PrefBlog

Bloomberg published a graph showing how common negative yields have become:

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There was a good chunk of pension de-risking done by Sun Life:

Two Canadian pension plans are teaming up to buy about $530-million of annuities, in a creative deal to transfer investment, longevity and inflation risk to an insurance company.

The two defined-benefit pension plans, owned by companies that did not want to be named, have struck the joint annuity agreement with Sun Life Financial Inc. despite having no other relation to each other. The advantage of banding together and doing the transaction at the same time was more than $20-million dollars in savings combined as Sun Life balanced the inflation exposure of the two plans.

Sun Life began working with both companies separately in early 2015, and the insurer noticed that they had different inflation formulas. “One plan sponsor promised to increase benefits when inflation was low. The other promised to increase benefits when inflation was high,” said Brent Simmons, senior managing director for defined-benefits at Sun Life, adding that both promises are tricky to buy proper asset management strategies for.
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Annuities for pension plans are part of a strategy known as “pension de-risking” in industry parlance, and they are a way of reducing long-term risks and ratcheting down income volatility for defined-benefit pension plans. These sorts of transactions became commonplace in the United States several years ago, and the U.K. has also been a leader with £19-billion ($38-billion) in de-risking deals last year. Canada’s market is still developing.

Two significant de-risking annuity deals in Canada include a $150-million deal by the Canadian Wheat Board in 2013, and a $500-million deal with an unnamed Canadian company done by Industrial Alliance Insurance and Financial Services Inc. last year.

Meanwhile, Canadian retail is moving to cash:

Canadians are holding a record $75-billion in cash amid an “ocean of fear” about investing in the markets, a new study finds.

That means they could miss out on billions in payback, warns the study released today by Canadian Imperial Bank of Commerce economists Benjamin Tal and Royce Mendes.
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And here’s a stunning figure from the report: The extra money accounts for about 10 per cent of all personal liquid assets in the country.

This angst isn’t new. It obviously came about during the 1987 crash, and again in 2001 and then again during the financial crisis.

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Sadly, it appears there will be no more entertainment from Silver Bullion Trust:

Silver Bullion Trust (“SBT” or the “Trust”) (symbol: TSX – SBT.UN (C$) and SBT.U (US$)) today announced that SBT Unitholders voted to approve amendments to SBT’s Amended and Restated Declaration of Trust dated July 9, 2009 (the “DOT”), in order to permit its conversion from a closed-end fund to a silver-bullion exchange traded fund (the “ETF Conversion”) at a special meeting of Unitholders held earlier today in Toronto.

As soon as possible, Purpose Investments Inc. will become the new manager and trustee of the Trust once the amendments to the DOT are signed and the bullion holdings will be administered by Silver Administrators Limited, SBT’s current administrator.

It was a modestly negative day for the Canadian preferred share market, with PerpetualDiscounts down 25bp, FixedResets gaining 8bp and DeemedRetractibles off 15bp. The Performance Highlights table shows a fair bit of movement below the placid surface. Volume was on the low side of 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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.06 to be $1.27 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.92 cheap at its bid price of 10.77.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.10 to be 0.78 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.57 to be 1.11 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.80 to be $1.57 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.69 and appears to be $1.04 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.75, looks $0.40 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.31 and is $0.45 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.35%, with one outlier below -1.50%. Note the range of the y-axis has changed. There is one junk outlier below -1.50% and two above +0.50%.

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

The oil crash is being compared to subprime, in appearance if not in effect:

One year ago, analysts at Bank of America Merrill Lynch drew a parallel between the subprime mortgage crash and the disorderly fall in the price of oil.

Led by Chris Flanagan, a veteran of the securitization space, the team drew attention to Markit’s ABX Index, better known as the mother of all synthetic subprime credit indexes.
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Fast-forward to today and the BofAML analysts provide an update to their previous thesis, which was that the downward spiral in the price of oil was shaping up to look a lot like the negative trend that engulfed the subprime space circa the year 2007.
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Given that both housing and oil prices were fueled to spectacular heights in the two periods by massive credit expansion, it’s probably more than just coincidence that the respective “bubble” bursting patterns are so similar.
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Lower prices beget accelerated selling, as asset owners need to raise cash. It could be margin calls or it could be producer selling needs, it doesn’t really matter: the selling becomes inevitable and turns into forced selling.

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But all that’s boring. What’s really cool is advances in 3D Printing Technology:

Orbital ATK (NYSE: OA), a global leader in aerospace and defense technologies, announced today that it has successfully tested a 3D-printed hypersonic engine combustor at NASA Langley Research Center. The combustor, produced through an additive manufacturing process known as powder bed fusion (PBF), was subjected to a variety of high-temperature hypersonic flight conditions over the course of 20 days, including one of the longest duration propulsion wind tunnel tests ever recorded for a unit of this kind. Analysis confirms the unit met or exceeded all of the test requirements.

One of the most challenging parts of the propulsion system, a scramjet combustor, houses and maintains stable combustion within an extremely volatile environment. The tests were, in part, to ensure that the PBF-produced part would be robust enough to meet mission objectives.

“Additive manufacturing opens up new possibilities for our designers and engineers,” said Pat Nolan, Vice President and General Manager of Orbital ATK’s Missile Products division of the Defense Systems Group. “This combustor is a great example of a component that was impossible to build just a few years ago. This successful test will encourage our engineers to continue to explore new designs and use these innovative tools to lower costs and decrease manufacturing time.”

The test at Langley was an important opportunity to challenge Orbital ATK’s new combustor design, made possible only through the additive manufacturing process. Complex geometries and assemblies that once required multiple components can be simplified to a single, more cost-effective assembly. However, since the components are built one layer at a time, it is now possible to design features and integrated components that could not be easily cast or otherwise machined.

And not just that … now there’s some muttering about 4-D Printing:

Now, scientists say they recently developed innovative 4D-printing methods that involve 3D-printing items that are designed to change shape after they are printed.
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“Other active research teams exploring 4D printing require multiple materials printed together, with one material that stays rigid while another changes shape and acts like a hinge,” said study co-senior author Jennifer Lewis, a materials scientist at Harvard University.

The researchers wanted to create 4D-printed structures that were created more simply, from one kind of material instead of several. They sought inspiration from nature, looking at plants, whose tendrils, leaves and flowers can respond to environmental factors such as light and touch. For instance, “pinecones can open and close depending on their degree of hydration — how wet they are,” Lewis told Live Science.
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Plant structures largely consist of fibers of a material known as cellulose. Lewis and her colleagues devised 3D-printed structures made of stiff cellulose fibers embedded in a soft hydrogel, the same kind of material from which soft contact lenses are made. This hydrogel swells up when immersed in water.

The researchers can control the directions in which these fibers are oriented within the printed structures. In turn, the orientations of these fibers control the way in which these structures swell when they are immersed in water, much like how cellulose fibers control the way plants flex because of pressure exerted by fluids inside them, the researchers said. In essence, the scientists can use the orientation of cellulose fibers in the structures to program how the objects change shape.

The scientists found that they could make the structures they created shift into cone, saddle, ruffle and spiral shapes minutes after they were soaked in water. They had flat sheets bend and twist into complex 3D structures resembling orchids and calla lilies.

What a completely fascinating time to be alive!

It was a good solid day for the Canadian preferred share market, with PerpetualDiscounts up 22bp, FixedResets winning 39bp and DeemedRetractibles gaining 21bp. The relatively calm numbers mask a lot of churn on the Performance Highlights table, though! Volume was well 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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.14 to be $1.18 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.76 cheap at its bid price of 18.03.

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Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 17.31 to be 0.80 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.60 to be 1.01 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.61 to be $1.91 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.95 and appears to be $1.13 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.75, looks $0.46 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.43 and is $0.26 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.43%, with two outliers below -1.00%. There are five junk outliers below -1.00%.

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

Yeah, so it was a Friday to be remembered:

Oil prices surged as much as 10 per cent on Friday, one of the biggest daily rallies ever, as bearish traders who had taken out record short positions scrambled to close them, betting the market’s long rout may finally be over.

The onset of a massive snowstorm on the U.S. East Coast sent heating oil up more than 10 per cent. This helped fuel a 15 per cent gain in crude prices over two days, reversing nearly half of the relentless, fund-driven selloff that had pushed crude below $30 (U.S.) a barrel for the first time in 12 years.

… and headline inflation and retail sales both rose:

Canadians are still buying new cars and vegetables even as they become more expensive, supporting the central bank’s view the economy will recover from a commodity crash without further interest-rate cuts.

December inflation climbed at the fastest pace in a year at 1.6 per cent, led by double-digit gains for fruit and vegetables and a reduced drag from gasoline, Ottawa-based Statistics Canada said Friday. The agency also reported retail sales rose 1.7 per cent in November, almost triple the highest estimate in a Bloomberg economist survey
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Fresh fruit and vegetable prices rose 13 per cent in December from a year earlier, pushing up total food costs 3.7 per cent. Most fresh produce is imported from the U.S. or Latin America during winter. Canada’s dollar fell 16 per cent last year versus the U.S. currency.

… which made it a hot day for equities:

The Standard & Poor’s/TSX Index jumped 2.9 percent to 12,389.58 at 4 p.m. in Toronto, capping the gauge’s first weekly gain of the year. Nine of the index’s 10 main industries rose more than 1.1 percent, with energy, utility and industrial shares the biggest gainers. The S&P/TSX, which entered a bear market two weeks ago, fell on Wednesday to its lowest level since August 2012. It’s down 4.8 percent in 2016.

Canada joined a rebound among global equities sparked by speculation the European Central Bank and Bank of Japan are poised to add to stimulus at the same time China reassured investors it would do more to damp volatility. Crude oil surged 8.9 percent, bringing its two-day increase past 20 percent.
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All but one of the 55 companies in the S&P/TSX energy index rose as the gauge climbed 5.5 percent. Baytex Energy Corp. surged 15 percent, while Paramount Resources Ltd. and Enerplus Corp. climbed at least 9.3 percent. Penn West Petroleum Ltd. rose 15 percent to the highest level in more than two weeks.

And as for preferred shares …

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The Canadian preferred share market had a superb day today, with PerpetualDiscounts gaining 193bp, FixedResets winning 328bp and DeemedRetractibles up 223bp. The Performance Highlights table is ridiculous. Volume was very high.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 16.72 to be $1.00 rich, while TRP.PR.B, resetting 2020-6-30 at +128, is $0.82 cheap at its bid price of 9.52.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.00 to be 0.81 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.68 to be 0.82 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.43 to be $1.88 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 19.45 and appears to be $1.33 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.75, looks $0.50 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.17 and is $0.48 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.31%, with two outliers below -1.00%. There are five junk outliers below -1.00% and one above +1.00%

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