Month: October 2008

Issue Comments

ANOTHER DBRS Mass Review of Splits

The credit crunch keeps rolling … portfolio values keep dropping … and last spring’s review is no longer operable.

DBRS has announced it:

has today placed the rating of certain structured preferred shares (Split Shares) Under Review with Negative Implications. Each of these split share companies has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). The Preferred Shares benefit from a stable dividend yield and downside principal protection via the net asset value (NAV) of the Capital Shares against the percentage loss in the Portfolio’s NAV. Preferred Shares have experienced significant declines in downside protection during the past number of weeks due to the unprecedented volatility in the global equity markets. As a result of this share price volatility, DBRS has placed the Preferred Shares listed below Under Review with Negative Implications. DBRS will take final rating action on these Preferred Shares once a longer-term trend has been established for the NAVs of the affected split share companies.

DBRS Review Announced 2008-10-24
Ticker Rating Asset
Coverage		 Last
PrefBlog
Post		 HIMIPref™
Index
FBS.PR.B Pfd-2(low) 1.4+:1
10/23		 Downgraded SplitShare
ASC.PR.A Pfd-2(low) 0.9+:1
10/24		 Downgraded Scraps
ALB.PR.A Pfd-2(low) 1.5+:1
10/23		 Confirmed SplitShare
BSD.PR.A Pfd-2(low) 1.0-:1
10/17		 Retraction Suspended InterestBearing
CIR.PR.A Pfd-4(low) 0.7-:1
10/24		 Downgraded None
CBW.PR.A Pfd-5 0.7+:1
10/24		 Downgraded None
DF.PR.A Pfd-2 1.6-:1
10/15		 Don’t Panic!!! Scraps
DGS.PR.A Pfd-2 1.7-:1
10/23		 Proposed Merger None
ES.PR.B Pfd-3(high) 1.2+:1
10/23		 Small Redemption None
FCS.PR.A Pfd-2 1.3+:1
10/22		 Partial Redemption None
GFV.PR.A Pfd-2 1.5-:1
10/23		 Issuer Bid None
GBA.PR.A Pfd-5 0.7+:1
10/23		 Downgraded None
HPF.PR.A Pfd-2(low) Their Numbers Note Calculation Dispute Massive Retraction Scraps
HPF.PR.B Pfd-4 Their Numbers Note Calculation Dispute Massive Retraction Scraps
FIG.PR.A Pfd-2 1.5-:1
10/22 1.3+:1
see update		 Partial Redemption InterestBearing
PIC.PR.A Pfd-3(high) 1.3-:1
10/16		 Downgraded Yes
NBF.PR.A Pfd-2(low) 1.5+:1
10/23		 Review – Developing
Never Resolved		 None
SLS.PR.A Pfd-2(low) 1.2-:1
10/23		 None None
SNH.PR.U Pfd-3(high) 1.2-:1
10/23		 None None
SNP.PR.V Pfd-2(low) 1.3+:1
10/23		 Partial Redemption None
YLD.PR.A Pfd-3 1.0+:1
10/15		 Downgraded Scraps
TXT.PR.A Pfd-3(high) 1.4-:1
10/16		 Downgraded None
WFS.PR.A Pfd-2(low) 1.4-:1
10/26		 Monthly Retraction SplitShare

Update, 2008-10-26: There is an error in the calculation of the asset coverage for FIG.PR.A. As of the June 30 financials, the company had 9,964,308 preferreds outstanding and 7,061,762 capital units. Thus, net assets of $4.56 for the capital units equates to asset coverage of ((10 * 9,964,308) + (7,061,762 * 4.56))/9,964,308 = 1.32 … call it 1.3+:1.

Programme Changes

HIMIPref™ Bug Fix: curveYield Calculation

As noted on October 22

I’ll explain in another post, because it’s kind of funny, but basically there’s a little loop used in the process of curve approximation that calculates a yield; in the case of YLD.PR.B, quoted at 1.60 with a stated annual dividend of $1.05 (currently suspended) until maturity 2012-2-1 at $15 [dubious], the little loop ran ’round 5,709,833 times [in the run where the problem was unequivocally isolated] before the WebService timed out and blew up the whole programme.

The function at fault (yieldApproximatorTypeCalc::getSemiAnnualYieldFromTable) calculates the yield to maturity of a set of cash flows defined in a table (the input is set up in much the same way as Excel’s XIRR() function) by successive approximations to the yield using the Newton Method.

Unfortunately, this procedure can be unstable near a horizontal asymptote or a local extremum.

When calculating the curveYield for YLD.PR.B on October 21, the function did not converge; instead, it oscillated between two highly incorrect numbers.

The function has been adjusted such that:

  • After 500 iterations, a successively smaller damping factor is applied to the yield change, and
  • After 1,000 iterations, status information is written to the errorOutput.txt file after each iteration, and
  • After 1,010 iterations the process aborts and returns ANALYTICAL_DOUBLE_NO_SOLUTION

The function now converges for YLD.PR.B on October 21; other tests (prior to application of the damping factor) confirm that the ‘no solution’ result is handled properly by the rest of the programme.

It’s not often I find a crippling bug in HMIPref™ any more! That’s the only lack of convergence in this function in almost 15 years of daily data!

Market Action

October 23, 2008

The Department of Finance announced today a programme of writing Credit Default Swaps on bank paper – the Canadian Lenders Assurance Facility:

which will provide insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. This initiative will help to secure access to longer-term funds so that Canadian financial institutions can continue lending to consumers, homebuyers and businesses in Canada.

This temporary program will be offered to lenders on commercial terms so there is no expected fiscal cost.
…
Additional details of the Canadian Lenders Assurance Facility will be released shortly, after consultations with financial institutions.

We can hope that they’re a little better at it than, say, AIG!

There is at least one player shouting that Treasury’s Whack-a-Mole efforts to restore normality to the credit markets are more like Whack-a-Mountain:

Banks getting $125 billion from U.S. taxpayers to unlock the credit crunch are saying they’d rather hoard the money than use it for loans, the head of the largest independent mortgage company said.

Treasury Secretary Henry Paulson is injecting capital into institutions including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. on the expectation they would step up lending and investing to prevent the economic slowdown from getting worse. That isn’t happening, said Lee Farkas, chairman of Ocala, Florida-based Taylor, Bean & Whitaker Mortgage Corp.

Many large banks have told Farkas the U.S. rescue isn’t boosting their interest in offering or expanding credit lines to lenders such as his, even for borrowing secured by “low-risk, highly liquid loans,” he said.

“By their own admission, they’re taking the money and they don’t want to put it to work,” he said in an interview during the Mortgage Bankers Association’s conference in San Francisco. “Every single one you talk to, from the biggest to medium biggest, is saying the same thing, they want to de-lever.”

****************

Sorry, folks! I can’t keep my eyes open any more, and tomorrow could be an interesting day!PerpetualDiscounts were off 22bp on the day and now yield 6.77%, equivalent to 9.48% interest at the standard 1.4x factor. Long corporates are at about 7.2%, so the spread is about 230bp – still hanging in there!

I did update the October 21 performance; and updated the post regarding the new Fixed-Reset Royal Bank issue with not entirely surprising news of what comparison of coupons has done for the prices of extant issues. My guess is that tomorrow will be worse … but I’ll have a better idea at about 4pm…

Update, 2008-10-24: The subindices have been updated:

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.45% 5.68% 67,134 14.66 6 -1.1212% 948.5
Floater 6.21% 6.28% 45,328 13.49 2 -3.2561% 553.1
Op. Retract 5.33% 6.13% 127,400 4.06 14 -0.0750% 991.6
Split-Share 6.23% 10.42% 57,874 4.02 12 +0.0510% 940.5
Interest Bearing 7.95% 14.32% 57,644 3.36 3 -4.6302% 885.7
Perpetual-Premium 6.72% 6.79% 48,871 12.76 1 +0.6491% 923.9
Perpetual-Discount 6.70% 6.77% 173,511 12.89 70 -0.2289% 808.4
Fixed-Reset 5.31% 5.13% 874,068 15.15 10 -2.3328% 1,081.8
Issue Comments

BSD.PR.A: Retraction Suspended, Capital Units Get No Distribution

Brookfield Funds has announced:

In accordance with its Declaration of Trust, and because the net asset value is currently below the required 1.4 times coverage ratio, the monthly distribution on the Capital Units of the Brascan SoundVest Rising Distribution Split Trust will not be paid this month. The Declaration of Trust prohibits the Trust from paying a cash distribution on its Capital Units if, after giving effect to the proposed distribution, the net asset value per unit of its Capital Units would be less than approximately $4.00 and as of October 17, 2008 this amount was $nil. The Trust will continue to monitor its net asset value per Capital Unit to determine if it will be able to make monthly distributions in the future.

These announcements do not affect the quarterly distributions payable on the Preferred Securities of Brascan SoundVest Rising Distribution Split Trust.
…
The Brascan SoundVest Rising Distribution Split Trust also announced that it is temporarily suspending the annual redemption rights that would have arisen in November in respect of both its Capital Units and Preferred Securities. The Declaration of Trust provides for the suspension of redemptions when the same 1.4 times coverage ratio mentioned above cannot be maintained. The Trust will monitor its net asset value to determine when it will be able to resume redemptions. Further details of the redemption procedure to be followed will be announced if and when the suspension is lifted.

After having previously kept the NAV of the portfolio secret, the managers have now made it available again: NAV as of October 17 was $9.98.

The suspension of retractions is something of a surprise, although their right to do so is indeed spelled out in the prospectus. This is not the greatest problem in the world for the preferred securityholders, however, since they always had to buy a capital unit before retracting anyway:

Commencing in 2005, Preferred Securities may be surrendered together with an equal number of Capital Units for redemption in the month of November of each year for redemption on the last Business Day (any day on which the Toronto Stock Exchange is open for trading is hereinafter referred to as a ‘‘Business Day’’) in November of that year (a ‘‘Redemption Date’’), subject to the Trust’s right to suspend redemptions in certain circumstances. A Securityholder who surrenders Preferred Securities together with Capital Units for redemption at least 15 Business Days prior to a Redemption Date will receive payment for each Combined Security equal to the Combined Value determined as of the Redemption Date, less redemption costs. Redemption proceeds will be payable on or before the fifteenth Business Day after the applicable Redemption Date. See ‘‘Details of the Offering — Certain Provisions of the Preferred Securities— Concurrent Annual
Redemption’’.

On October 17, BSD.UN closed at $1.50; BSD.PR.A closed at $7.40; given a NAV of $9.98 retraction would have been quite profitable. The prospectus language, by the way is (bolding added):

The Trust may suspend the redemption of Capital Units and the repayment of Preferred Securities or postpone repayment of redemption proceeds:
…
(iii) if, after giving effect to redemptions, the Combined Value would be less than 1.4 times the Repayment Price,

… so the language in the press release …

The Declaration of Trust provides for the suspension of redemptions when the same 1.4 times coverage ratio mentioned above cannot be maintained.

… is a bit of a stretch. To me, it looks like they just want to hang on to their assets. Inquiries and complaints may be directed to:

Zev Korman
Director, Investor Relations and Communications – Public Funds
Tel: 416-359-1955
Email: zkorman@brookfield.com

My own eMail says:

I note that BSD has suspended retractions and have commented on this on my blog at http://www.prefblog.com/?p=3565

Given that the prospectus gives the Trust the option of suspending retractions, without making this an obligation, what motivation is there for the suspension other than a desire to retain assets?

May I publish your response?

New Issues

New Issue: Royal Bank Fixed-Reset 5.60%+267

Royal Bank has announced:

a domestic public offering of $200 million of Non-Cumulative, 5 year rate reset Preferred Shares Series AL.

The bank will issue 8 million Preferred Shares Series AL priced at $25 per share and holders will be entitled to receive non-cumulative quarterly fixed dividend for the initial period ending February 24, 2014 in the amount of $1.40 per share, to yield 5.60% per cent annually. The bank has granted the Underwriters an option, exercisable in whole or in part, to purchase up to an additional 4 million Preferred Shares at the same offering price.

Subject to regulatory approval, on or after February 24, 2014, the bank may redeem the Preferred Shares Series AL in whole or in part at par. Thereafter, the dividend rate will reset every five years at a rate equal to 2.67% over the 5-year Government of Canada bond yield. Holders of Preferred Shares Series AL will, subject to certain conditions, have the right to convert all or any part of their shares to non-cumulative floating rate preferred shares Series AM (the “Preferred Shares Series AM”) on February 24, 2014 and on February 24 every five years thereafter.

Holders of the Preferred Shares Series AM will be entitled to receive a non-cumulative quarterly floating dividend at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 2.67%. Holders of Preferred Shares Series AM will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series AL on February 24, 2019 and on February 24 every five years thereafter.

The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is November 3, 2008.

Update: Fixed-Reset issues got clobbered today, not surprisingly … I have uploaded the Fixed-Reset Index Portfolio … the issues have a long way to go before they yield 5.6%. The yield differences is about 0.50% … if you think of them as 5-year issues, that will be about 2.5% further to go on price … if you think of them as perpetuals, that’s about 7.5% further downside on price. Although, mind you, there is no reason why the prices could remain unchanged, with the new Royal issue trading at an immediate premium.

Market Action

October 22, 2008

Stocks got clobbered again:

U.S. stocks sank and the Standard & Poor’s 500 Index dropped to the lowest level since April 2003 on concern a worsening global economic slump will damp profits.

…
The S&P 500 lost 58.27 points, or 6.1 percent, to 896.78. The Dow Jones Industrial Average plunged 514.45, or 5.7 percent, to 8,519.21 as all 30 of its companies dropped. The Nasdaq Composite Index lost 80.93, or 4.8 percent, 1,615.75. About 24 stocks fell for each that rose on the New York Stock Exchange.
…
The S&P 500 has moved more than 1 percent on 13 of the 16 trading days this month, making it the most volatile by that measure since September 1932, according to S&P analyst Howard Silverblatt.

… Canada was not immune:

Canadian stocks fell, pushing the main index toward its worst monthly drop in 21 years, as energy shares including Canadian Natural Resources Ltd. slumped along with oil prices on signs that fuel consumption is dropping.
…
The Standard & Poor’s/TSX Composite Index fell 5.7 percent to 9,236.88 in Toronto. Canada’s broadest stock benchmark, which derives more than three-quarters of its value from commodity and financial shares, has lost 21 percent in October, the most since after the “Black Monday” crash in the same month in 1987.
…
The S&P/TSX has dropped 39 percent from its June 18 record as debt markets froze after more than $660 billion in credit losses at global institutions.

Barney Frank wants Financial Services bonuses frozen:

House Financial Services Committee Chairman Barney Frank said there should be a freeze on Wall Street bonuses until companies find a way to keep the year-end payouts from encouraging excessive risk-taking.

“There should be a moratorium on bonuses,” Frank, a Massachusetts Democrat, told reporters yesterday in Washington. “They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus,” and if it causes losses “you don’t lose anything.”

He’s right as far as this particular time ’round goes, but most of the time, if it causes losses you’re looking for work. It’s another variation of ‘Lose a million, you’ve got a problem. Lose a billion, THEY’VE got a problem.” Which, ultimately, comes down to risk management which, from all appearances, has for the past few years been largely a regulatory box-ticking exercise, as opposed to a job that somebody actually wanted done. The pro-Street Dealbreaker leads the charge:

I mean, yeah, it was really only higher ups who perpetrated the monumental fuck ups we’re currently paying for, including but not limited to the barbershop quartet of, say, Dick Fuld, Stan O’Neal, Chuck Prince, and Jimmy Cayne (with back up dancers Angelo Mozilo, Alan Greenspan et al.), but surely something will come of cutting the annual take-home of low-level plebes who were minding their own business placing Seamless Web orders while their boss’s boss’s boss’s boss’s boss was investing in that can’t miss asset class, subprime.

I was once offered a job running a small piece of a large company – they wanted to pay me bonus based on how well the other 99.9% of the company did, rather than how well my little feifdom did. There were other problems, and the conversation didn’t last long.

There will be no market reporting AGAIN, due to the same technical difficulties that caused yesterday‘s report to be cut short. However, I have now determined, isolated and neutralized the problem; it only remains to determing that I am doing so in the best manner.

I’ll explain in another post, because it’s kind of funny, but basically there’s a little loop used in the process of curve approximation that calculates a yield; in the case of YLD.PR.B, quoted at 1.60 with a stated annual dividend of $1.05 (currently suspended) until maturity 2012-2-1 at $15 [dubious], the little loop ran ’round 5,709,833 times [in the run where the problem was unequivocally isolated] before the WebService timed out and blew up the whole programme.

So, all is well, basically, but I’M TIRED.

More later.

Update, 2008-10-24: The subindices have been updated:

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.39% 5.63% 69,256 14.76 6 +0.0043% 959.3
Floater 6.00% 6.06% 45,073 13.8 2 +3.9025% 571.7
Op. Retract 5.33% 6.19% 125,891 4.06 14 -0.1940% 992.4
Split-Share 6.23% 10.31% 57,836 4.00 12 -1.9658% 940.0
Interest Bearing 7.54% 13.03% 56,283 3.48 3 -0.5706% 928.7
Perpetual-Premium 6.76% 6.84% 48,995 12.71 1 -0.6022% 917.9
Perpetual-Discount 6.67% 6.75% 174,038 12.89 70 +0.1023% 810.2
Fixed-Reset 5.18% 5.01% 877,400 15.37 10 +0.6953% 1,107.7
Market Action

October 21, 2008

The situation in the States just keeps getting more bizarre … there are major problems in the commercial paper market:

The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money- market mutual funds beset by redemptions.

“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said in a statement in Washington. About $500 billion has flowed out of prime money-market funds since August, a Fed official said.

Assiduous Readers will remember my proposal to have banks consolidate their branded MMFs for capital purposes … I thought that was pretty radical, but I’m beginning to wonder if it’s enough. If MMFs are sensitive to runs AND these runs have a major economic effect … perhaps its time to start regulating them as banks.

Whack-a-Mole financial problems continue … this time with Australian mortgage funds:

The East Coast Mortgage Trust, Northern Investment Trust Fund and the Richmond Mortgage Fund — holding a combined $660 million — all froze redemptions yesterday as spooked investors attempted to liquidate holdings.

The latest freezes followed an announcement yesterday by the giant Challenger Howard Mortgage Fund that it had frozen $2.8 billion of funds, claiming the federal Government’s pledge to guarantee bank deposits had exacerbated a run on redemptions.

There has been a lot of chatter lately alleging Fannie & Freddie caused the sub-prime argument. Menzie Chinn of Econbrowser rebuts the charge and provides an interesting graph:

The graph is taken from the IMF Global Financial Stability Report, October 2008 … which I may get around to reading soon!

Accrued Interest continues his push for exchange traded CDSs in a post titled CDS could be fair and simple, but implicitly supports a decoupling of the CDS and cash markets:

Third, in the event of default, the seller of the contract pays the buyer 60 cents on the dollar. No actual bonds change hands.

This type of CDS is known as a “recovery lock” and have been discussed on PrefBlog. The instrument has caused huge problems in connection with the Fannie/Freddie technical default. I cannot support any plan that allows – not just allows, idealizes! – the decoupling of cash and derivative markets.

Meanwhile, there’s a turf-war going on about who gets to regulate CDSs (hat tip: Naked Capitalism): the Fed, the CFTC or the SEC? More jobs for more regulators to tick off more boxes on more forms! Yay!

On the other hand (hat tip: Dealbreaker), Sen. Tom Harkin (D-Iowa) just wants to ban them:

Sen. Tom Harkin (D., Iowa), chairman of the Senate Agriculture Committee, which regulates derivatives and so has a claim to authority over credit default swaps, has repeatedly questioned whether the $60 trillion industry should be outlawed.
…
“They’ve been touted as reducing risk, but as we have seen, it has actually increased the risk, the systemic risk, of the whole society,” Harkin said during an Oct. 14 hearing exploring the need for greater regulation of the derivatives.

On a brighter note, there is speculation that settlement of CDSs on Lehman has had no effect.

Technical difficulties prevent me from publishing the three regular tables today. I will update this post tomorrow.

Update, 2008-10-23: Tomorrow, indeed! And only one of the tables! Boy, the things you have to put up with in a free blog, eh?

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.39% 5.61% 70,921 14.75 6 -0.2258% 959.2
Floater 6.61% 6.69% 44,965 12.93 2 +0.3587% 550.2
Op. Retract 5.31% 6.06% 124,480 4.05 14 +0.6078% 994.3
Split-Share 6.10% 9.77% 58,714 4.03 12 +1.6114% 958.9
Interest Bearing 7.49% 12.52% 55,054 3.47 3 +0.0455% 934.0
Perpetual-Premium 6.72% 6.79% 49,406 12.77 1 +0.6494% 923.5
Perpetual-Discount 6.68% 6.75% 174,648 12.89 70 +0.2926% 809.4
Fixed-Reset 5.22% 5.04% 886,644 15.32 10 +0.0686% 1,100.0
Issue Comments

FFN.PR.A & FTN.PR.A : We Have Nothing to Fear but Fear Itself

Continuing their plea for calm last week Quadravest has begged holders of FTN & FFN not to panic – please, don’t panic! we implore you not to panic!:

Fueled by the intensification of the ongoing credit crisis, world financial markets reached a level of “panic” during the last several weeks which arguably has never been seen by investors on such a global scale. Several of the largest financial institutions in the United States and around the world required unprecedented government intervention in order to rescue them from complete insolvency.
…
The impact of the broad based selling has adversely impacted the portfolios of Financial 15 Split Corp. (“Financial 15”) and Financial 15 Split Corp. II (“Financial 15 II”). The net asset values have declined by approximately 15% from August 31, 2008 to October 15, 2008.

Asset coverage of the preferred shares remains OK: 1.9+:1 for FTN.PR.A and just under 1.6:1 for FFN.PR.A according to the company. But the capital unitholders are certainly feeling some pain:

Canada Prime

Bank Rate cut; Prime Follows

The Bank of Canada announced today:

that it is lowering its target for the overnight rate by one-quarter of a percentage point to 2 1/4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 2 1/2 per cent.

… and as a result:

Assuming that BMO & RY have simply misplaced their quill pens temporarily, this will be a smooth transmission of the Bank Rate cut – unlike last time. The Bank of Canada also announced today that $4-billion in 3-month money was auctioned off at 2.778% average yield, range of 2.55% to 3.00%.

Market Action

October 20, 2008

Bloomberg has some interesting colour on the US TIPS market:

Treasury Inflation-Protected Securities fell 8 percent since June as investors shunned all but the most easily traded debt amid the seizure in credit markets. TIPS were the only part of the U.S. government bond market to lose money in that time as Treasuries of all maturities gained 2.12 percent, according to Merrill Lynch & Co. indexes.

BlackRock Inc., Brown Brothers Harriman & Co., DWS Investment GmbH and New Century Advisors are buying the securities because inflation will likely increase at a faster pace over the next decade than the 1 percent annual rate TIPS yields suggest. Consumer prices, unchanged in September, may increase 4.5 percent this year and 2.65 percent in 2009, according to the median estimate of 69 forecasters surveyed by Bloomberg.

The Cleveland Fed’s liquidity adjusted inflation expectations estimator shows a ten year expectation of 1.48% as of 10/16, vs. the unadjusted figure of 0.95%.

A very good day for markets in general, credit markets particularly and especially prefs! PerpetualDiscounts now yield 6.77% dividend, equivalent to 9.48% interest at the standard factor of 1.4x, while long corporates are now at 7.25% for a pre-tax interest-equivalent spread of 223bp.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.37% 5.61% 70,920 14.75 6 +0.4190% 961.4
Floater 6.63% 6.71% 47,107 12.91 2 -3.6728% 548.3
Op. Retract 5.35% 6.28% 125,807 4.05 14 +0.9336% 988.3
Split-Share 6.19% 10.15% 59,011 4.02 12 +1.7515% 943.7
Interest Bearing 7.48% 11.85% 53,381 3.44 3 +2.4139% 933.6
Perpetual-Premium 6.76% 6.84% 48,326 12.71 1 -2.1601% 917.5
Perpetual-Discount 6.70% 6.77% 174,867 12.86 70 +0.9456% 807.0
Fixed-Reset 5.22% 5.04% 900,641 15.31 10 -0.0661% 1,099.3
Major Price Changes
Issue Index Change Notes
BAM.PR.B Floater -6.7146%  
BCE.PR.G FixFloat -2.1951%  
CL.PR.B PerpetualPremium (for now!) -2.1601% Now with a pre-tax bid-YTW of 6.84% based on a bid of 23.10 and a limitMaturity. Closing quote 23.10-60, 5×4. All trades today at 23.60.
CM.PR.K FixedReset -2.0833%  
TD.PR.Q PerpetualDiscount +2.0418% Now with a pre-tax bid-YTW of 6.40% based on a bid of 21.99 and a limitMaturity. Closing Quote 21.53-99, 3×7. Day’s range of 21.53-25.
GWO.PR.H PerpetualDiscount +2.0588% Now with a pre-tax bid-YTW of 7.08% based on a bid of 17.35 and a limitMaturity. Closing Quote 17.35-44, 10X5. Day’s range of 16.75-25.
BNS.PR.O PerpetualDiscount +2.0824% Now with a pre-tax bid-YTW of 6.38% based on a bid of 22.06 and a limitMaturity. Closing Quote 22.06-75, 5×1. Day’s range of 21.52-23.15.
SLF.PR.A PerpetualDiscount +2.0987% Now with a pre-tax bid-YTW of 6.68% based on a bid of 18.00 and a limitMaturity. Closing Quote 18.00-61, 10×16. Day’s range 17.75-01.
HSB.PR.C PerpetualDiscount +2.1322% Now with a pre-tax bid-YTW of 6.74% based on a bid of 19.16 and a limitMaturity. Closing Quote 19.16-60, 3×2. Day’s range 19.01-30.
PWF.PR.E PerpetualDiscount +2.2578% Now with a pre-tax bid-YTW of 6.35% based on a bid of 21.74 and a limitMaturity. Closing Quote 21.74-00, 1×2. Day’s range of 21.50-75.
CM.PR.D PerpetualDiscount +2.2786% Now with a pre-tax bid-YTW of 7.33% based on a bid of 19.75 and a limitMaturity. Closing Quote 19.75-19, 2×1. Day’s range 19.50-22.
SLF.PR.B PerpetualDiscount +2.2969% Now with a pre-tax bid-YTW of 6.65% based on a bid of 18.26 and a limitMaturity. Closing Quote 18.26-50, 2×3. Day’s range 18.16-50.
BAM.PR.H OpRet +2.4286% Now with a pre-tax bid-YTW of 10.92% based on a bid of 21.51 and softMaturity 2012-3-30 at 25.00. Compare with BAM.PR.I (10.65% to 2013-12-30), BAM.PR.J (10.63% to 2018-3-30) and BAM.PR.O (11.13% to 2013-6-30). Closing quote 21.51-98, 5×3. Day’s range 20.50-21.50.
POW.PR.D PerpetualDiscount +2.4417% Now with a pre-tax bid-YTW of 6.84% based on a bid of 18.46 and a limitMaturity. Closing Quote 18.46-60, 10×1. Day’s range 18.42-85.
PWF.PR.F PerpetualDiscount +2.5038% Now with a pre-tax bid-YTW of 6.58% based on a bid of 20.06 and a limitMaturity. Closing Quote 20.06-79, 3×10. Day’s range 20.00-21.25.
BNS.PR.N PerpetualDiscount +2.5629% Now with a pre-tax bid-YTW of 6.22% based on a bid of 21.21 and a limitMaturity. Closing Quote 21.21-48, 4×3. Day’s range 20.95-50.
TD.PR.R PerpetualDiscount +2.7166% Now with a pre-tax bid-YTW of 6.42% based on a bid of 21.93 and a limitMaturity. Closing Quote 21.93-49, 3×10. Day’s range 21.86-50.
BNA.PR.A SplitShare +3.0800% Asset coverage of just under 2.8:1 as of September 30 according to the company. Coverage now of 2.4+:1 based on BAM.A at 25.44 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 17.55% based on a bid of 20.75 and a hardMaturity 2010-9-30 at 25.00. Compare with BNA.PR.B (10.43% to 2016-3-25) and BNA.PR.C (12.11% to 2019-1-10). Closing quote 20.75-22.94, 2×1. No trades today.
TCA.PR.Y PerpetualDiscount +3.1746% Now with a pre-tax bid-YTW of 6.15% based on a bid of 45.50 and a limitMaturity. Closing Quote 45.50-48, 3×5. Day’s range 45.75-50.
BNA.PR.B SplitShare +3.4541% See BNA.PR.A, above. Closing quote 18.27-19.44, 6×5. No trades.
POW.PR.B PerpetualDiscount +3.5380% Now with a pre-tax bid-YTW of 6.78% based on a bid of 19.90 and a limitMaturity. Closing Quote 19.90-99, 8×3. Day’s range 19.94-10.
FTN.PR.A SplitShare +3.6585% Asset coverage of 2.2+:1 as of September 30 according to the company. Now with a pre-tax bid-YTW of 8.19% based on a bid of 8.50 and a hardMaturity 2015-12-1 at 10.00. Closing quote of 8.50-96, 10×3. Day’s range 8.30-50.
BAM.PR.O OpRet +4.5769% See BAM.PR.H, above. Closing quote 19.65-00, 1×16. Day’s range 18.95-20.00.
DFN.PR.A SplitShare +4.7836% Asset coverage of 1.9+:1 as of October 16, according to some guy’s estimate. Now with a pre-tax bid-YTW of 6.98% based on a bid of 9.20 and a hardMaturity 2014-12-1 at 10.00. Closing quote 9.20-49, 5×5. Day’s range 8.92-65.
BAM.PR.J OpRet +4.7904% See BAM.PR.H, above. Closing quote 17.50-74, 5×10. Day’s range 17.00-75.
FIG.PR.A InterestBearing +6.1224% Asset coverage of just under 1.4:1 as of October 15, according to Faircourt. Now with a pre-tax bid-YTW of 11.48% based on a bid of 7.80 and a hardMaturity 2014-12-31 at 10.00. Closing quote 7.80-99, 2×1. Day’s range of 7.50-06.
GWO.PR.I PerpetualDiscount +6.5970% Now with a pre-tax bid-YTW of 6.98% based on a bid of 16.32 and a limitMaturity. Closing Quote 16.32-59, 4×5. Day’s range 15.89-59.
BNA.PR.C SplitShare +9.3604% See BNA.PR.B, above. Closing quote 14.02-96, 8×5. Day’s range of 13.22-14.96.
Volume Highlights
Issue Index Volume Notes
BNS.PR.M PerpetualDiscount 335,600 Nesbitt crossed 199,200 at 17.60, then another 120,000 at the same price. Now with a pre-tax bid-YTW of 6.41% based on a bid of 17.65 and a limitMaturity.
DC.PR.A Scraps (would be OpRet but there are credit concerns) 177,400 CIBC crossed 166,900 at 13.75. Now with a pre-tax bid-YTW of 15.62% based on a bid of 13.52 and a softMaturity 2016-6-29 at 25.00.
BNS.PR.L PerpetualDiscount 154,700 Desjardins crossed 55,000 at 17.60, then Nesbitt crossed 80,500 at the same price. Now with a pre-tax bid-YTW of 6.43% based on a bid of 17.60 and a limitMaturity.
BMO.PR.J PerpetualDiscount 151,400 Nesbitt crossed 123,400 at 16.60, but the trade was cancelled. They then crossed 75,000 at 16.60, then 48,400 at the same price. Now with a pre-tax bid-YTW of 6.88% based on a bid of 16.69 and a limitMaturity.
CM.PR.H PerpetualDiscount 109,045 TD crossed 98,000 at 16.35. Now with a pre-tax bid-YTW of 7.40% based on a bid of 16.33 and a limitMaturity.
L.PR.A Scraps (would be OpRet but there are credit concerns) 104,650 RBC crossed 24,900 at 22.00, then CIBC crossed 64,900 at the same price. Now with a pre-tax bid-YTW of 8.33% based on a bid of 22.00 and a softMaturity 2015-7-30 at 25.00.
PIC.PR.A Scraps (would be SplitShare but there are credit concerns) 173,050 CIBC crossed 158,900 at 13.00. Now with a pre-tax bid-YTW of 13.17% based on a bid of 13.07 and a hardMaturity 2010-11-1 at 15.00.

There were thirty-seven other index-included $25-pv-equivalent issues trading over 10,000 shares today.