PrefBlog

Fitch has joined the the cooling housing market bandwagon:

Canadian home sales activity slowed in August, due in part to steps taken by the government to tighten mortgage lending standards, which took effect in July. In Fitch Ratings’ view, these early signs of a cooldown in the housing market could be generally positive for the stability of the Canadian banking system and the sustainability of economic growth, though the full extent and pace of the housing correction remains unclear.
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Although a correction in housing prices and a slowdown in residential construction spending would have some negative effects on economic growth in the near term, the introduction of more stringent mortgage regulations should help limit the impact of excess leverage on mortgage performance and bank balance sheets.

Reduced near-term risks of a housing bubble are likely to ease pressure on the Bank of Canada to tighten monetary policy, supporting the economic outlook at a time when weakening global growth and monetary stimulus in the U.S. would make it very difficult for the central bank to tighten credit conditions. Our current base case assumes that Canadian growth will remain steady at 2.2% annually through 2014.

But it takes two to make a market!

Get ready for a Canadian housing crash.

That’s the forecast from the folks at research firm Capital Economics, who say the collapse in house prices will feed into economic weakness and cause the Bank of Canada to back track on its insistence that the next move in domestic interest rates will be up.

“Home sales have slumped in recent months, not just in response to the tightening of mortgage lending standards. We fear this adjustment is only just starting and anticipate that the resulting excess supply of homes for sale will eventually drive home prices down by as much as 25 per cent,” the firm says in a note to clients.

Meanwhile, QE3 is having the intended primary effect:

Mortgage rates for 30-year U.S. loans tumbled, matching the lowest level on record and keeping borrowing costs down as the real estate market improves.

The average rate for a 30-year fixed mortgage fell to 3.49 percent in the week ended today from 3.55 percent, Freddie Mac said in a statement. It matched a record reached in July. The average 15-year rate slid to 2.77 percent from 2.85 percent, a new low, according to the McLean, Virginia-based company.

Low borrowing costs, spurred in part by the Federal Reserve’s purchase of mortgage securities, have aided a housing-market recovery after the worst downturn since the 1930s. Sales of existing homes climbed to a two-year high in August, the National Association of Realtors reported yesterday. Single-family housing starts rose to the fastest annual rate since April 2010, the Commerce Department said.

Unauthorized trading or unauthorized losses?

Kweku Adoboli’s lawyers said UBS AG had a culture that overlooked trading limits and other rules as long as employees made money.

Adoboli lawyer Charles Sherrard said the bank became “more aggressive in terms of its desire to make profits” in 2011, while cross-examining one of Adoboli’s former bosses at a fraud trial in London today.

IOSCO has found another regulatory job-creation rationale:

The same lack of oversight that enabled traders to manipulate the London interbank offered rate plagues other benchmarks around the globe, according to a group of international securities regulators.

Fewer than half of the benchmark interest rates surveyed in the U.S., Europe and Asia were based on actual transactions, according to a confidential International Organization of Securities Commissions discussion paper obtained by Bloomberg News. Instead, the rates were calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations, the group said.

It was an uneven day for the Canadian preferred share market, with PerpetualPremiums up 11bp, FixedResets winning 12bp and DeemedRetractibles flat. Volatility was muted but uniformly positive. Volume was low.

Inflation expectations can become self-fulfilling, which worries Richard Fisher:

Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s third round of large-scale asset purchases has led to an increase in market expectations for higher inflation without more job creation.

“I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction.”
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Measures of expected future inflation “have ramped up pretty quickly,” Fisher said. The five-year, five-year forward breakeven rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after the FOMC decided on QE3. That was up half a percentage point from July 26.

Congress’s inaction on fiscal policy and excessive government regulation are holding back businesses from spending on hiring and investment, Fisher said in a later Bloomberg Television interview. The Fed’s stimulus efforts, or so-called quantitative easing, won’t work because the central bank can’t address those obstacles to growth, he said.

There might be another SEC attempt to destroy the public bond market:

The U.S. Securities and Exchange Commission should scrutinize corporate bond markets to determine if retail investors can find fair prices, said Commissioner Daniel Gallagher.

Gallagher, a Republican on the five-member commission that regulates securities trading, called for the agency to look at the imbalance of information available to retail investors and institutional traders in a speech today at a financial-markets conference hosted by Georgetown University’s McDonough School of Business in Washington.

“Retail investors continue to face significant headwinds in the bond markets,” Gallagher said. “Unlike their large institutional counterparts, retail investors generally have less expertise in the basics of bond trading and cannot tap into large dealer networks for quotes in order to shop around for the best prices available.”

Gallagher said the SEC issued a report this year on the state of the municipal securities market and should consider a similar effort with the corporate bond market, “given how large and important that market has become.” That doesn’t necessarily mean more regulation, he said.

You know what regulators mean when they say a study won’t necessarily mean more regulation, don’t you? I don’t have to spell it out for you, do I?

Westcoast Energy, proud issuer of W.PR.H and W.PR.J, has been confirmed by DBRS at Pfd-2(low):

DBRS has today confirmed the Unsecured Debentures, First Preferred Shares and Commercial Paper ratings of Westcoast Energy Inc. (Westcoast or the Company) at A (low), Pfd-2 (low) and R-1 (low), respectively, all with Stable trends. The rating actions incorporate DBRS’s expectation that Westcoast’s significant capex program (projected to be $1.2 billion in 2012, including only $426 million spent through June 30, 2012, and likely to remain elevated in the medium term), will result in negative free cash flows and pressure its credit ratios, as incremental financing will likely come from increased long-term debt issuance.
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The Company’s financial profile remains relatively strong despite rising capex related to its medium-term growth program. Increasing earnings and cash flow from expansions placed in service to date have resulted in relatively strong credit ratios. Westcoast should generate sufficient cash flow to meet a significant portion of its capex and dividend payments going forward, with manageable funding needs at both Union Gas Limited and the Company. Westcoast’s consolidated credit metrics will likely continued to be pressured over the medium term as a result of its significant growth capex, although the metrics are underpinned by Westcoast’s mostly low-risk and regulated operations and will likely remain within the parameters of the current ratings.

It was a good day for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles gaining 9bp and FixedResets up 3bp. Volatility picked up a little. Volume was average.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 200bp, unchanged from the September 12 report.

TD says the housing bubble is yesterday’s news:

TD Economics has gradually reduced its estimate of the overvaluation in Canada’s house prices, as the growth in people’s disposable income picks up while the market stagnates.

The quarterly economic forecast that the bank released Tuesday pegs the current overvaluation in the market at 10 per cent. It had previously estimated that prices were 15 per cent too high, and then suggested a range of 10 to 15 per cent.

Rick Waugh says the same thing:

Canada’s housing market is “at worst” destined for a soft landing, the head of one of the country’s largest banks predicted Tuesday.

Speaking in Toronto, Bank of Nova Scotia chief executive officer Rick Waugh said even though there is a housing bubble in Canada, he doesn’t expect the residential real estate market to crash.

I don’t have figures on how good either party is at predicting house prices.

The slow-motion bank run (is that a jog?) in Europe continues:

An accelerating flight of deposits from banks in four European countries is jeopardizing the renewal of economic growth and undermining a main tenet of the common currency: an integrated financial system.

A total of 326 billion euros ($425 billion) was pulled from banks in Spain, Portugal, Ireland and Greece in the 12 months ended July 31, according to data compiled by Bloomberg. The plight of Irish and Greek lenders, which were bleeding cash in 2010, spread to Spain and Portugal last year.

The flight of deposits from the four countries coincides with an increase of about 300 billion euros at lenders in seven nations considered the core of the euro zone, including Germany and France, almost matching the outflow. That’s leading to a fragmentation of credit and a two-tiered banking system blocking economic recovery and blunting European Central Bank policy in the third year of a sovereign-debt crisis.

It was a quiet day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets up 4bp and DeemedRetractibles gaining 2bp. Volatility was muted. Volume was below average.

Let’s all reach for yield!

Rates on U.S. high-yield corporate bonds fell below 7 percent for the first time last week, according to Bank of America Merrill Lynch index data.

Average borrowing costs for speculative-grade companies from Sprint Nextel Corp. (S) to HCA Holdings Inc. (HCA) dropped to an unprecedented 6.965 percent Sept. 14 from 7.07 percent the day earlier, Bank of America Merrill Lynch’s U.S. High Yield Master II index data shows. The gauge was at 8.54 percent at year-end and 8.79 percent a year ago, the index data show.

There’s a good editorial on Bloomberg about licensing:

The average cosmetologist in the U.S. trains for 372 days before earning a license. The average emergency medical technician spends 33 days in training. From this, one might conclude that Americans are obsessed with primping but tragically unprepared for emergencies.

Actually, the disparity merely confirms what a muddle the process of occupational licensing is. In 1952, fewer than 5 percent of U.S. workers required a state license. By 2006, according to a survey that year by the Gallup Organization, 29 percent of workers said they needed a government-issued license to do their job.

It’s a serious concern for civil liberties: governments should be in the business of prohibitions – with the growth in licensing, they are in the business of permissions.

Bloomberg’s editors have been on a hot streak lately, bringing to my attention a reckless change in US pension law:

So Congress changed the discounting rules, allowing companies to choose discount rates based on a 25-year average of corporate bond yields instead of using an average of just two years.
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Meanwhile, companies that go bankrupt will tend to have accrued larger unfunded liabilities. The bulk of those liabilities are covered by the Pension Benefit Guaranty Corp., a federal agency backstopped by taxpayers.

The pension legislation also raised the premiums that companies pay into the agency, which, in theory, should offset costs to taxpayers. But Congress counted the increased premiums as funds available to pay for highway construction, essentially double-counting the money.

This relief of pension funding obligations will undermine the solvency of pension funds in part to address a problem that doesn’t exist. Companies protest that they can’t afford to adjust to sharply falling discount rates. The costs they face, however, are a mix of costs they should have been able to control and costs they do control.

In the first category is any increase in unfunded pension liabilities due to lower discount rates. It’s true: Given the crashing bond yields of recent years, without relief, pension funds would be told to start holding many more assets. But the flip side of falling yields is that bond prices have risen significantly.

If a pension plan invested in bonds with maturities matching its obligations — that is, enough 10-year bonds to cover the payments due in 10 years, and so forth — the value of its holdings should have risen enough to cover its added asset needs. Only companies that chose not to properly match their maturities are left closing a gap.

But immunizing liabilities is BORING!

Spanish banks are slowly but surely bleeding deposits:

Spanish banks, already hooked on cheap European Central Bank loans, are hemorrhaging deposits as the government debates whether to seek a bailout.

Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain.
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There is “a clear underlying trend of accelerating deposit decline,” Nomura’s Quinn wrote in a Sept. 4 report. Term deposits by households fell 6.9 percent in July from a year earlier, while those of companies fell 24 percent, which “points to continued deposit declines in the future,” he said.

It was a mixed day for the Canadian preferred shares market, with PerpetualPremiums gaining 4bp, FixedResets up 3bp and DeemedRetractibles down 6bp. Volatility was muted. Volume returned to “lousy”.