PrefBlog

Spain is cutting off welfare recipients:

Spanish renewable-energy companies that once got Europe’s biggest subsidies are deserting the nation after the government shut off aid, pushing project developers and equipment-makers to work abroad or perish.

From wind-turbine maker Gamesa Corp. Tecnologica SA (GAM) to solar park developer T-Solar Global SA, companies are locked out of their home market for new business. These are the same suppliers that spearheaded more than $69 billion of wind and solar projects since 2004 that today supply more than 50 percent of Spain’s power demand on the most breezy and sunny days.

But fear not, subsidy fans! Germany’s still got lots of money!

Germany’s power-transmission companies have tabled plans to build four electricity Autobahns to link wind turbines off the north coast with manufacturing centres in the south – a boost for Angela Merkel after criticism from industry that Berlin has done little since announcing an accelerated nuclear phase-out a year ago.

Tennet, Amprion, 50 Hertz and Transnet BW said that building 3,800km high-voltage electricity lines – at a cost of around €20-billion – over the next decade was possible if politicians and public rallied behind the so-called energy transformation.

German two-year notes yield zero:

German two-year government notes advanced, sending the yield to zero for the first time.

The rate was at 0.002 percent at 4:36 p.m. London time.

Other countries yield a little more:

Signs of stress multiplied in financial markets today. Italy missed its target in a bond auction, driving its 10-year yields up to 6.01 percent at one point, the highest since Jan. 31. The yield was at 5.93 percent at 5:26 p.m. in Brussels. Doubts over the health of Spain’s banks pushed up Spanish 10- year yields to 6.70 percent, the highest since Nov. 28. That yield was last at 6.63 percent.

But … there’s never an ill wind …:

U.S. 5-year government bonds have also reached a new low of 0.6967 per cent, lower than the 0.7045 per cent they hit in early February, and 30-year Treasuries have also dropped to 2.72 per cent – though the low for these bonds was around 2.5 per cent in December 2008.

It was a sharply negative day for the Canadian preferred share market, with PerpetualPremiums down 15bp, FixedResets losing 31bp (about one-third of this was due to the evaporation of the bid in RY.PR.Y and may be regarded as ficticious and transient) and DeemedRetractibles off 11bp. The Performance Highlights table is longer than usual and dominated by losers. Volume was on the light side.

PerpetualDiscounts now yield 5.15%, equivalent to 6.70% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.4%, so the pre-tax interest-equivalent spread is now about 230bp, unchanged from the figure reported May 23.

Too soon to call it a trend … but there are interesting goings-on in the credit rating agency world:

The response to the Moody’s Investors Service downgrade of the biggest Nordic banks was rising bond and share prices.

The reaction is the latest sign that investors are paying less attention to the views of rating companies and relying more on their own analysis to determine whether to buy or sell.
…
Denmark, which is bringing its proposals to the European Parliament, says ratings often don’t reflect credit risks. Measures to improve the industry include a plan to cut reliance on ratings for both investors and within financial regulation, the Business Ministry in Copenhagen said May 21. The intention is also to make it easier for investors and issuers to demand compensation from ratings companies that fail to do their job properly, the ministry said.

In Denmark, banks have started firing Moody’s after winning assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value. Nykredit A/S, Denmark’s biggest mortgage lender and Europe’s largest issuer of covered bonds backed by home loans, terminated its contract with Moody’s in April, citing its “volatile” views.

There’s nothing in the article about the potential for investors and issuers to demand compensation from investment managers that fail to do their job properly – what a surprise! Assurances from large investors that opinions of ratings companies hold limited value hold limited value – what else are they going to say?

In Greek news:

The New Democracy party in Greece, which supports the austerity measures imposed by the European Union, came first in all six opinion polls published on May 26 as campaigning continued for the country’s general election on June 17.

Party leader Antonis Samaras sought to illustrate the consequences of a euro exit, saying Greek incomes, bank deposits and property values would lose at least half their value within days, while food prices would rise by a quarter.

Hmmm … maybe it will help him win. Maybe. And maybe it will also accellerate the bank run. Maybe.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets off 2bp and DeemedRetractibles down 6bp. Volatility was average. Volume remained light.

Interesting commentary from Fitch about possible changes in the money market:

In particular, we believe further MMF reform will likely lead managers to expand their product offerings beyond MMFs, possibly resulting in one unintended consequence. A potential decrease in information transparency for short-term market participants and regulators could occur, should more cash be moved from highly regulated and transparent MMFs into other parts of the financial system.

For example, corporate investors may shift liquid funds into separately managed cash accounts (SPA) as an alternative to MMFs. SPAs are one way a corporate treasurer could choose to diversify cash management activities without relying on MMFs. SPAs are managed in line with customized investment strategies that are designed to meet the investment objectives of a specific client. Importantly, SPAs are generally designed to provide liquidity from maturing securities with only minimum reliance on secondary market liquidity, which could be could be constrained during times of market stress. In contrast to MMFs which offer same-day liquidity, SPAs require corporate treasurers to have a high degree of confidence in their cash needs and cash flow forecasts.

This comes after revelations that the Fed is offering investment advice:

The Federal Reserve has warned U.S. money market funds to cut their investments in Europe, a top official says.

“The Fed and regulators have tried to stress to money market funds to reduce their exposure to European financial institutions,” Charles Plosser, the president of the Reserve Bank of Philadelphia, told the Wall Street Journal.

However, the Fed has not yet begun to centrally micromanage the economy:

Federal Labour Minister Lisa Raitt tabled a back-to-work bill on Monday, ordering an end to the strike within days at Canadian Pacific Railway Ltd. …

Ms. Raitt’s move comes as the economic impact mounts from the six-day strike by 4,800 members of the Teamsters Canada Rail Conference.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets off 5bp and DeemedRetractibles losing 17bp. SLF DeemedRetractibles performed shockingly badly, with all of them down far more than would have been predicted from knowing that they went ex-Dividend today; otherwise the Performance Highlights table shows fair volatility. Volume was light; no surprise given that it was a US holiday.

Cheerful Greek thoughts from the Institute of International Finance (aka the Bankers’ Club):

The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.

The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,” Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”

The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector.
…
For Greece, in its fifth year of recession, it may be more effective to offer extra money to help its battered economy recover, Dallara said. Because Greece’s economy has shrunk so much faster than expected, it may need more time to meet its budget targets and repay its international loans, he said.

Greece’s shrinking economy could be aided “at a cost” of an additional 10 billion euros. “We’re talking about very modest sums compared to what’s already on the table,” he said.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets up 12bp and DeemedRetractibles winning 14bp. Volatility was muted. Volume was well below average.