; property taxes, maintenance and insurance have been ignored, but so has rent … I suspect that once you throw everything into the mix the house has done a lot better.

Got some data? Let me know and I’ll add it to the table.

Coincidentally, Rob Carrick writes:

National price data from the Canadian Real Estate Association shows an average annual gain of 5.4 per cent nationally from 2004 through 2013 for resale homes. The comparable average return from stocks was just under 8 per cent. If we go back 20 years, we get an 8.3 per cent gain from Canadian stocks and an increase of 4.5 per cent in the average national house price. Over 30 years, stocks made 8.5 per cent and houses 5.5 per cent.

Stocks, or at least the benchmark for the Canadian market, win. Case closed. So why do houses enjoy such a great reputation as an investment? Some answers to this question were recently presented in a blog post by Adrian Spitters, a certified financial planner (CFP) with Assante Capital Management Ltd. in Abbotsford, B.C. For one thing, he thinks people take a much longer-term view of housing prices than they do with stocks. With stocks, they focus a lot on short-term price fluctuations and lose sight of long-term results.

The perception of stocks has also been hurt by two market crashes since 2000, even though long-term investors have still done fine. “Years ago, when people didn’t have access to information online, I don’t think they panicked as much about stocks,” Mr. Spitters said in an interview. “People tend to be more aware of the volatility.”

He also says people ignore the true cost of owning a home and thus come away with an overly optimistic view of how much money they’ve made. Property taxes, furnishings, maintenance, improvements, insurance and mortgage interest all have to be factored into calculations of how much money is being made on housing.

Property taxes, maintenance and insurance, I agree. Furnishings, mortgage interest, I disagree. But one thing is, of course, that houses can be levered up higher than equities.

Sunday School. Coming soon to a trading desk near you!

The video, shared widely on social media Friday, takes aim at the famously crass culture on trading floors – most recently highlighted in The Wolf of Wall Street movie – and is part of a broader campaign to change the corporate culture at scandal-plagued Deutsche Bank, which has faced major penalties in recent years for improper trading practices.

Mr. Fan warns in the video that all e-mails and conversations are open to scrutiny when regulators are investigating a case of suspected wrongdoing and said “communications that run even a small risk of being seen as unprofessional” must stop “right now.”

“Some of you are falling way short of our established standards,” Mr. Fan says in the video. “Let’s be clear: Our reputation is everything. Being boastful, indiscreet and vulgar is not okay. It will have serious consequences for your career, and I have lost patience on this issue.”

Assiduous Reader DW writes in and says:

I’ve read with some interest your recent posts on bond ladders. (I would have responded on your site, if I could figure out how to sign-in without re-registering. Although I’ve commented before, the system has no record of me; and instead of repeating the registration process again, I’ve decided to send you this note.)

I confess that many of the points raised by others and addressed by you are lost on me, in part because it’s easy to buy a bond ladder via an ETF and in part because I buy bond ladders as an act of duration defence, not offence; but also in part because I lack the financial sophistication to grasp some of the finer points – either that or they seem too minor for me to worry about.

But I have a specific question that ties into your point that some people hold short-term instruments to counter-balance longer-term fixed income, such as the preferred shares you recommend. I’m interested in your thoughts on whether it might make sense to use something like First Asset’s Laddered 1-5 Year Strip Bond ETF (BXF) for short-duration exposure. I like the strip aspect of the ETF because it eliminate the adverse tax effect of an ETF holding premium bonds; and I like the longer-term defensive characteristics of the ladder format. Your comments go me wondering whether it might make sense to construct something of a synthetic fixed income barbell by putting half of the fixed income allocation in something like BXF and half in a collection of the PrefLetter recommendations.

On this point, if it’s feasible, it would be nice to see some recommendations in your PrefLetter on this point: namely, how one might go about fitting your preferred share recommendations into an overall fixed income allocation, even if the guidance is only general and lists only a collection of bond ETFs you think are potentially sensible for this purpose. Regardless, the publication is excellent.

Some people lost their accounts during the horrific server migration in December. *sigh* They may re-register, or get me to do it.

Anyway, the first problem in looking at this is that the main page for the First Asset DEX 1-5 Year Laddered Government Strip Bond Index ETF states that:

The First Asset ETF has been designed to replicate, to the extent possible, the performance of a Canadian 1-5 year laddered government strip bond index, net of expenses. The current index is the DEX 1-5 Year Laddered Government Strip Bond Index … More information on the Index is available at the Index Provider’s website at www.canadianbondindices.com

… and the index is not mentioned on the TMX Debt Market Methodolgies page. It’s just the banks’ way of reminding us that they’re important bankers and we’re just ignorant customer scum. Ha-ha! Where else ya gonna go, suckers? Can you spell “monopoly”? However, somebody has inadvertently left a link to the methodology on the CANADIAN DEBT MARKET INDICES page, so we can look at that.

According to the DEX 1-5 year Laddered Government Strip Bond Index Methodology:

a Government only laddered index structure, in CDN$, selected from the constituents of the DEX Strip Bond Index (please refer to the DEX Strip Bond Index Methodology for qualification criteria)
– Laddered into 5 term buckets (1-1.99 yrs, 2-2.99 yrs, 3-3.99 yrs, 4-4.99 yrs, 5-5.99 yrs)
– Index constituents are rebalanced annually, each June 30 (or the last business day of June)
– Bonds will roll out to the next lower bucket on the rebalance date
– Bonds with < 1 year to maturity will roll out of the first bucket on the rebalance date at the mid market closing level on rebalance date – Index will re-invest the full market value of all roll out securities into the longest bucket at full units - Inception Date is June 29, 2012 – 5 bonds are selected for each term bucket (25 in total) in the following proportion: - 1 Government of Canada (or Government of Canada Agency) Bond - 4 Provincial Bond (including provincial guarantees) - Substitutions may be required where no Government of Canada or Agency Bond exists. – Minimum issue size 50MM – Select the most liquid in the bucket (as ranked by trailing 12 month average daily dollar volume traded)

They don’t say how they’re computing the “trailing 12 month average daily dollar volume traded”, but I assume it’s from data “provided by [the bank-owned] CDS (Canadian Depository for Securities) for the Canadian Strip marketplace.” as is the case with the Canadian Strip Bond Index. Compete with that, sucker! I feel certain that you, too, can buy such data from CDS at ever-so-reasonable prices.

With respect to distributions, according to the prospectus:

With respect to Strip Bonds, the First Asset ETF will generally be required to include annually in income notional interest deemed to have accrued on the Strip Bonds from the date of purchase, notwithstanding the fact that there is no entitlement to interest payable under the Strip Bonds.

OK, so all this is fair enough. How is it valued?

The value of any bond will be the price provided by FTSE TMX Global Debt Capital Markets Inc. (formerly “PC-Bond” a business unit of TSX Inc). FTSE TMX Global Debt Capital Markets Inc. will determine the price from quotes received from one or more dealers in the applicable bond, selected for this purpose by FTSE TMX Global Debt Capital Markets Inc.

So it looks like that the issues will be valued as strips. While this makes eminent sense, it should be noted that strips are expensive; pricing and yield information is difficult to get ahold of on their website (which is alarming in and of itself) but we can get some information from the December 31, 2013 Financial Statements.

They are, for instance, holding 195M PV of Canada Strips 2015-12-1, valued at $190,543. This means the price is 97.7144, with a term of 1.918 years. That’s an IRR of 1.213%, bond-equivalent-yield of 1.209%. A Two-Year Canada was yielding 1.13% about then.

Repeating all these calculations, very laboriously I might say, results in the calculation that (as of 2013-12-31) the portfolio was yielding 1.79% with a duration of just over three years. It was about 20% federal, 40% Ontario and 40% Quebec. Three year Canadas were about 1.21%. I don’t know about then, but now three year Ontario and Quebec bonds are both trading about 30bp over three year Canadas, So all in all, it looks like the pricing is fair, but you’re still paying strip prices for this stuff.

Strips are expensive and provincials are expensive (due to liquidity) and Canadas are very expensive (due to liquidity). I never recommend anybody ever buy Canadas, because the liquidity premium is grotesque.

Given that what you want is short-duration bonds to counterbalance the long duration of your preferred share portfolio, I would suggest buying short-term provincial bonds instead of strips (because strips are so expensive) and – if your portfolio is of sufficient size – buy short corporates in prudent size as they become available. Current coupon issues only, of course; and remember, in an RRSP it doesn’t matter so you can buy an ETF or fund in a registered plan without worrying about the coupon.

Here’s how business gets done:

A German water utility alleged a former UBS AG (UBSN) banker had an “inappropriate” relationship with consultants advising on disputed swap deals, the latest lawsuit to highlight how complex financial instruments backfired on municipal agencies during the 2008 financial crisis.

Kommunale Wasserwerke Leipzig GmbH said in court documents that Steven Bracy, the banker at the center of the allegations, booked strippers for consultants at Swiss firm Value Partners and went on an African safari with them. That happened even as he was supposed to be advising KWL on its derivative transactions with UBS.

KWL made the allegations in its response to a lawsuit filed by UBS, in which the bank is seeking $138 million under so-called credit protection agreements from 2006 and 2007. The utility argues in court documents that the close relationship between the bank and the consultants creates a conflict of interest that invalidates the deal. Bracy is scheduled to testify at the trial in London today.
…
Bracy, then a UBS employee, “appears” to have asked another man in 2006 to arrange for four strippers to be paid $5,600 each, KWL said in court documents. Later that year, Value Partners invited Bracy and another UBS employee to go on a “luxury safari” in South Africa to discuss a partnership.
…
A lawyer for UBS, Charles Falconer, told the court in April that written agreements show Value Partners was advising KWL on the transaction.

“There was never any doubt in anyone’s mind that Value Partners were acting for KWL,” he said. “Attempts by Value Partners during the course of the transactions to blur the line were rebuffed by UBS.”

Falconer said UBS didn’t force KWL to accept the deal and any blame was with the water supplier and its former managing director, Klaus Heininger. Heininger was convicted by a German court of accepting more than $3 million in bribes from Blatz and Senf beginning in 2005.
…
The strippers and safari weren’t the only gifts allegedly exchanged between UBS and Value Partners. The bank gave tickets to the World Cup soccer quarter-finals in Berlin in 2006 to Blatz and another person at Value Partners, and watches and suitcases to Blatz and Senf later that year, the bank said in court documents. The bank says the gifts were “normal” in the industry, unsolicited, too minor to breach fiduciary duties and not given surreptitiously.

The only thing I find surprising about this is that the strippers did so well. What did they have to do to earn $5,600 each?

Every now and then there’s a story decrying cybersecurity as a military boondoggle:

It’s a threat the government deems serious enough to hire more than 10,000 “cyber warriors” in the near future, according to the Cyber Security Challenge, a public-private contest created to hire the next generation of cybersecurity experts.

And it’s a focus that already consumes billions of dollars in taxpayer dollars each year.

In 2011, the federal government spent over $13 billion on cybersecurity, all but $3 billion of that from the Department of Defense, according to a recent report by the DOD’s Cyber Threat Task Force.

“There has been very little analysis as to the cost or expected benefits for any regulation pertaining to cybersecurity,” said James Gattuso, a senior research fellow at the Heritage Foundation, a nonprofit conservative think tank in Washington, D.C. “It’s admittedly a very difficult thing to measure.”

… and every now and then there’s a story about the lack of cybersecurity:

It shouldn’t be easy to shut down a European ministry for days, depriving bureaucrats of access to e-mail and the web. Someone, however, has managed to do just that to Belgium’s foreign ministry, which had to quarantine its entire computer system last Saturday and only managed to restore the work of the passport and visa processing systems on Thursday. Similar attacks seem to be taking place elsewhere in Europe, as Belgian Foreign Minister Didier Reynders told the Belga news agency after meeting with a senior French diplomat that “everyone (on the European level) notes at this moment a very powerful pickup in hacking activity probably coming from the east and in any case having to do with Ukraine.”
…
Given the attack target’s clout and resources, one would have expected the U.S. and its NATO allies to thoroughly study and block the malware. That didn’t happen. Defense conglomerate BAE Systems wrote in a recent report that “the operation behind the attacks has continued with little modification to the tools and techniques, in spite of the widespread attention a few years ago.”

… and every now and then there’s some actual sabre rattling:

The U.S. dramatically escalated its battle to curb China’s technology theft from American companies by accusing five Chinese military officials of stealing trade secrets, casting the hacker attacks as a direct economic threat.

The indictment effectively accuses China and its government of a vast effort to mine U.S. technology through cyber-espionage, stealing jobs as well as the innovation on which the success of major global companies like United States Steel Corp. (X) and Alcoa Corp. (AA) depends.
…
Those indicted were officers in Unit 61398 of the Third Department of the Chinese People’s Liberation Army. The Justice Department identified them as Wang Dong, Sun Kailiang, Wen Xinyu, Huang Zhenyu and Gu Chunhui.

In one of the cases, the Justice Department said Sun stole proprietary technical and design specifications for piping from Westinghouse, the nuclear reactor arm of Toshiba Corp. (6502), as the company was building four power plants in China and negotiating other business ventures with state-owned enterprises.

In another instance, Wang and Sun hacked into U.S. Steel computers as the company was participating in trade cases, according to the department’s statement.

… which results in more sabre rattling:

China is lashing out at the United States as a cybersecurity “hypocrite” after U.S. authorities indicted Chinese military officers with hacking into the systems of corporations.

China’s foreign ministry spokesman, Hong Lei, accused the U.S. on Tuesday of damaging already-fragile relations between Beijing and Washington. On Monday Beijing summoned the U.S. Ambassador to China to voice its complaints and pulled out of a joint cybersecurity working group, saying the U.S. must “correct its mistake and withdraw its indictment.”

A lot of long bonds are being issued globally:

Global borrowers from Shell in The Hague to Peoria, Illinois-based Caterpillar Inc. (CAT) raised a record $368 billion this year from bonds maturing in 10 years or more, according to data compiled by Bloomberg. The average yield companies pay to raise long-dated debt worldwide fell 61 basis points this year to 4.4 percent, approaching the low of 4.1 percent reached in 2013, Bank of America Merrill Lynch data show
…
The average maturity of global company notes has climbed to 8.5 years, compared with 8.1 years over the past decade, Bank of America Merrill Lynch data show.

OK, I want everybody to go to the TMX website. In the bottom left hand corner will be a little orange “Suggest an idea box”. Click that. Suggest something, or not. Your choice. But then go to the voting and feedback page (you might be able to do this directly. I’m not sure how their cookies work).

I have suggested the following:

Report Closing Quotes

You currently report Last quotations (as of 4:30pm) rather than Closing quotations (as of 4:00pm).

This is ridiculous. The extended session isn’t even an active market, as defined by the accounting profession.

I suspect that your use of Last quotations is a holdover from days prior to the extended session, and results solely from an oversight, since Last quotations have meaning only insofar as they reflect the Closing quotation.

You have ten votes and are allowed to place three of them with any one idea. I want three of your votes for this. For more information on this issue, see TMX DataLinx: “Last” != “Close” and More on the TMX Close != Last. This issue has been driving me nuts for over three years now.

Other ideas that got my support were:

provide real time quotes

It’s time for this – why not make a bold move a jump to the head of the line?

This doesn’t have a hope in hell, since selling real time quotes is extremely lucrative, but it’s a nice thought.

Provide alerts when a company changes their symbol and provide the new symbol is

This would be useful.

There was another about providing the net change rather than the gross price change on an ex-dividend day, but I can’t find it on the site now.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 19bp, FixedResets gaining 2bp and DeemedRetractibles off 5bp. Volatility was average. Volume was extremely light.

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	-0.0702 %	2,470.6
FixedFloater	4.51 %	3.75 %	33,047	17.90	1	0.4773 %	3,804.6
Floater	2.95 %	3.08 %	51,010	19.48	4	-0.0702 %	2,667.6
OpRet	4.38 %	-8.90 %	34,606	0.12	2	0.0389 %	2,712.7
SplitShare	4.81 %	4.10 %	63,995	4.19	5	0.2676 %	3,108.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0389 %	2,480.4
Perpetual-Premium	5.51 %	-9.94 %	97,754	0.09	15	0.0391 %	2,405.7
Perpetual-Discount	5.31 %	5.34 %	111,455	14.90	21	-0.1920 %	2,542.0
FixedReset	4.53 %	3.40 %	201,907	4.33	75	0.0214 %	2,558.4
Deemed-Retractible	4.98 %	-3.68 %	144,596	0.10	42	-0.0493 %	2,525.2
FloatingReset	2.66 %	2.33 %	163,223	4.03	6	0.0594 %	2,494.9

Performance Highlights
Issue	Index	Change	Notes
GWO.PR.R	Deemed-Retractible	-1.27 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.35 Bid-YTW : 5.75 %
FTS.PR.J	Perpetual-Discount	-1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-20 Maturity Price : 23.00 Evaluated at bid price : 23.30 Bid-YTW : 5.10 %
MFC.PR.F	FixedReset	1.36 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.92 Bid-YTW : 3.69 %
SLF.PR.G	FixedReset	1.73 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.50 Bid-YTW : 3.89 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.S	FixedReset	132,690	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 3.64 %
MFC.PR.D	FixedReset	99,831	Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 24.97 Bid-YTW : 1.47 %
ENB.PF.A	FixedReset	27,390	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-20 Maturity Price : 23.16 Evaluated at bid price : 25.08 Bid-YTW : 4.14 %
NA.PR.S	FixedReset	26,506	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-15 Maturity Price : 25.00 Evaluated at bid price : 25.57 Bid-YTW : 3.62 %
RY.PR.Z	FixedReset	26,198	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-24 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 3.48 %
TRP.PR.D	FixedReset	23,330	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-20 Maturity Price : 23.17 Evaluated at bid price : 25.00 Bid-YTW : 3.85 %
There were 13 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
MFC.PR.A	OpRet	Quote: 25.53 – 26.24 Spot Rate : 0.7100 Average : 0.4495 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.25 Evaluated at bid price : 25.53 Bid-YTW : -12.99 %
FTS.PR.J	Perpetual-Discount	Quote: 23.30 – 23.73 Spot Rate : 0.4300 Average : 0.2931 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-20 Maturity Price : 23.00 Evaluated at bid price : 23.30 Bid-YTW : 5.10 %
IAG.PR.A	Deemed-Retractible	Quote: 23.10 – 23.51 Spot Rate : 0.4100 Average : 0.2906 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.10 Bid-YTW : 5.67 %
CU.PR.D	Perpetual-Discount	Quote: 24.15 – 24.48 Spot Rate : 0.3300 Average : 0.2432 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-20 Maturity Price : 23.77 Evaluated at bid price : 24.15 Bid-YTW : 5.07 %
GWO.PR.R	Deemed-Retractible	Quote: 23.35 – 23.60 Spot Rate : 0.2500 Average : 0.1829 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.35 Bid-YTW : 5.75 %
BAM.PR.B	Floater	Quote: 17.06 – 17.27 Spot Rate : 0.2100 Average : 0.1444 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-20 Maturity Price : 17.06 Evaluated at bid price : 17.06 Bid-YTW : 3.10 %

Here’s a straw in the wind:

This was supposed to be a tough year for fixed income. But so far it is turning out very differently. The bond bears are suffering. Global fixed income assets have returned 4.1 per cent in the year to date, compared with 2.5 per cent for global equities, according to Bank of America Merrill Lynch. And there is probably more pain in store for asset managers who are under-invested in debt.

Inflation is persistently low and central banks are determined to keep monetary policy accommodative. The European Central Bank is likely to ease in June. And the U.S. Federal Reserve and the Bank of England are proving more dovish than expected. Investors are pushing their timing for the first hike in official rates a few months further into the future.

But, as usually happens, there’s another straw in the wind:

These bond bears just won’t go away.

Some even appear to be doubling down as their losses mount.

Exhibit A: As the ProShares UltraShort 20+ Year Treasury (TBT) fund plunged 21.6 percent this year, investors have responded by plowing $525.3 million into the exchange-traded fund, which uses leverage and derivatives.

Exhibit B: Investors have boosted short wagers on Treasuries using futures contracts trading on the Chicago Board of Trade to 56 percent more than their five-year average. A few weeks ago, there were the most since March 2008.

As I mentioned on May 13, Rob Carrick recently wrote a piece titled GICs beat laddered bond ETFs, hands down, to which I took some exception; what I didn’t mention was that I repeated my remarks in the comments section and waited to see what would happen. Well, it turned out to be a long drawn-out argument with a guy who’s really swallowed the Kool-Aid: GIC ladders are always best and anybody who doesn’t agree is either stupid or paid. He referred to a Financial Post piece by a stockbroker which isn’t very interesting: it boils down to ‘Don’t time the market’, but while searching for it I stumbled across a more interesting piece by Jane Bryant Quinn, a well regarded US financial journalist who takes another view: Seven Reasons Why Bond Ladders are Bad for Investors.

1. Bond ladders deprive you of current income. The money you put into individual bonds pays you an income at a fixed rate. When rates in the marketplace go up, your income will stay the same. In a bond mutual fund, by contrast, the managers will be adding higher-rate bonds to the pool. Your interest income – and spending money – will increase.

Well, sure. A bond fund will – normally – trade more than any individual investor, both because more issues are held, because frictional costs are so much less, and because many PMs feel that if they don’t fiddle with portfolio often enough they’ll get fired. But I do not accept this as a point in favour of funds because (i) it only considers the case in which yields rise – income will be adversely affected when yields fall, and (ii) it is therefore a market-timing argument and (iii) one purpose of Fixed Income is to FIX your INCOME and volatility of income is, if anything, to be deprecated.

2. Bond ladders often force you to reinvest at lower rates. If you’re not spending the interest income you get from individual bonds, you need to reinvest it. What are you doing with that money? It might not be enough to buy more than one or two bonds, at a high commission cost. If you want that money to be readily available, you’ll siphon it into a money market fund whose interest rate is kissing zero.

In a bond mutual fund, by contrast, you can reinvest all your interest income in new shares, at the market’s current, higher yields. In other words, you’ll be buying more shares at a lower price. When interest rates decline again, the value of your bond fund shares will rise. You’ll have more shares than you started with, which means more dollars in your pocket.

I’ll agree with her on this one. I alluded to the problem when I spoke to John Heinzl about Why only millionaires should invest in bonds directly

3. Bond ladders deprive you of future capital gains. When you hold individual bonds and interest rates decline, your bonds will rise in market value. They’ll be worth more than you paid for them. But in ladders, you hold to maturity so you’ll never collect the capital gains. In a mutual fund, the manager will harvest those gains and add them to the value of your shares.

On the face of it, this is nonsensical. Assuming the only difference between the bonds is the coupon, then the yields to maturity should be the same (and this is usually basically true), therefore there’s nothing to be gained by executing the swap.

It gets more interesting when taxes are taken into consideration. I considered the case of a 6% bond maturing 2024-5-16, exactly ten years hence. At a yield of 3%, it trades at 125.753. We hold 10MM face value of these, with a book value of par, because we bought them at issue ten years ago. So, what should we do?

• Hold them, getting $600,000 interest annually and paying tax on that? Or
• Sell them, pay the capital gains tax, buy 12.5753MM of 3%-coupon bonds trading at 100.00, get $377,259 in interest annually and pay tax on that?

Pre-tax, the MS-Excel XIRR function returns a value of 3.01974% Internal Rate of Return for the 6% coupon and 3.01985% IRR for the 3% coupon.

After tax, the values of 0.91590% is returned for the 6% coupon and 1.38098% for the 3% coupon – so it’s clearly in the investor’s interest to execute the swap.

Purists will notice that there is a negative cash flow after tax in 2015, since there’s a tax bill of $590,511 compared to interest income of $377,259, but purists can go jump in the lake, since I’m assuming taxes are paid from other resources (i.e., by the investor, not the fund). I used tax rates of 40% for income and 20% for capital gains, by the way. Purists will also be quick to inform me that the duration of the 3% bond is significantly higher than that of the 6% bond, 8.71 vs. 7.95, so I really should be swapping into a weighted combination of Bills and the 3% (about 91% bonds, 9% bills) … purists can do their own damn calculations.

So on point (3) we’ll award Ms. Quinn part marks: she is correct, but only for taxable accounts, only if the PM actually executes the swap and only if there’s differential taxation on capital gains (when I change capital gain taxation to 40%, the same as income, the Swap Scenario yields 0.95643%, which, to be fair, is 4bp more than the Hold Scenario as long as the swap isn’t duration neutral.

4. Bond ladders carry more default risk. Individual investors might hold no more than 10 or 20 bonds. If one of them goes bad, it could take a mean slice out of your portfolio. Ladders should be built only with high-quality bonds but – in municipals, especially — you never know when a snake is hidden in the underbrush.

Mutual funds are far better diversified, owning hundreds, even thousands of bonds (Vanguard’s Intermediate-Term Tax-Exempt fund holds 4,641 of them). Like ladders, the bonds come in varying maturities, from short to long.

This is phrased badly (the default risk is the same for both the ladder and the fund; but the ladder’s default risk is more concentrated), but is true. It only applies to corporate bonds, though; there will be some who will compare only GICs and Canadas.

5. Bond ladders leave you unprepared for emergencies. Sometimes, you can’t hold individual bonds to maturity. You might have unexpected medical bills or one of your kids might need some cash. You might have inherited the bonds and want to convert them into cash. Selling bonds before maturity is more expensive than you imagine. If interest rates have risen, their market value will be down – especially for small, retail lots. The markets trade in amounts of $100,000 or more, and clip 2 to 3 percent off the price if you’re selling just 25 or 30 bonds. You pay your broker a sales commission. And, after the sale, you don’t have a ladder any more – one or more of the rungs is gone.

With a mutual fund, on the other hand, you can sell shares at any time and at no cost if you have a no-load fund. The remainder of your investment will be just as diversified as it was before.

Spot on, this is a very compelling argument against ladders. As I pointed out in my discussion in the Globe comments, an investor seeking to have $X annual liquidity out of a five year ladder must invest $5X – and even then, the funds are only available between maturity and reinvestment. There is therefore the potential where the investor could be simultaneously short of liquidity and over-invested in short-term securities. This is less important if the ladder has marketable rungs than if it’s in GICs.

6. Bond ladders are expensive. You’ll probably work with a broker to set one, paying 2 percent in markups, at retail price. The ladders have to be managed, meaning more sales commissions. A no-load mutual fund, by contrast, charges no commissions and costs only a small amount per year in management fees – at Vanguard, about 0.2 percent. Also, funds buy their bond at institutional prices, which are much lower than the price you pay in the retail market.

Ms. Quinn gets part marks for this one. Is it better to pay X% in markups on 1/N of your portfolio every year (where N is the number of rungs in your ladder)? Or is it better to pay Y% on all of your portfolio every year? This will depend on the relative values of X and Y, on the value of N, and how fussy you are about maintaining a precise ladder – if you buy corporate bonds as new issues, you’ll pay less mark-up, but you’ll be lucky to get the next rung of your ladder within three months of where you want it. And – my antagonist in the Globe’s comments section will be quick to point out – there’s no commission on GICs and those are available as new issues on demand. But I don’t recommend GICs for ladders anyway.

7. What about other kinds of ladders? Ladders built from certificates of deposit instead of bonds face many of the same drawbacks: No increase in income when interest rates rise and a penalty if you’re forced to sell before maturity. The same is true of ladders build from Treasury securities. But there’s no default risk and you don’t have to pay sales commissions (for Treasuries, you’d have to build the ladder yourself, using Treasury Direct).

No marks for this one, I consider it at best a duplication of the first six points.

Ivo Krznar and James Morsink wrote an IMF working paper titled With Great Power Comes Great Responsibility: Macroprudential Tools at Work in Canada:

The goal of this paper is to assess the effectiveness of the policy measures taken by Canadian authorities to address the housing boom. We find that the the last three rounds of macroprudential policies implemented since 2010 were associated with lower mortgage credit growth and house price growth. The international experience suggests that—in addition to tighter loan-to-value limits and longer amortization periods—lower caps on the debt-to-income ratio and higher risk weights could be effective if the housing boom were to reignite. Over the medium term, the authorities could consider structural measures to further improve the soundness of housing finance.

I have to admit to some astonishment that they are advocating increased micro-management rather than simply capping the amount of mortgage insurance offered.

Most loans are five-year fixed-rate mortgages that are rolled over into a new five-year fixed rate contract for the life of the loan (typically 25 years) with the rate renegotiated every five years. In the case of variable-rate mortgages (which are less prevalent), the monthly payment is typically fixed, but the fraction allocated to interest versus principal changes every month with fluctuations in interest rates. Longer-term fixed rates were phased out in the 1960s after lenders experienced difficulties with volatile interest rates and maturity mismatches.

I didn’t know that about the ’60’s. I consider the whole 5-year-term thing to be not just outrageous, but probably also linked to the CDIC rules on insuring deposits with a maximum term of five years. I’d like to see that increased (with an extra premium being charged to the banks for longer dated deposit insurance), but the feds seem intent on destroying the market for long-dated bank paper with the forthcoming bail-in rules.

Insured mortgage loans have lower risk weights than uninsured loans. CMHC-insured mortgages have a capital risk weight of zero under the standardized approach and an average risk weight of about 0.5 percent under the internal ratings based (IRB) approach, reflecting the fact that CMHC obligations are considered sovereign exposures.

This is an insidious and under-recognized consequence of CMHC insurance. Not only are the banks laying off their actual business risk when they insure, they’re also reducing their regulatory capital requirement.

Limits on government-backed mortgage insurance and CMHC securitization: The government has announced plans to prohibit the use of government-backed insured mortgages in non-CMHC securitization programs, plans to limit the insurance of low-LTV mortgages to those that will be used in CMHC securitization programs, and limits on CMHC securitization programs. In addition, CMHC is now required to pay the federal government a risk fee on new insurance premiums written.8 It has also announced that it will increase mortgage insurance premiums by about 15 percent on average for newly extended mortgage (for all LTV ranges), effective May 1, 2014.9

Limiting the amount issued and auctioning it off to the highest bidder would be way too simple. A very major shortcoming of this paper is that they do not examine, or even list, the growth in CMHC outstanding (although they do show the growth rate from 2006 on).

Over the long run, the authorities could consider the possibility of eliminating the government’s extensive role in mortgage insurance. In this regard, Australia’s experience is relevant. Australia’s mortgage insurance system before 1998 was similar in important respects to Canada’s current system. A government-owned mortgage insurance company, the Home Loan Insurance Corporation (HLIC), was created in 1965. By the early 1990s, HLIC had a market share of about 55 percent.28 The mortgage market was operating efficiently and private sector mortgage insurance was well established, competitive, and available at reasonable cost. In December 1997, the government decided that it was no longer necessary for the government to play a direct role in mortgage insurance and passed legislation to allow for the privatization of HLIC. GE Capital (now Genworth) subsequently purchased the company and entered the Australian mortgage insurance market. Australia provides an example of the development over time of a well established private-sector mortgage insurance industry that alleviates the need for public sector involvement, with the associated risk to the government’s balance sheet stemming from the government insuring most of the mortgages in the country.

I like this idea. I didn’t know this about Australia. ┴ɥosǝ ∀nssᴉǝs oɟʇǝu ɥɐʌǝ ƃoop ᴉpǝɐs; qǝᴉuƃ ndsᴉpǝ poʍu ɯnsʇ ɥǝld ʇɥǝ ɟloʍ oɟ qloop ʇo ʇɥǝ qɹɐᴉu˙

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 28bp, FixedResets off 13bp, but DeemedRetractibles managed to eke out a gain of 1bp. Volatility picked up; the list is comprised entirely of losers. Volume was extremely low, presumably due to the long weekend, as those of us employed in the best-compensated industry on the planet can’t be bothered to do a full day’s work before a long weekend.

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	0.0703 %	2,472.3
FixedFloater	4.53 %	3.77 %	33,534	17.87	1	-0.1430 %	3,786.5
Floater	2.95 %	3.07 %	51,550	19.51	4	0.0703 %	2,669.4
OpRet	4.38 %	-7.55 %	34,782	0.13	2	0.0779 %	2,711.6
SplitShare	4.79 %	4.28 %	61,786	4.16	5	0.0237 %	3,099.9
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0779 %	2,479.5
Perpetual-Premium	5.51 %	-9.72 %	98,009	0.09	15	-0.0495 %	2,404.8
Perpetual-Discount	5.30 %	5.29 %	113,076	14.91	21	-0.2781 %	2,546.9
FixedReset	4.54 %	3.48 %	203,897	4.26	75	-0.1339 %	2,557.9
Deemed-Retractible	4.97 %	-4.10 %	143,410	0.11	42	0.0142 %	2,526.5
FloatingReset	2.65 %	2.35 %	139,777	4.18	6	-0.0659 %	2,493.4

Performance Highlights
Issue	Index	Change	Notes
SLF.PR.G	FixedReset	-2.08 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.10 Bid-YTW : 4.14 %
MFC.PR.F	FixedReset	-1.87 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.60 Bid-YTW : 3.90 %
FTS.PR.F	Perpetual-Discount	-1.41 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-16 Maturity Price : 23.57 Evaluated at bid price : 23.85 Bid-YTW : 5.14 %
BAM.PR.X	FixedReset	-1.36 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-16 Maturity Price : 22.14 Evaluated at bid price : 22.55 Bid-YTW : 4.03 %
IFC.PR.A	FixedReset	-1.10 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.28 Bid-YTW : 4.08 %
FTS.PR.J	Perpetual-Discount	-1.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-16 Maturity Price : 23.26 Evaluated at bid price : 23.59 Bid-YTW : 5.03 %

Volume Highlights
Issue	Index	Shares Traded	Notes
NA.PR.L	Deemed-Retractible	76,970	TD crossed 75,000 at 25.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-15 Maturity Price : 25.00 Evaluated at bid price : 25.32 Bid-YTW : -10.21 %
ENB.PR.B	FixedReset	62,579	TD crossed 37,200 at 24.68. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-16 Maturity Price : 23.22 Evaluated at bid price : 24.59 Bid-YTW : 4.00 %
ENB.PR.N	FixedReset	33,080	YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-01 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 4.00 %
IFC.PR.C	FixedReset	31,800	RBC crossed blocks of 11,100 and 11,500, both at 26.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.82 Bid-YTW : 3.00 %
BNS.PR.Z	FixedReset	29,366	TD crossed 14,000 at 24.70. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.64 Bid-YTW : 3.40 %
BNS.PR.Y	FixedReset	23,442	TD sold 10,000 to anonymous at 24.50. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.40 Bid-YTW : 3.14 %
There were 11 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PR.X	FixedReset	Quote: 22.55 – 22.99 Spot Rate : 0.4400 Average : 0.2658 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-16 Maturity Price : 22.14 Evaluated at bid price : 22.55 Bid-YTW : 4.03 %
PWF.PR.A	Floater	Quote: 19.80 – 20.30 Spot Rate : 0.5000 Average : 0.3296 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-16 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 2.66 %
SLF.PR.G	FixedReset	Quote: 23.10 – 23.55 Spot Rate : 0.4500 Average : 0.3001 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.10 Bid-YTW : 4.14 %
MFC.PR.F	FixedReset	Quote: 23.60 – 23.94 Spot Rate : 0.3400 Average : 0.2192 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.60 Bid-YTW : 3.90 %
IFC.PR.A	FixedReset	Quote: 24.28 – 24.65 Spot Rate : 0.3700 Average : 0.2528 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.28 Bid-YTW : 4.08 %
BAM.PR.G	FixedFloater	Quote: 20.95 – 21.38 Spot Rate : 0.4300 Average : 0.3197 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-16 Maturity Price : 21.56 Evaluated at bid price : 20.95 Bid-YTW : 3.77 %

Scotiabank will be selling its minority position in CI Financial:

Scotiabank owns 37 per cent of CI Financial Corp., a position now worth $3.8-billion. The country’s third-largest lender intends to “monetize” the stake at a time when wealth managers are in heavy demand and the S&P/TSX composite index nears a record high. Since the start of 2013, CI’s stock has climbed 44 per cent and the company now has $97-billion worth of assets under management.
…
Under the terms of an agreement between the two parties, Scotiabank cannot sell more than 20 per cent of CI to one purchaser. For that reason, the position could either be split up among multiple strategic parties, or could be sold directly to investors through a public offering.

DBRS confirmed FFN.PR.A at Pfd-4(high):

Although downside protection has increased over the past year, the Preferred Share dividend coverage ratio is below 1.0 times and the monthly Class A Share distribution is expected to result in a grind on the portfolio of 4.5% for the remaining six months until maturity. As a result, the rating of the Preferred Shares has been confirmed at Pfd-4 (high).

DBRS is behind the times – the term was extended yesterday.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 4bp, FixedResets off 7bp and DeemedRetractibles gaining 3bp. Volatility was minimal. Volume was below average.

PerpetualDiscounts now yield 5.24%, equivalent to 6.81% interest at the standard equivalency factor of 1.3x. Long corporates yield about 4.4%, so the pre-tax interest-equivalent spread is now about 240bp, a significant tightening from the 250bp reported May 7.

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	0.2678 %	2,470.6
FixedFloater	4.53 %	3.77 %	33,479	17.89	1	1.8447 %	3,791.9
Floater	2.95 %	3.09 %	51,439	19.47	4	0.2678 %	2,667.6
OpRet	4.38 %	-6.23 %	32,203	0.13	2	0.0585 %	2,709.5
SplitShare	4.79 %	4.38 %	64,338	4.16	5	0.1824 %	3,099.1
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0585 %	2,477.5
Perpetual-Premium	5.50 %	-11.33 %	96,857	0.09	15	0.0052 %	2,405.9
Perpetual-Discount	5.28 %	5.24 %	113,710	14.95	21	0.0444 %	2,554.0
FixedReset	4.53 %	3.51 %	206,676	4.26	75	-0.0731 %	2,561.3
Deemed-Retractible	4.98 %	-3.82 %	142,678	0.11	42	0.0265 %	2,526.1
FloatingReset	2.65 %	2.33 %	145,024	4.05	6	0.0726 %	2,495.1

Performance Highlights
Issue	Index	Change	Notes
SLF.PR.H	FixedReset	-1.09 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.32 Bid-YTW : 3.56 %
GCS.PR.A	SplitShare	1.50 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-07-31 Maturity Price : 25.00 Evaluated at bid price : 24.99 Bid-YTW : 4.10 %
BAM.PR.G	FixedFloater	1.84 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-15 Maturity Price : 21.58 Evaluated at bid price : 20.98 Bid-YTW : 3.77 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BMO.PR.S	FixedReset	60,608	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.49 Bid-YTW : 3.64 %
MFC.PR.B	Deemed-Retractible	51,538	TD crossed 47,000 at 22.93. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.83 Bid-YTW : 5.72 %
MFC.PR.L	FixedReset	39,285	Desjardins crossed 13,000 at 24.95. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.90 Bid-YTW : 3.87 %
MFC.PR.G	FixedReset	37,616	Scotia crossed 25,200 at 26.05. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-12-19 Maturity Price : 25.00 Evaluated at bid price : 25.99 Bid-YTW : 2.65 %
GWO.PR.Q	Deemed-Retractible	34,910	RBC bought 30,800 from CIBC at 24.85. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.85 Bid-YTW : 5.33 %
POW.PR.D	Perpetual-Discount	30,738	Nesbitt crossed 27,100 at 24.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-15 Maturity Price : 23.70 Evaluated at bid price : 24.00 Bid-YTW : 5.25 %
There were 27 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
PWF.PR.K	Perpetual-Discount	Quote: 23.88 – 24.20 Spot Rate : 0.3200 Average : 0.2259 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-15 Maturity Price : 23.58 Evaluated at bid price : 23.88 Bid-YTW : 5.21 %
SLF.PR.H	FixedReset	Quote: 25.32 – 25.50 Spot Rate : 0.1800 Average : 0.1071 YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.32 Bid-YTW : 3.56 %
ENB.PR.A	Perpetual-Premium	Quote: 25.29 – 25.52 Spot Rate : 0.2300 Average : 0.1642 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-14 Maturity Price : 25.00 Evaluated at bid price : 25.29 Bid-YTW : -11.33 %
BAM.PF.D	Perpetual-Discount	Quote: 22.42 – 22.59 Spot Rate : 0.1700 Average : 0.1096 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-15 Maturity Price : 22.10 Evaluated at bid price : 22.42 Bid-YTW : 5.53 %
TRP.PR.D	FixedReset	Quote: 25.12 – 25.28 Spot Rate : 0.1600 Average : 0.1078 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-15 Maturity Price : 23.20 Evaluated at bid price : 25.12 Bid-YTW : 3.88 %
BAM.PF.A	FixedReset	Quote: 26.00 – 26.18 Spot Rate : 0.1800 Average : 0.1319 YTW SCENARIO Maturity Type : Call Maturity Date : 2018-09-30 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 3.66 %

Scandal at the Fed!

Some investors may have gotten early word of changes to Federal Reserve policy between 1997 and 2013 and profited by trading before the policy shifts were publicly announced, according to Singapore-based researchers.

Trading records show abnormally large price movements and imbalances in buy and sell orders that are “statistically significant and in the direction of the subsequent policy surprise,” according to a paper by Gennaro Bernile, Jianfeng Hu and Yuehua Tang at Singapore Management University.

The moves occurred before and during the time that reporters were given the Federal Open Market Committee statement in so-called media lockups.

I wonder if this allegation will be investigated with as much hand-wringing and vigour as the LIBOR and FX pseudo-scandals.

Speaking of scandals…:

Ex-U.S. Treasury Secretary Timothy Geithner must comply with Standard & Poor’s demand that he provide documents related to its claim the U.S. sued the company in retaliation for downgrading government debt.

Harold W. McGraw III, chairman of S&P parent McGraw Hill Financial Inc. (MHFI), said in a court statement that Geithner called him days after S&P downgraded the U.S. debt in August 2011 and told him that the company would be held accountable for it. McGraw said Geithner told him there would be a “response” for the downgrade, which the government said was based on an error.

Geithner is the highest former government official S&P has pursued for information to support its allegations. S&P, the only credit rating company sued by the Justice Department for allegedly giving fraudulent ratings to mortgage-backed securities, has said it was singled out because of the downgrade.

The Justice Department and Geithner have denied there is a connection between the downgrade and the lawsuit filed last year. The government has said it may seek as much as $5 billion in civil penalties from S&P for losses to federally insured financial institutions that relied on its ratings for mortgage-backed securities and collateralized-debt obligations, or CDOs, that lost value after the housing market collapsed.

Here’s a step in the right direction!:

Wall Street’s bonus pool may rise as much as 10 percent this year for asset managers while fixed-income traders could see a 15 percent cut, according to compensation consultant Johnson Associates Inc.
…
“Many asset-management firms pay the same or better than the big banks, and this year that gap will get even bigger,” [founder of the consultancy Alan] Johnson said in the interview.

It was a day of modest gains for the Canadian preferred share market today, with PerpetualDiscounts winning 9bp, FixedResets gaining 1bp and DeemedRetractibles up 4bp. Volatility was modest. Volume was average.

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	0.3252 %	2,464.0
FixedFloater	4.61 %	3.85 %	33,097	17.75	1	-1.1990 %	3,723.2
Floater	2.96 %	3.09 %	51,884	19.47	4	0.3252 %	2,660.4
OpRet	4.39 %	-6.96 %	33,423	0.13	2	-0.1039 %	2,707.9
SplitShare	4.80 %	4.37 %	65,031	4.16	5	-0.2847 %	3,093.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1039 %	2,476.1
Perpetual-Premium	5.50 %	-11.78 %	96,746	0.09	15	-0.0052 %	2,405.8
Perpetual-Discount	5.28 %	5.26 %	115,093	14.91	21	0.0893 %	2,552.9
FixedReset	4.53 %	3.48 %	205,506	4.27	75	0.0090 %	2,563.2
Deemed-Retractible	4.98 %	-5.95 %	142,028	0.11	42	0.0379 %	2,525.4
FloatingReset	2.65 %	2.35 %	142,091	4.19	6	-0.0396 %	2,493.3

Performance Highlights
Issue	Index	Change	Notes
GCS.PR.A	SplitShare	-1.91 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-07-31 Maturity Price : 25.00 Evaluated at bid price : 24.62 Bid-YTW : 4.42 %
BAM.PR.G	FixedFloater	-1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-14 Maturity Price : 21.37 Evaluated at bid price : 20.60 Bid-YTW : 3.85 %
CIU.PR.C	FixedReset	1.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-14 Maturity Price : 21.49 Evaluated at bid price : 21.85 Bid-YTW : 3.48 %

Volume Highlights
Issue	Index	Shares Traded	Notes
GWO.PR.I	Deemed-Retractible	125,955	TD crossed 48,700 at 22.80. Scotia crossed 70,000 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.72 Bid-YTW : 5.75 %
ENB.PR.N	FixedReset	101,554	RBC crossed 69,000 at 24.98. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-01 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 4.02 %
ENB.PR.P	FixedReset	96,071	Scotia crossed 86,700 at 24.43. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-14 Maturity Price : 22.97 Evaluated at bid price : 24.44 Bid-YTW : 4.10 %
BMO.PR.J	Deemed-Retractible	84,607	Nesbitt crossed 75,000 at 25.82. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-13 Maturity Price : 25.50 Evaluated at bid price : 25.79 Bid-YTW : -10.68 %
BMO.PR.M	FixedReset	80,840	Nesbitt crossed 75,000 at 25.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-08-25 Maturity Price : 25.00 Evaluated at bid price : 25.37 Bid-YTW : 3.01 %
BNS.PR.M	Deemed-Retractible	73,783	Nesbitt crossed blocks of 30,700 and 35,000, both at 25.95. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-27 Maturity Price : 25.50 Evaluated at bid price : 25.93 Bid-YTW : -3.01 %
There were 30 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
MFC.PR.A	OpRet	Quote: 25.47 – 26.06 Spot Rate : 0.5900 Average : 0.3569 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.25 Evaluated at bid price : 25.47 Bid-YTW : -8.61 %
GCS.PR.A	SplitShare	Quote: 24.62 – 24.99 Spot Rate : 0.3700 Average : 0.2470 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-07-31 Maturity Price : 25.00 Evaluated at bid price : 24.62 Bid-YTW : 4.42 %
BNS.PR.K	Deemed-Retractible	Quote: 25.50 – 25.70 Spot Rate : 0.2000 Average : 0.1195 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-13 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : -16.38 %
SLF.PR.C	Deemed-Retractible	Quote: 22.46 – 22.66 Spot Rate : 0.2000 Average : 0.1403 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.46 Bid-YTW : 5.84 %
CM.PR.E	Perpetual-Premium	Quote: 25.46 – 25.65 Spot Rate : 0.1900 Average : 0.1314 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-13 Maturity Price : 25.00 Evaluated at bid price : 25.46 Bid-YTW : -13.53 %
TD.PR.Y	FixedReset	Quote: 25.57 – 25.75 Spot Rate : 0.1800 Average : 0.1304 YTW SCENARIO Maturity Type : Call Maturity Date : 2018-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.57 Bid-YTW : 3.06 %