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TXPR closed at 543.45, up 2.56% on the day. Volume today was 3.66-million, by far the highest of the past thirty days, well ahead of second-highest June 23.

CPD closed at 10.89, up 2.45% on the day. Volume was 157,679, the highest of the past 30 trading days and just ahead of second-highest June 25.

ZPR closed at 8.55, up 3.26% on the day. Volume of 1,247,410 was by far the highest of the past 30 trading days, well ahead of second-place June 30.

Five-year Canada yields were unchanged at 0.37% today.

Other markets did well, attributed largely to a potential coronavirus vaccine:

Canadian and U.S. stocks ended higher on Wednesday, following promising early data for a potential COVID-19 vaccine and a strong quarterly report from Goldman Sachs. It was the highest close for the TSX since March.

Moderna Inc rallied after a small-scale study showed its experimental COVID-19 vaccine produced high levels of virus-killing antibodies.
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A raft of stimulus measures and encouraging economic data have lifted the S&P 500 to about 5% below its record high hit in February.

However, the United States has failed to control the coronavirus and there is a high level of uncertainty over how much the pandemic will affect the economy, Philadelphia Federal Reserve Bank President Patrick Harker said, as a number of U.S. sunbelt states reported a surge in COVID-19 cases recently.

Unofficially, the Dow Jones Industrial Average rose 228.47 points, or 0.86%, to 26,871.06, the S&P 500 gained 29.1 points, or 0.91%, to 3,226.62 and the Nasdaq Composite added 61.92 points, or 0.59%, to 10,550.49.
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In Toronto, the S&P/TSX Composite Index closed up 154.88 points, or 0.97%, at 16,063.33. Most sectors were higher, led by a 3.03% boost in real estate stares. Energy rose 2.11%, financials 1.32%, and telecom 1.41%.

There were no big surprises in the Bank of Canada rate announcement:

The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent. The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds. The Bank’s short-term liquidity programs announced since March to improve market functioning are having their intended effect and, with reduced market strains, their use has declined. The provincial and corporate bond purchase programs will continue as announced. The Bank stands ready to adjust its programs if market conditions warrant.

While economies are re-opening, the global and Canadian outlook is extremely uncertain, given the unpredictability of the course of the COVID-19 pandemic. Reflecting this, the Bank’s July Monetary Policy Report (MPR) presents a central scenario for global and Canadian growth rather than the usual economic projections. The central scenario is based on assumptions outlined in the MPR, including that there is no widespread second wave of the virus.

After a sharp drop in the first half of 2020, global economic activity is picking up. This return to growth reflects the relaxation of necessary containment measures put in place to slow the spread of the coronavirus, combined with extraordinary fiscal and monetary policy support. As a result, financial conditions have improved. The prices of most commodities, including oil, have risen from very low levels. In the central scenario, the global economy overall shrinks by about 5 percent in 2020 and then grows by around 5 percent on average in 2021 and 2022. The timing and pace of the recovery varies among regions and could be hampered by a resurgence of infections and the limited capacity of some countries to contain the virus or support their economies.

The Canadian economy is starting to recover as it re-opens from the shutdowns needed to limit the virus spread. With economic activity in the second quarter estimated to have been 15 percent below its level at the end of 2019, this is the deepest decline in economic activity since the Great Depression, but considerably less severe than the worst scenarios presented in the April MPR. Decisive and necessary fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery. Since early June, the government has announced additional support programs, and extended others.

There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output. In the central scenario, roughly 40 percent of the collapse in the first half of the year is made up in the third quarter. Subsequently, the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges. As a result, in the central scenario, real GDP declines by 7.8 percent in 2020 and resumes with growth of 5.1 percent in 2021 and 3.7 percent in 2022. The Bank expects economic slack to persist as the recovery in demand lags that of supply, creating significant disinflationary pressures.

CPI inflation is close to zero, pulled down by sharp declines in components such as gasoline and travel services. The Bank’s core measures of inflation have drifted down, although by much less than the CPI, and are now between 1.4 and 1.9 percent. Inflation is expected to remain weak before gradually strengthening toward 2 percent as the drag from low gas prices and other temporary effects dissipates and demand recovers, reducing economic slack.

As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In addition, to reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at a pace of at least $5 billion per week of Government of Canada bonds. This QE program is making borrowing more affordable for households and businesses and will continue until the recovery is well underway. To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed.

Very diplomatic of them not to mention that a loose fiscal policy is required to back up a loose monetary policy! Of course, those who run this country are well aware that loose monetary policy makes the rich richer, via increases in asset prices, while a loose fiscal policy will generally make the rich poorer eventually, via higher taxes, so there are no prizes for guessing the most likely outcome.

The BoC also published the Monetary Policy Report:

The news conference followed the publication of the bank’s quarterly Monetary Policy Report (MPR) – Mr. Macklem’s first as head of the bank. He succeeded Stephen Poloz just six weeks ago. The bank usually updates its economic forecasts in each MPR, but Mr. Poloz opted against specific projections in April, citing extreme uncertainty at the height of the crisis.
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It estimated that the inflation rate – a key measure for the bank – fell to -0.1 per cent in the second quarter. The bank forecast that even as the economy reopens, inflation would be a thin 0.4 per cent in the third quarter, and just 0.6 per cent for the year as a whole, before picking up modestly to 1.2 per cent in 2021 and 1.7 per cent in 2022.
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But Charles St-Arnaud, chief economist at Alberta Central, the province’s credit-union association, said Mr. Macklem’s call for Canadians to rely on a long period of low rates to finance consumption seemed at odds with the bank’s long-standing concerns about elevated consumer debt.

“I find it interesting that missing from that statement is the risk of pushing already extremely leveraged households and businesses to even more extreme levels,” he said. “It feels a bit like the BoC is somewhat contradicting itself.”

Well, if leveraged households go bankrupt, then the rest of us will have a target to sneer at, which is the whole point of politics. “Why didn’t they just get some money from Daddykins, like we did?”

OSFI has excitedly announced a new way for banks to raise Tier 1 capital:

A Canadian bank is now marketing a new financial instrument called a Limited Recourse Capital Note (LRCN). The bank has sought a ruling from OSFI regarding the regulatory capital treatment of the LRCNs.

OSFI has reviewed the quality of this structure relative to the eligibility criteria set out in Chapter 2 of OSFI’s Capital Adequacy Requirements Guideline, with particular emphasis on economic substance over legal form. We also considered the potential behaviour and impacts of the structure on financial stability, particularly in periods of stress.

OSFI has published a capital ruling that explains OSFI’s considerations in determining that the LRCNs can qualify as Additional Tier 1 regulatory capital by the bank and other FRFIs, subject to certain limitations and disclosure requirements.

Details are pretty much as one would expect:

A Canadian bank (the Bank) proposed to issue the LRCNs to third-party investors. The structure consists of two instruments: (1) deeply subordinated interest-bearing LRCNs with a term to maturity of 60 years issued by the Bank directly to investors; and (2) perpetual, non-cumulative preferred shares issued by the Bank to a special purpose vehicle (SPV) for the benefit of LRCN holders.
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In the event of the non-payment of principal or interest in cash on any interest payment date, upon an event of default [Footnote 2], or at maturity, the sole recourse against the Bank for the claims of LRCN holders will be the delivery of the preferred shares held by the SPV. Upon a non-viability trigger event as described in Chapter 2 of OSFI’s Capital Adequacy Requirements (CAR) Guideline, the LRCNs’ principal, plus accrued and unpaid interest, will become due and payable and, upon non-payment of such principal and interest, LRCN holders will receive common shares of the Bank issued upon conversion of the preferred shares held by the SPV. Redemptions or purchases of the LRCNs or underlying preferred shares by the issuing entity will be subject to prior Superintendent approval.

subject to some limitations:

Limitations on Investor Base
The LRCNs can only be issued to institutional investors.
Limitations on LRCNs’ and Preferred Shares’ Terms and Conditions
LRCNs and preferred shares must have a minimum par or stated value of $1000 and be traded on institutional desks (i.e. not exchange-listed).
The LRCNs must have an initial term to maturity of at least 60 years.
Unless the instrument has been replaced with an instrument of higher capital quality (i.e. CET1-qualifying common shares or retained earnings), the issuer will only be permitted to redeem the LRCNs or preferred shares where the carrying cost of the LRCNs or preferred shares exceeds the cost of replacement capital of equivalent quality (i.e. AT1).
Limit on LRCN Issuances
LRCN issuances will be subject to a cap of 0.75% of RWA [Footnote 7] (i.e. 50% of the AT1 bucket) as measured on the date of issuance.
In calculating this limit, the issuer should compare the aggregate of its outstanding and proposed issuances of LRCNs on the date of issuance to 0.75% of RWA. The limit should consider the issuer’s capital at the last reporting date with adjustments for subsequent transactions including issuances, redemptions, buybacks, and acquisitions.
Disclosure
The disclosure and marketing of the LRCNs to investors must clearly disclose how the LRCNs’ risks are equivalent to the risks of investing in directly issued Tier 1-qualifying Non-Viability Contingent Capital (NVCC) preferred shares.

DBRS has assigned the structure a rating of A(low):

DBRS, Inc. (DBRS Morningstar) assigned a provisional rating of A (low) with a Stable trend to Royal Bank of Canada’s (RBC or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes (the Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of AA less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. This is one notch below the rating of RBC’s NVCC Subordinated Debt.

This appears to mean that the banks will be able to issue preferred shares at bond prices, but I’m not sure how the taxes will work – it depends on whether the SPV is consolidated for tax purposes, or if there is some other way of the bank recovering the tax benefit of the preferred share dividends … or even if the preferred shares can pay interest!

PerpetualDiscounts now yield 5.71%, equivalent to 7.42% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.00%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 440bp from the 450bp reported July 8. We are now back below the pre-2020 record of 445bp briefly touched in 2008.

The Bank of Canada is worrying about how to measure inflation:

While the official CPI data indicated potentially worrisome declines in consumer prices in the peak lockdown months – a 0.2-per-cent drop year over year in April, and an even deeper 0.4-per-cent decline in May – the newly developed “analytical price index,” as Statscan is calling it, showed a flat reading for April and a slim 0.1-per-cent decline for May. Still in deflationary territory, but just barely.

Deflation is a potentially catastrophic threat to any economy, so the CPI trend had definitely raised some antennae. It’s an especially big deal for the Bank of Canada, which relies on an inflation target of 2 per cent as its guide to applying monetary policy to help steer the economy to health.
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But during the lockdowns, some items in the usual basket have been unavailable or at least very difficult to buy (e.g. theatre tickets, flights abroad, sit-down restaurant meals, haircuts), while other items became a higher priority on households’ shopping lists (e.g. store-bought food, baking supplies, hand sanitizer). The normal CPI basket didn’t seem to apply; Statscan has been measuring the prices for goods that no one is buying, while under-weighting things that have dominated consumer spending.

The analytical price index – which essentially reweights the CPI to reflect the sudden and sweeping changes in spending patterns – does, indeed, reveal these distortions. While Statscan cautioned that the findings are “experimental,” and shouldn’t be considered a replacement for the official inflation statistics, they do support the views expressed by Bank of Canada Governor Tiff Macklem in a speech and press conference three weeks ago: that prices probably haven’t slid as deeply as the CPI suggests, but the reality is only modestly better.

The comments a few weeks ago were full of yield curve control … and the BoC is buying long bonds:

The BoC on Monday purchased $600-million of 30-year bonds in a reverse auction. The maximum amount had previously been $400-million, according to strategists.
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The 30-year yield jumped by more than 10 basis points – its largest increase since mid-March – last week when the government released its new deficit forecast.

The BoC appears “to be changing the composition” of its balance sheet to more closely match Ottawa’s preference for longer-term borrowing, said Andrew Kelvin, chief Canada strategist at TD Securities.

Investors will on Wednesday eye the BoC’s interest rate announcement, as well as the central bank’s Monetary Policy Report, the first since Tiff Macklem took the reins as governor, for changes to the bond-buying program.

I understand that Enbridge Inc. has issued US$1 bil 5.75% hybrid ser 2020-A due 07/15/2080; the prospectus is available on EDGAR. It will be noted that I am permitted to link directly to this prospectus, as the SEC promotes investor understanding of their investments, unlike the situation in Canada.

The Notes, including accrued and unpaid interest thereon, will be converted automatically (an “Automatic Conversion”), without the consent of the holders thereof (the “Noteholders”), into shares of a newly-issued series of our preference shares, designated as Preference Shares, Series 2020-A (the “Conversion Preference Shares”) upon the occurrence of an Automatic Conversion Event (as defined herein). As the events that give rise to an Automatic Conversion are bankruptcy and related events, it is in our interest to ensure that an Automatic Conversion does not occur, although the events that could give rise to an Automatic Conversion may be beyond our control. We are under no obligation to, and do not intend to, list the Conversion Preference Shares on any stock exchange or other market. We may, at our option, redeem the Notes, in whole at any time or in part from time to time, on any day in the period commencing on (and including) April 15, 2030 (being the date falling three months prior to the Initial Interest Reset Date (as defined herein)) and ending on (and including) the Initial Interest Reset Date, and thereafter on any day in the period commencing on the date falling three months prior to any Interest Reset Date and ending on (and including) any Interest Reset Date at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the date fixed for redemption. Within 90 days following the occurrence of a Tax Event (as defined herein), we may, at our option, redeem all (but not less than all) of the Notes at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the date fixed for redemption. Within 90 days following the occurrence of a Rating Event (as defined herein), we may, at our option, redeem all (but not less than all) of the Notes at a redemption price equal to 102% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the date fixed for redemption.

I haven’t checked, but I assume the terms – other than coupon and term – are similar to the currently extant ENBA.

PerpetualDiscounts now yield 5.76%, equivalent to 7.49% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.98%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 450bp from the 440bp reported June 24. We are now back above the pre-2020 record of 445bp briefly touched in 2008.

Great-West Lifeco Inc. has announced:

that it has entered into an agreement with a syndicate of agents co-led by RBC Capital Markets, BMO Capital Markets and Scotiabank for the sale on an agency basis of $250 million aggregate principal amount of debentures maturing July 8, 2050 (the Debentures).

The Debentures will be dated July 8, 2020, will be issued at par and will mature on July 8, 2050. Interest on the Debentures at the rate of 2.981% per annum will be payable semi-annually in arrears on January 8 and July 8 in each year, commencing January 8, 2021, until the date on which the Debentures are repaid. The Debentures are redeemable at any time prior to January 8, 2050 in whole or in part at the greater of the Canada Yield Price and par, and on or after January 8, 2050 in whole or in part at par, together in each case with accrued and unpaid interest.

The Debenture offering is expected to close on or about July 8, 2020. The net proceeds will be used by Lifeco for general corporate purposes.

GWO PerpetualDiscounts are trading to yield about 5.65% today, equivalent to 7.34% interest at the standard equivalency factor of 1.3x, so the Seniority Spread for GWO is about 435bp, comparable to the overall figure reported June 24.

I missed this earlier, but Scotiabank issued US$1,250,000,000 of 4.900% Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (Non-Viability Contingent Capital (NVCC)) closing on 2020-6-4:

The US$1,250,000,000 aggregate principal amount of 4.900% Fixed Rate Resetting Perpetual Subordinated Additional Tier 1 Capital Notes (Non-Viability Contingent Capital (NVCC)) (subordinated indebtedness) (the “Notes”) offered by this prospectus supplement (this “Prospectus Supplement”) have no scheduled maturity or scheduled redemption date. From and including June 4, 2020 (the “Issue Date”) to, but excluding, June 4, 2025 (such date and each fifth (5th) anniversary date thereafter, a “Reset Date”), interest will accrue on the Notes at an initial rate equal to 4.900% per annum. From and including each Reset Date to, but excluding, the next following Reset Date, interest will accrue on the Notes at a rate per annum equal to the sum, as determined by the Calculation Agent (as defined herein), of (i) the then-prevailing U.S. Treasury Rate (as defined herein) on the relevant Reset Rate Determination Date (as defined herein) and (ii) 4.551%. Subject to the cancellation rights described below, The Bank of Nova Scotia (the “Bank”) will pay interest on the Notes quarterly in arrears on March 4, June 4, September 4 and December 4 of each year, commencing on September 4, 2020 (each, an “Interest Payment Date”).

So that’s pretty close to the initial coupon and spread to five-years as you’d see on a Canadian dollar preferred shares … but the bank can deduct the interest from income for tax purposes. Who needs preferred shares?