PrefBlog

Nothing happened today, so I went to a flamenco show. During an informal question and answer period after the show (you aren’t allowed to merely enjoy anything nowadays, particularly dance: you must show diligence in getting booked up) Ms. Enrique explained that the large fans held by the women were mocking the fans held at one time by the nobility at court, exaggerated for satirical purposes; the long trains on some of the dresses are in the same vein.

Which got me to wondering: how are the rich mocked today? I’m not convinced that they are, at least not in North America, where there is a degree of social mobility lacking in a structured society. We don’t mock their wine cellars – because we all want a 5,000 bottle wine cellar. We don’t mock their private planes – because we all want a private plane. Even rap artists, who one might expect to be the most logical source of mockery, make a big fuss about how wonderful it is to have big cars and drink champagne and all the rest of it. We don’t mock the rich, because they are us. The rich are not like you and me – they have more money!

It was a soft day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets losing 16bp and DeemedRetractibles down 11bp. Volatility was good. Volume was heavy, with quite a few issues trading more than 100,000 shares.

There’s a dilemma the politicians are having a problem with: how can you square long-term lending risk with zero short term lender risk? The Europeans are trying hard!

European Union lawmakers are considering rules to protect bank depositors that may stymie two of the main funding sources for the region’s lenders.

The proposals risk limiting how much banks can raise from covered bond sales and European Central Bank loans by placing curbs on the assets they can use for security. The aim is to boost protection for account holders and other creditors.
…
Tying up assets in collateralized fundraisings is known as encumbrance and pushes unsecured creditors further back in the queue for payment in a default. Any move to limit secured debt issuance risks hurting banks that have relied on record covered bond sales and the 1 trillion euros ($1.3 trillion) of loans that the ECB has pumped into the system since December.

But getting too cocky about Anglo-Saxon capitalism, remember US efforts to eliminate liquidity:

Wall Street banks will have two years to implement the so-called Volcker rule so long as they make a “good faith” effort to comply with the ban on proprietary trading, U.S. regulators said.

Banks will have the “full two-year period” provided by the Dodd-Frank financial overhaul law to “fully conform” their activities and investments, the Federal Reserve and four other U.S. agencies said in a statement today. The Fed has the authority to extend the period of compliance beyond July 21, 2014, the regulators said.

France and Spain paid up for funding:

France sold 8 billion euros ($10.5 billion) in debt today as risks linked to the French presidential election drove up yields.

The amount sold was at the maximum target set by Agence France Tresor, the country’s debt-management body. France sold 2.7 billion euros of benchmark five-year debt at an average yield of 1.83 percent, up from 1.78 percent on March 15.

Earlier today, Spain sold 2.54 billion euros in two- and 10-year bonds, slightly more than the maximum target of 2.5 billion euros. Borrowing costs rose as Spanish Prime Minister Mariano Rajoy’s struggles to meet deficit targets.

Scrutiny of both countries is increasing amid the fading effect of the European Central Bank’s longer-term refinancing operation, which injected about 1 trillion euros of liquidity into the region’s financial system. The yield on Spain’s benchmark 10-year bond has jumped about 1 percentage point since the beginning of March to above 6 percent, while the yield on the equivalent French debt has gained more than 10 basis points with Socialist Francois Hollande leading in election polls.

It would seem that the bond market shaves the Spanish barber:

Spain sold 2.54 billion euros ($3.3 billion) of bonds, just above the maximum target for the auction, and its borrowing costs rose. Bonds declined after the sale.

The Treasury sold its 10-year benchmark bond at an average yield of 5.743 percent, compared with 5.789 percent on the secondary market before the sale and 5.403 percent when it last sold them in January. It sold two-year securities at 3.463 percent.

It was a quiet day overall for the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets up 3bp and DeemedRetractibles off 2bp. Oddly, there was a violent move in the PerpetualDiscount sector – the Performance Highlights table is comprised entirely of three losers of this ilk. However, these three issues were responsible for the entire PerpetualDiscount index move. Volume was below average.

Chapter 4 of the IMF Global Financial Stability Report is a fascinating review of longevity risk:

Private pension providers and governments are particularly exposed to longevity risk and this risk is greatly increased in the current low-interest-rate environment. In line with other estimates in the literature, the analysis in this chapter finds that the liabilities of U.S. pension plans would rise by 9 percent for a three-year increase in longevity. Governments may be even more exposed: many not only sponsor defined benefit pension plans for their employees, but maintain extensive old-age social security systems covering most of the population. In addition, the government is likely liable for the “tail” of longevity risk: in the case of a longevity shock affecting the entire population, the private sector would likely be overwhelmed by the financial consequences. In that case, the losses are likely to be assumed by the government in some way, including through pension fund guarantee schemes that take on the pension liabilities of failing institutions and social security schemes that aim to prevent old age poverty.

However, the section that attracted press attention was Chapter 2: Sovereigns, Banks, and Emerging Ma rkets: Detailed Analysis and Policies:

Looking ahead, many European banks have announced medium-term business plans with reductions in assets amounting to about $2.0 trillion in total.
…
The variations in the scale of bank deleveraging across scenarios are mainly driven by differences in the extent of cyclical pressures. Under the complete policies scenario – where cyclical pressures ease – assets are cut back by $2.2 trillion, mostly reflecting banks’ own business plans. By contrast, in the weak policies scenario – where cyclical pressures are stronger – banks reduce assets by $3.8 trillion (Figure 2.27). As cyclical pressures intensify, the impact on EU credit rises disproportionately. This is because with stronger cyclical headwinds, more banks need to work their way further down the deleveraging pecking order when reducing their balance sheets, and so EU and domestic credit is curtailed more.

It was an unexciting day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets flat and DeemedRetractibles down 5bp. A bright spot was the floating rate sector, which again scored a lock-out on the positive side of the Performance Highlights table. Volume was slightly below average.

PerpetualDiscounts now yield 5.18%, equivalent to 6.73% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 225bp, a marked widening from the 215bp reported April 13.

The Bank of Canada sounded a warning note:

The Bank projects that the economy will grow by 2.4 per cent in both 2012 and 2013 before moderating to 2.2 per cent in 2014. The degree of economic slack has been somewhat smaller than the Bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013.

As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer than anticipated in January. After moderating this quarter, total CPI inflation is expected, along with core inflation, to be around 2 per cent over the balance of the projection horizon as the economy reaches its production potential, the growth of labour compensation remains moderate, and inflation expectations stay well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

Is this a first? If not globally, then for a super-major bank? Citibank had a negative say-on-pay vote:

Citigroup Inc. (C) shareholders rejected the bank’s executive compensation plan in an advisory vote amid criticism it would let Chief Executive Officer Vikram Pandit collect rewards too easily.

About 45 percent of the votes were in favor of the plan, which Citigroup had argued would help attract and retain top talent, according to a preliminary tally at the New York-based firm’s annual meeting in Dallas today.

“That’s a serious matter,” Chairman Richard Parsons said in response to the outcome. “The board of directors takes this matter seriously” and will seek a more quantitative, formula- based method for setting top executives’ pay, he said.

Comrade Peace-Prize is demonizing speculation:

President Barack Obama urged Congress to bolster federal supervision of oil markets, including bigger penalties for market manipulation and greater power for regulators to increase the amount of money that traders must put up to back their energy bets.

Obama asked Congress to fund a six-fold increase for surveillance and enforcement staff at the Commodity Futures Trading Commission to put “more cops on the beat” overseeing oil markets.

He is seeking to empower the CFTC to raise margin requirements for traders’ oil positions and also asked lawmakers to raise civil and criminal penalties for businesses that are guilty of market manipulation to $10 million from $1 million. The plan would cost $52 million.

“Rising gas prices means a rough ride for a lot of families” Obama said in remarks in the White House Rose Garden today. “When gas prices go up it’s like an additional tax that comes right out of your pocket.”

The European market is a shell game:

Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors.

Holdings of Spanish government debt by lenders based in the country jumped 26 percent in two months, to 220 billion euros ($289 billion) at the end of January, data from Spain’s treasury show. Italian banks increased ownership of their nation’s sovereign bonds by 31 percent to 267 billion euros in the three months ended in February, according to Bank of Italy data.

German and French banks, meanwhile, have cut holdings of those countries’ bonds, as well as Irish and Greek debt, by as much as 50 percent since 2010 in some cases. That leaves domestic firms on the hook for a restructuring such as Greece’s last month and their main financier, the European Central Bank, facing losses. Like Greece, governments would have to rescue their lenders with funds borrowed from the European Union.

“The more banks stop cross-border lending, the more the ECB steps in to do the financing,” said Guntram Wolff, deputy director of Bruegel, a Brussels-based research institute. “So the exposure of the core countries to the periphery is shifting from the private to the public sector.”

This is very much to the politicians’ advantage. Should there be another default, one in which the ECB loses money, they will be able to point at banks and evil bonus-seeking traders as the cause of the losses, rather than the sovereign default.

How does one get ahead in life? Bootlicking is a perennial favourite:

The Bank of England has its eye on Canada’s central bank chief, the Financial Times reports today.

The newspaper said that a member of the Bank of England’s court, the group that oversees the central bank but does not set policy, recently approached Mr. Carney about the idea of replacing Mervyn King in June, 2013.

The Bank of Canada told The Globe and Mail that the newspaper report indicating Mr. Carney had been approached as a potential candidate was not accurate. Mr. Carney, who is respected around the world, and most recently was also tapped to head the global Financial Stability Board, would not comment to the newspaper.

It’s rocket science! It’s an entirely unheard of approach to investing! Imagine, a pension plan sitting down to determine what they want to accomplish before investing!

Healthcare of Ontario Pension Plan’s big bet on bonds paid off in 2011, as the plan ended the year up 12.2 per cent on its investments and more than fully funded.

What happens, however, when rates rise and that bond bet turns around? Not what you might think, according to HOOPP. Yes, the bonds may decline in value, but that shouldn’t leave the plan with a funding gap.

HOOPP, which runs about $40-billion, is a booster of an approach to pension management known as liability driven investment (LDI). For adherents of LDI, beating market benchmarks is considered largely irrelevant and the goal is simply to remain in a fully funded state with enough assets to cover projected liabilities.

Geez, I don’t know about my Assiduous Readers, but I think these guys should all get Nobel Prizes. Two each! Taking account of client objectives prior to formulating an investment strategy is revolutionary!

There was a good upward move in the Canadian preferred share market today, with PerpetualPremiums gaining 3bp, FixedResets up 9bp and DeemedRetractibles winning 14bp. The Performance Highlights table is comprised entirely of winning Floaters, presumably driven up by thoughts of imminent BoC rate hikes. Volume was well below average.

Spain looks as if it’s sliding down the greasy path:

A Spanish minister called on the European Central Bank to do more to stem the sovereign debt crisis as the cost of insuring the country’s bonds against default surged to a record.

“They should step up purchases of bonds,” Jaime Garcia- Legaz, a deputy minister in Luis de Guindos’s Economy Ministry, said yesterday in an interview.

His comments came as ECB officials split over the steps to tame the crisis amid growing expectations that Spain will be the next euro member to seek a European bailout. Spanish banks’ borrowings from the ECB surged almost 50 percent in March, data showed yesterday, as they took almost a third of the longer-term lending offered to euro-region institutions.

But China is inching towards convertibility:

China’s decision to widen the yuan’s trading band against the dollar for the first time since 2007 signals a drive toward a convertible currency that also saw overseas investors get bigger investment quotas this month.

The increase to 1 percent from 0.5 percent takes effect tomorrow, the People’s Bank of China said on its website yesterday. This month, regulators raised quotas for foreigners buying onshore stocks and bonds to $80 billion from $30 billion and increased the amount of yuan held offshore that can be invested locally.

Spanish troubles have led the Europeans to admit that the Euro is only a reserve currency in good times – in bad times, not so much:

European officials travel to Washington this week seeking a larger global war chest to combat the two-year debt crisis as the Spanish government battles to quell renewed market turmoil over its finances.

Three weeks after European leaders unveiled emergency euro- area funding exceeding the symbolic $1 trillion mark, concerns about Spain’s position have ratcheted the nation’s borrowing costs to the highest levels this year. Crisis-fighting resources will dominate talks at the International Monetary Fund’s spring meeting in Washington from April 20-22.

Sarkozy wants the ECB to inflate Europe out of its difficulties, although he’s very careful to cast this in a more politically correct manner:

French President Nicolas Sarkozy, speaking to the biggest rally of his re-election bid, said the European Central Bank should do more to promote economic growth, reviving an issue he raised in his 2007 campaign.

“On the question of the ECB’s role in boosting growth, we French are going to open the debate,” Sarkozy told a crowd today in central Paris that his aides estimated at more than 100,000. “If Europe is not going to sink in the international economy, it must renew with growth.”
…
“Europe must cut its debts, it has no choice,” Sarkozy said. “But between deflation and growth, it has no choice either. If it chooses deflation, it will disappear.”

Krugman is on board with the idea:

The way economist Paul Krugman sees it, Europe has two options.

It can continue with its current path, imposing austerity on governments in an attempt to rein in ever-worsening fiscal situations. Or, it can opt for the reverse, wherein the European Central Bank and eurozone leaders move to implement expansionary monetary and fiscal policies to spur growth.

Right now Europe has chosen austerity and according to Mr. Krugman, that choice is clearly showing that Europe is carrying out economic suicide.

“Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression,” he said in a column in the New York Times.

It was a modest day for the Canadian preferred share market, with PerpetualPremiums up 1bp, FixedResets gaining 4bp and DeemedRetractibles winning 5bp. Volatility was muted. Volume was below average, despite a fair amount of good-sized blocks.