PrefBlog

The predicted hike in the European policy rate is causing some angst:

Primed to raise its benchmark interest rate this week for the first time in almost three years, President Trichet’s European Central Bank again faces the conundrum that its monetary policy rarely suits all 17 members of the euro area, where the kaleidoscope of growth ranges from record expansion to recession paired with a sovereign-debt crisis.

The upshot may be that the normalization of rates from a record low of 1 percent will disproportionately hurt Spain, Greece, Portugal and Ireland, while failing to nip inflation threats in Germany. Such uneven fallout risks exacerbating the two-speed European recovery and dealing further damage to the bonds of so-called peripheral nations.

But the outlook for Treasuries continues to be bright (according to some):

Treasuries are signaling that the $9 trillion market will weather the end of the Federal Reserve’s quantitative easing program in June without suffering a selloff that drives long-term borrowing cost higher.

The class of investors that includes foreign central banks purchased 60 percent of the $66 billion in benchmark 10-year U.S. notes sold this year, up from 42 percent in 2010.
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Rising demand from international investors and financial institutions bodes well for bonds with the Fed’s plan to buy more than $600 billion of Treasuries more than 80 percent complete. U.S. fixed-income assets are retaining their appeal as the credit quality of European sovereign debt deteriorates and banks meet tighter risk standards governing the capital they need cushion against losses.

Algos gone wild? RBC bought 2100 shares of CIU.PR.C in 12 transactions starting at 25.05 at 12:04pm and finishing at 27.00 at 12:18. Too much time-span to be a retail market order … I wonder what happened there? The lucky seller was Byron Securities (who?), which sold 900 shares at an average price of 25.85.

Other than that, it was a relatively quiet day for the Canadian preferred share market, with PerpetualDiscounts down 1bp, FixedResets gaining 4bp and DeemedRetractibles up 5bp. Only three entries on the performance highlights table, and volume was nothing special.

There’s a new bid for the NYSE:

Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) made an unsolicited bid of about $11.3 billion for NYSE Euronext, trying to snatch the owner of the New York Stock Exchange away from Deutsche Boerse AG. (DB1)

Nasdaq OMX and ICE offered $42.50 in cash and stock for each NYSE Euronext share, according to a statement released today. The shares closed at $35.17 yesterday. Deutsche Boerse’s February all-stock agreement to purchase NYSE Euronext values the company at about $35.04 a share.

Ireland’s credit rating has been cut again:

Ireland’s credit rating was cut one level by Standard & Poor’s and put on watch for a possible downgrade by Fitch Ratings after the cost of rescuing Irish banks reached as much as 100 billion euros ($141.5 billion).

S&P today lowered the rating to BBB+ from A-, putting the country on the same level as Thailand and the Bahamas. The outlook is stable, S&P said in a statement. Fitch placed its long-term foreign and local-currency issuer default ratings of BBB+ on negative, “indicating a heightened probability of a downgrade in the near term,” it said in a statement.

But the interesting part is the wrangling over the banks’ senior debt:

Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.

“The government’s position is very clear: It doesn’t want to take action on senior bondholders for the four banks that are going forward,” said Matthew Elderfield, head of regulation at the central bank, said in an interview with Bloomberg Television. “It recognizes that, on balance, that if you want to have these viable banks able to return to the market that would hurt their capacity to do that.”
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During an election campaign last month, Eamon Gilmore, now deputy prime minister, dismissed ECB President Jean-Claude Trichet as a “civil servant” who would answer to politicians. As recently as March 28, Agriculture Minister Simon Coveney said the government planned to impose losses on senior bondholders in the banks to cut the costs of its bailout.
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The cost of insuring against losses on the senior debt of European banks fell to the lowest in more than five months today. The Markit iTraxx Financial Index, linked to the senior debt of 25 banks and insurers, dropped as much as 6 basis points to 137, the lowest since November 19, before paring the decline, according to JPMorgan Chase & Co. Credit-default swaps on Portugal, Ireland, Greece and Spain also declined.

California has problems of its own:

[California Governor Jerry ] Brown said yesterday he’s also putting together a plan to deal with the growing gap between assets and expected obligations of the California State Teachers’ Retirement System, the second-largest public pension in the U.S.

Calstrs’ so-called unfunded liability grew to $56 billion at the end of June, according to a report released yesterday. The 38 percent increase will require the state to boost its annual contribution by $140 million to $150 million, according to the pension fund. California paid $573 million toward teacher retirements last year.

Since 1999, teachers have been allowed to purchase up to five years of service credit to retire early and collect a full pension. Brown would repeal that benefit beginning in July.

DBRS has published a comment letter on the new ESMA guidelines:

The Consultation Paper seeks to clarify the endorsement regime and update the endorsement guidelines. ESMA currently interprets that “as stringent as” CRA requirements must be established by law or regulation in a third country by June 7, 2011 in order for the use of endorsement. It does not currently support the interpretation that a third country CRA would be permitted to follow “as stringent as” standards through its own policies and procedures. The Consultation Paper states that the CRA Regulation does not envisage a dual system of compliance or some combination of a third country legal/regulatory regime topped up by policies and procedures adopted by the third country CRA.

By way of background, endorsement allows the use in the EU of ratings issued outside the EU under certain conditions.
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DBRS does not support ESMA’s current interpretation that it cannot supervise EU-registered CRAs who use endorsement without an equivalent third country regulatory regime in place. The key test should be whether a third country CRA adheres to standards as stringent as those required by the CRA Regulation, whether or not a third country regime has been enacted into law.

Endorsement is important because, according to the consultation paper:

A credit rating that a registered CRA endorses in compliance with the conditions set out in article 4.3 “shall be considered to be a credit rating issued by a credit rating agency established in the Community and registered in accordance with this Regulation” (art. 4.4). These ratings can be therefore used for regulatory purposes and be distributed to the public by registered CRAs.

This endorsement process started in October, 2009. The Canadian Securities Administrators published proposed regulatory changes on March 18, due to pressure from the Europeans:

The CESR’s stance is that the “comply or explain” model is insufficient, and thus they indicated to the CSA that they would not provide an equivalency recommendation to the European Commission should the CSA proceed on that basis. As the CSA notes in the introduction to the revised proposal, it’s a threat worth paying attention to:

The failure to obtain an equivalency determination from the European Commission, and the consequent inability of a CRO that issues ratings out of Canada to rely on the endorsement or certification models in the EU Regulation, would have a negative impact on such CROs. The issuers that such CROs rate might also be negatively impacted to the extent those ratings are used for regulatory purposes in the European Union.

As a result, the CSA are now proposing that, in the absence of exemptive relief, DROs must establish codes of conduct which do not deviate from the provisions set out in the proposed Instrument. Those provisions have also been revised somewhat, to require that a DRO establish certain governance protections, such as a majority of independent directors, and a formal internal controls system.

Thus, we finally have a clear statement from the regulator that Credit Rating Agencies have the function of cheerleading for issuers. Yay.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 3bp, FixedResets up 9bp and DeemedRetractibles gaining 6bp. Volatility was muted, volume was fair.