PrefBlog

That’s a wrap!

The Canadian preferred share market closed the month on a sour note, with PerpetualDiscounts down 13bp and FixedResets losing 6bp on a well-behaved day with only one entry in the performance highlights – POW.PR.B, oddly enough, which I have used as a gauge of the market impact of the stupid trading in POW.PR.C. Volume was subdued and dominated by FixedResets.

PerpetualDiscounts closed the month yielding 5.81%, equivalent to 8.13% interest at the standard equivalency factor of 1.4x. Long Corporates returned 4.02% on the month to close with a yield of about 5.8%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 235bp, a little wider than the 230bp reported on January 27.

The first exception to Comrade Peace-Prize’s vengeful tax on banks will probably be short-term funding through repos:

The administration wants to recover government fees spent during the financial crisis through a levy on banks, which is projected to recoup at least $90 billion over 10 years. The fee, proposed as a 15-basis-point tax on liabilities other than insured deposits, could make repo transactions money losers for firms because profit margins on trades may be less than the fee.

“One of the modifications I expect would be to exclude Treasury repo, in part because the Fed wants to drain reserves using the repo market,” said Joseph Abate, a money market strategist in New York at Barclays Plc, one of the 18 primary dealers that trade with the central bank. “The 15 basis points fee would obviously make the banks less willing to participate in those transactions.”
…
Government policy makers have acted to shield the repo market in the past. The House of Representatives passed a financial overhaul bill in December that would penalize fully secured creditors if a systemically important financial firm failed, after carving out an exemption for trades involving Treasury securities.

Bernanke’s appointment to a second term was confirmed by the senate, 70-30.

As a public service, The Toronto Star and the Toronto Police came together this week to illustrate for the man in the street the realities of regulation:

• A statistical blip is dressed up as a trend in order to sell newspapers
• Regulators take stern action to Show Who’s Boss
• Things get back to normal

I know one ETF that’s going to show a rather large tracking error this month …. on the month-to-date, the TXPR Total Return Index Value is -0.32%, while CPD is -0.53%. Allowing 4bp for their fees, that means that their execution of the index rebalancing cost them about 17bp. Given $393-million under management, that comes to about $668,000.

It wasn’t much of day for the Canadian preferred share market, with PerpetualDiscounts down 5bp on the day while FixedResets gained 2bp. There are only three entries on the Performance Highlights table, so individual issues were reasonably well behaved, while volume remained at reasonably normal levels.

The Securities & Exchange Commission has issued a statement SEC Approves Money Market Fund Reforms to Better Protect Investors. Some of the changes are cosmetic and boxticky, others serve the usual regulatory purpose of looking good without addressing the underlying issue. Their rationale for the changes is:

The financial crisis and the weaknesses revealed by the Reserve Primary Fund’s “breaking the buck” in September 2008 precipitated a full-scale review of the money market fund regulatory regime by the SEC. A money market fund “breaks the buck” when its net asset value (NAV) falls below $1.00 per share, meaning investors in that fund will lose money. The SEC’s new rules are intended to increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds by tightening the maturity and credit quality standards and imposing new liquidity requirements.

Reserve Primary Fund broke the buck because it had a relatively small position in commercial paper that defaulted; there was no backstop to cover the default. While it will be conceded that the mathematical chances of this happening again will be reduced by, say, the strong encouragement to MMFs to hold Treasury securities, the fundamental cause is not addressed: there was no backup.

I have argued that the Volcker proposals for MMF regulation be implemented. Nothing will ever guarantee that commercial paper won’t default; the only thing that will seriously affect the incidence of buck-breaking is a formalization of the current nod-and-wink guarantee by the sponsor; it will then require a double-default to break the buck.

The Boston Fed has released a book of conference proceedings titled Policymaking Insights from Behavioral Economics with chapters:

• Behavioral Economics: Its Prospects and Promises for Policymakers
• Behavioral Aspects of Price Setting and Their Policy Implications
• Household Savings Behavior in the United States: The Role of Literacy, Information, and Financial Education Programs
• The Behavioral Economics of the Labor Market: Central Findings and Their Policy Implications
• U.S. House Price Dynamics and Behavioral Economics
• Happiness, Contentment, and Other Emotions for Central Banks
• Behavioral Economics and Public Policy: Reflections on the Past and Lessons for the Future
• Implications of Behavioral Economics for Monetary Policy
• Behavioral Economics as “Psychologically Informed” Economic Inquiry

Comrade Peace-Prize’s bank regulation initiative caused some chatter at Davos.

A relatively quiet day on the Canadian Preferred Share market, with PerpetualDiscounts gaining 8bp and FixedResets losing 6bp on the day. Volume was normal, and there was only one issue exhibiting an interesting amount of price volatility.

PerpetualDiscounts closed yielding 5.78%, equivalent to 8.09% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.8%, so the pre-tax interest-equivalent spread is now about 230bp, continuing to widen from the 215bp reported January 20.

The International Monetary Fund has released the January 2010 Market Update to the Global Financial Stability Report, which contained some items of interest:

Credit losses arising from commercial real estate exposures are expected to increase substantially (Figure 2). The expected writedowns are concentrated in countries that experienced the largest run-ups in prices and subsequent corrections and are in line with our previous estimates.

And without wishing to become too think-tanky, I interpret the following as a warning shot against Comrade Peace-Prize’s unilateralism:

Policymakers should be mindful of the costs associated with uncertainty about future regulation, as this may hinder financial institutions’ plans regarding their business lines and credit provision. But they should also avoid the risks associated with too rapid deployment of new regulations without proper overall impact studies. It also continues to be vitally important that differences in international implementation of the new regulatory framework are minimized to avoid an uneven playing field and regulatory arbitrage that could compromise financial stability.

… but at least one guy thinks that nobody cares anyway, not even Comrade PP himself:

Philip Swagel, a former U.S. Treasury Department official who teaches at Georgetown University in Washington, said G7 officials would be wise not to worry too much about whether Mr. Obama’s boldest proposals will see the light of day, let alone fret about the U.S. gaining – or even seeking – enough global support that other countries end up having to replicate the measures.

“It’s not that they’re dead on arrival, they were never intended to be initiatives to push forward in the international agenda,” Mr. Swagel said in an interview. “They were aimed at domestic consumption, signalling to the American people that the President is as mad as they are.”

YES WE CAN indulge ourselves with cynical grandstanding!

A mixed day for Canadian preferreds with PerpetualDiscounts up 5bp and FixedResets losing 14bp. The market was well-behaved, with only four issues on the performance highlights list; one of the losers was our old friend POW.PR.C, gradually winding down toward normalcy. Volume continued at elevated levels.