PrefBlog

You know what Russia needs? Russia needs another James Coyne, that’s what Russia needs:

The message some Russia watchers are getting from Friday’s surprise interest-rate cut is this: Start listening more to what President Vladimir Putin’s aides say about monetary policy and less to central bankers.

Here’s the key evidence. In comments made just nine days ago, the country’s central bank chief indicated she saw no chance of a rate cut any time soon after inflation soared to a five-year high. A week earlier, though, one of Putin’s most vocal economic aides urged the exact opposite, saying a reduction was needed to bolster the ailing economy.

So when the Bank of Russia shocked traders and analysts alike by announcing it was lowering the benchmark rate from an 11-year high, the words spoken by that aide, Andrey Belousov, left many to speculate that the Kremlin is exerting more pressure on central bank policy makers. The rate cut — to 15 percent from 17 percent — triggered a wave of ruble selling that drove the currency down as much as 4 percent, adding to a year-long selloff that’s left it down 50 percent percent [sic] against the dollar.

How ’bout that loonie performance, eh?

Canada’s dollar fell for a 10th week, the longest losing streak since 2000, after a report showing the economy unexpectedly shrank bolstered speculation the central bank will cut interest rates again.

The currency reached the weakest level in almost six years as data showed gross domestic product contracted 0.2 percent in November. Government bonds climbed, pushing yields to record lows. The Bank of Canada reduced borrowing costs last week for the first time since 2009, saying the surprise move was meant to provide insurance as the slump in crude oil, the nation’s biggest export, weighed on the economy.
…
The loonie, as Canada’s dollar is known for the image of the aquatic bird on the C$1 coin, depreciated 0.9 percent to C$1.2732 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.2799, the weakest since March 2009, and sank 2.5 percent on the week. One loonie buys 78.54 U.S. cents.

The Canadian currency dropped 8.7 percent since Dec. 31, the fifth consecutive monthly loss and the biggest since October 2008.
…
The yield on Canada’s benchmark 10-year bond sank to as low as 1.246 percent, while two-year yields touched 0.391 percent and 30-year yields reached 1.830 percent, all records.

The nation’s largest trade partner expanded less than forecast in the fourth quarter. U.S. GDP grew at an annualized 2.6 percent, the Commerce Department in Washington reported, fanning concern the global slowdown is becoming a drag on the world’s biggest economy. Economists surveyed by Bloomberg had forecast a 3 percent advance after a 5 percent gain from July through September.

The median forecast in a Bloomberg survey for Canada’s monthly GDP was for little change after 0.3 percent growth in October. Instead, it shrank the most in 11 months. The economy grew 1.9 percent in November from a year earlier, versus a forecast of 2.1 percent and an advance of 2.3 percent in October.

Long Canadas at 1.83%. If I had a fifteen year old hat, I’d have to eat it. But honestly, who owns Canadas any more? That’s, like, so 20th century:

With years of income and investing ahead, the Canada Pension Plan Investment Board can afford to own more risky assets such as real estate and stocks, according to Chief Executive Officer Mark Wiseman. Pension contributions will continue to grow through 2022, allowing the fund to reduce its 28 percent holdings in fixed income, he said.

“We’re an 18-year-old investor,” Wiseman, who’s 44, said during an interview Tuesday at Bloomberg’s Toronto office. “The portfolio can afford to have less bonds than it has today.”
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The 28 percent allocation to bonds and money market securities the CPPIB lists on its website as of March of last year is already below the 29 percent average for private pension plans in Canada, according to data from Towers Watson. In 2000, the Canada Pension Plan was 95 percent invested in fixed income, according to its latest annual report.

Caisse CEO Michael Sabia, who oversees the management of pensions in Quebec, said in November that it’s looking to cut its bond holdings to 30 percent from 35 percent. Ontario Teachers’ Pension Plan, the country’s third biggest pension plan, has a 41 percent allocation to fixed income.

Quick! Enact some more regulations to force the banks to buy more! Not that there’s any shortage of buyers now, but there will be, once the tide turns. I’m just waiting for the first big wave of private equity / infrastructure valuation scandals, which I see as being inevitable. Figures can lie and liars can figure. Deal with it.

The politicians will be telling us that economic decline is all oil’s fault, but what are the numbers?

Canada’s economy shrank in November on manufacturing and oil production, pushing the dollar to the weakest in almost six years on speculation the central bank will make another rate cut following last week’s surprise move.

Gross domestic product shrank by 0.2 percent, the most in 11 months, to an annualized C$1.65 trillion ($1.30 trillion), Statistics Canada said Friday in Ottawa. The median forecast in a Bloomberg economist survey was for output to be little changed. Manufacturing declined by 1.9 percent, the most since January 2009, mining and quarrying fell by 2.5 percent, and oil and gas extraction by 0.7 percent.

The IMF recommendations won’t be popular in the halls of power:

Canada’s policy makers should maintain accommodative measures to ensure the economy isn’t sidetracked by the oil shock, the IMF said today in a report.

The Bank of Canada’s decision this month to counter falling oil prices with a rate cut was appropriate, while the federal should consider putting future fiscal tightening on pause once it balances its budget this year to promote growth, the International Monetary Fund said.

Trouble is, the pseudo-conservatives first goosed the economy when it didn’t need it, eliminating the $10-billion surplus. Then there was nothing in reserve when a recession hit. Holy smokes! A recession! Who would have thought they were still possible? And now politics will lead to a tightening – or at least, non-relaxation – in fiscal policy.

I used to be a Conservative. But then my party was taken over by ultra-partisan apparatchiks and sloganeering charlatans.

All over Canada, preferred share investors are telling their buddies about their investments!

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About the best thing one can say about the Canadian preferred share market today is that it wasn’t as bad as yesterday! PerpetualDiscounts were off 2bp, FixedResets were down 149bp (bringing their two day loss to a staggering 3.23%) and DeemedRetractibles gained 4bp. ENB and BAM FixedResets are prominent at the extreme bad end of the very length Performance Highlights table – but not much escaped! Volume was high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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It’s surpising to see that after such a wild day, there is such an excellent fit to theory for the TRP FixedResets!

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MFC.PR.F is now back on the line defined by its peers; additionally, as a result of today’s big moves in BAM FixedReset prices, Implied Volatility has markedely increased from 20% yesterday.

Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

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A very strange distinction from the MFC series, because the Implied Volatility for the BAM FixedResets has declined markedly, from 19% yesterday. I would like to think that this means the BAM Implied Volatility will permanently settle to single digits – where I think it should be for true perpetual FixedResets – while MFC Implied Volatility will permanently increase to 40%, where I think it should be for issues with a DeemedRetraction … but I’ll see if this lasts before I start thinking that!

The cheapest issue relative to its peers is now BAM.PF.G, resetting at +284bp on 2020-6-30 (more than five years hence!), bid at 24.10 to be $0.57 cheap. BAM.PF.B, resetting at +263bp 2019-3-31 is bid at 24.30 and appears to be $0.58 rich. With all the fuss over Issue Reset Spreads, it is interesting to see that the relationship between bid and spread is inverted for these two issues.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.05, looks $0.66 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.50, is still $0.80 expensive after losing $1.71 on the day!

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What can I say? Every Investment Grade FixedReset/FloatingReset pair but one (RY.PR.I / RY.PR.K) is now showing a negative break-even average three month bill rate until interconversion … and the exception is showing only a 0.02% breakeven average rate! Meanwhile, the DC.PR.B / DC.PR.D pair (not shown) clocks in at -1.22%, while the other two junk pairs are strongly positive. You guys interpret this, it’s beyond me; but it does show, overall, the market’s extreme distaste for Floating Rate product.

On the other hand, this distaste does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Craig Torres and Aki Ito provide some interesting charts illustrating the Fed’s insouciance regarding the prospects of oil-fuelled deflation:

There’s core inflation:

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There’s consumer expectations of inflation:

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… and there’s trimmed mean inflation:

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Oil, Schmoil!

But hey, how ’bout that Canadian economy, eh?

Canadian payroll employment dropped in November by the most in almost five years, a government report showed Thursday, adding to concern the outlook for the nation’s labor market is dimming as oil prices tumble.

The number of non-farm payroll employees fell by 33,000, Statistics Canada said, the most since August 2009, just after the last recession. The Ottawa-based agency also published revised labor force data Wednesday that cut the total number of 2014 job gains by more than a third.

It’s not doing the loonie any good:

Weak oil prices and a surging U.S. currency made another dent in the value of the Canadian dollar Thursday, adding momentum to the loonie’s unprecedented downward spiral.

The dollar, which has fallen about 14 per cent in the past six months, closed at 79.30 cents (U.S.), down more than half a cent on the day.

Artis REIT, proud issuer of AX.PR.A, AX.PR.E and AX.PR.G, was confirmed at Pfd-3(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the ratings of Artis Real Estate Investment Trust’s (Artis or the Trust) Senior Unsecured Debentures at BBB (low) and Preferred Trust Units at Pfd-3 (low), all with Stable trends. The rating confirmation reflects the expected improvement in key financial metrics and growth in operating income driven mainly by significant property acquisitions over the last few years. The ratings continue to be supported by Artis’s mid-sized and diversified commercial real estate portfolio, diverse tenant base and conservative financial profile; however, they remain constrained by a concentration of properties in suburban office and smaller retail formats as well as the Trust’s exposure to small or secondary markets, limited scale within each asset type segment and high proportion of secured debt.
…
DBRS notes that the achievement of a positive rating action for Artis will be less dependent on improving coverage and leverage metrics and more reliant on increasing size and scale while improving overall asset quality. On the other hand, weaker-than-expected operating and earnings performance and/or higher financial leverage that leads to EBITDA interest coverage falling below 2.20 times on a sustained basis could result in a negative rating action.

Happy preferred share investors are so excited about this market they can hardly speak!:

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This is not the worst day ever for FixedResets! There was November 25, 2008 (-3.38%), October 10, 2008 (-2.92%) [which ended so wildly that I had to issue an update to PrefLetter a week later, because the prices didn’t make any sense at all], November 19, 2008 (-2.67%), October 23, 2008 (-2.37%) and November 21, 2008 (-2.21%). So this is only the sixth worse day for FixedResets ever. Note that the quoted numbers are taken from the monthly revisions to the indices and therefore will not necessarily match the originally published figures.

Alert Assiduous Readers will have noticed, however, that all these chart-topping days were in October and November, 2008, when information regarding the impending collapse of the Canadian economy and zero-recovery bankruptcy of every Canadian bank was first leaked to the better-connected individuals in the market (these events were later cancelled), so these were all credit-based disasters. So we have the privilege of having witnessed the worst ever yield-based FixedReset day. And, of course, FixedResets are now a much larger part of the market than they were back in the old days.

It was (ahem) a poor day for the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles both off 16bp and FixedResets down 174bp. The Performance Highlights table … well, yeah, the Performance Highlights table. Volume was high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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So according to this, the cheapest issue is now TRP.PR.C, bid at 17.30; it is $0.57 cheap, and will reset 2016-1-30 at +154. TRP.PR.E, bid at 25.11 and resetting at +235bp on 2019-10-30 is $0.75 rich.

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MFC.PR.F is now visibly above the line defined by its peers.

Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

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Changes in the market level, which have had the visible effect of reducing Implied Volatility, have resulted in the cheapest issue relative to its peers being BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 23.01 to be $0.29 cheap. BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 23.85 and appears to be $0.55 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.30, looks $1.28 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.21, looks $1.31 expensive and resets 2019-3-1.

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The point representing the DC.PR.B / DC.PR.D pair, interconvertible 2019-9-30, is not shown: it has an implied three-month bill yield of negative 1.16% – rather an extreme view for the market to take!

It is interesting to see that while the TRP.PR.A / TRP.PR.F pair is now showing a positive breakeven three-month bill yield over the next five years, the BNS.PR.P / BNS.PR.A pair, resetting 2018-4-26, is calculated at negative 0.19%. surprising to see this in an investment-grade pair, but when the market goes nuts, it doesn’t fool around!

Pairs equivalence is looking more rational, with the investment grade pairs (which are presumably more closely watched and easier to trade) do show a rising trend with increasing time to interconversion which, qualitatively speaking, is entirely reasonable, although the increase (over five years-odd) looks pretty substantial given the scale of the chart (two years-odd).

The FOMC release was ‘steady as she goes’:

Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.
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The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

… but markets were hoping for more gloom (which makes sense, right? Ummmm….):

U.S. stocks fell, sending the Dow Jones Industrial Average to its biggest two-day loss in a year, as energy shares plunged and concern grew about international risks to the American economy and weakness in multinational earnings.

Energy companies slumped 3.9 percent as a group after oil retreated. Apple Inc. climbed 5.7 percent after reporting a record $18 billion in quarterly profit, one of the biggest in corporate history. Boeing Co. advanced 5.4 percent as it posted a quarterly profit that beat analysts’ estimates.

The Standard & Poor’s 500 Index fell 1.4 percent to 2,002.16 at 4 p.m. in New York. The Dow Jones Industrial Average lost 195.84 points, or 1.1 percent, to 17,191.37. The gauge fell 2.8 percent over two days, the most since February 2014. The Nasdaq 100 Index dropped 0.6 percent, erasing an earlier rally of 1.7 percent. The Chicago Board Options Exchange Volatility Index, known as the VIX, added 19 percent to 20.44, its biggest jump of the year.
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U.S. stocks turned lower after the Fed boosted its assessment of the economy and downplayed low inflation readings while repeating a pledge to remain “patient” on raising interest rates. Losses accelerated in the final hour, pushing declines in the Dow and S&P 500 beyond 1 percent and wiping out gains in the Nasdaq.

Karl Marx’ ghost is chuckling quietly about the inherent contradictions of capitalism:

This year, at least a dozen elite colleges, including Chicago, Duke, Dartmouth, and Columbia, have offered extensions of once-sacrosanct January admissions deadlines. The University of Pennsylvania, Vanderbilt, and Bates are among schools whose admissions deans said they were doing so for the first time, aside from individual hardship cases or such emergencies as storms and major website failures.
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These universities are hardly hurting for customers. More than 30,000 hopefuls are applying to Chicago this year. In the last go-round, the school rejected 92 percent—the most ever—making it one of the most selective schools in the U.S. Advisers and high school seniors say they suspect schools are just burnishing reputations for selectivity. More applications mean more rejections, which heightens a college’s prestige in the world of higher education.

… while I cannot help but wonder what Gloria Steinem would think of keeping women in the seraglio (for their own safety, of course):

Sorority women at the University of Virginia were ordered to stay home on the biggest party night of the year to protect their “safety and well-being” — and they are furious about it.

Members of the National Panhellenic Conference told 16 UVA sorority chapters last week not to participate in Boys’ Bid Night fraternity parties on Saturday. The revelry has led to allegations of sexual assault and excessive drinking in the past. Women who break the prohibition may face sanctions.

“They are treating us like children and punishing us for being women,” said Whitney Rosser, a senior from Lynchburg, Virginia, and a member of Alpha Phi. “We’re angry because we are being told we are not allowed to go out instead of addressing the deeper issue of why sexual assault happens.”

Meanwhile…:

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It was another explosively mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets down 83bp (!) and DeemedRetractibles off 7bp. The Performance Highlights table is suitably enormous. Volume was slightly below average.

PerpetualDiscounts now yield 4.84%, equivalent to 6.29% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.71% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 260bp, a slight (and perhaps spurious) narrowing from the 260bp reported January 21

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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So according to this, the cheapest issue is now TRP.PR.C, bid at 17.27 following its appalling recent performance; it is $0.63 cheap, and will reset 2016-1-30 at +154. TRP.PR.E, bid at 25.11 and resetting at +235bp on 2019-10-30 is $0.67 rich.

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MFC.PR.F is now visibly above the line defined by its peers.

Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

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Changes in the market level, which have had the visible effect of reducing Implied Volatility, have resulted in the cheapest issue relative to its peers being BAM.PF.E, resetting at +255bp on 2020-3-31, bid at 23.80 to be $0.40 cheap. BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 23.90 and appears to be $0.72 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.30, looks $1.32 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.05, looks $1.38 expensive and resets 2019-3-1.

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The point representing the DC.PR.B / DC.PR.D pair, interconvertible 2019-9-30, is not shown: it has an implied three-month bill yield of negative 1.27% – rather an extreme view for the market to take!

It is interesting to see that the TRP.PR.A / TRP.PR.F pair is now showing a breakeven three-month bill yield over the next five years of negative 0.16% … surprising to see this in an investment-grade pair, but when the market goes nuts, it doesn’t fool around!

Pairs equivalence is looking more rational, with the investment grade pairs (which are presumably more closely watched and easier to trade) do show a rising trend with increasing time to interconversion which, qualitatively speaking, is entirely reasonable, although the increase (over five years-odd) looks pretty substantial given the scale of the chart (two years-odd). The average break-even rate is way down from recent levels again today

It was a poor day for US equities:

The Standard & Poor’s 500 Index lost 1.3 percent by 4 p.m. in New York, while the Dow Jones Industrial Average slid the most since Jan. 5. The Stoxx Europe 600 Index dropped 1 percent from a seven-year high as euro climbed 1.3 percent to $1.1378. Japan’s currency strengthened 0.5 percent helping send the Bloomberg Dollar Spot Index to its first retreat in eight days. Gold futures rose 1 percent as 10-year Treasury (USGG10YR) yields fell one basis point to 1.82 percent. U.S. natural gas advanced 3.5 percent as a snowstorm blanketed the country’s northeast.

Caterpillar (CAT), the world’s largest manufacturer of mining and construction equipment, reported profit that missed estimates, while Microsoft’s software-license sales to businesses trailed estimates. Orders for business equipment in the U.S. unexpectedly fell in December for a fourth month, signaling the global slowdown may be weighing on American companies. U.S. stock exchanges were operating normally amid travel bans imposed by the government because of the snowstorm.
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Orders for U.S. durable goods — items meant to last at least three years — decreased 3.4 percent in December after falling 2.1 percent the prior month, Commerce Department data showed. Separate reports showed U.S. consumer confidence surged more than forecast, while purchases of new homes increased 11.6 percent in December.

… but Canada did all right:

Canadian stocks rose a fifth day, after erasing an earlier loss, as gold producers rallied to offset disappointing U.S. economic data and earnings. The U.S. is Canada’s largest trading partner.

Metro Inc. rallied to a record after announcing a three-for-one stock split and dividend increase. Torex Gold Resources Inc. and Detour Gold Corp. jumped at least 5.6 percent as gold snapped a two-day decline. Finning International Inc. (FTT), which sells Caterpillar Inc. equipment, lost 3.8 percent after the U.S.-based heavy equipment company forecast profit that missed estimates.

The Standard & Poor’s/TSX Composite Index (SPTSX) rose 36.05 points, or 0.2 percent, to 14,833.88 at 4 p.m. in Toronto, erasing an earlier loss of as much as 1 percent. The benchmark Canadian equity gauge has rallied 3.7 percent during its five-day streak, the longest since November. It is up 1.4 percent this year and trades at a two-month high.

Toronto is headed for another round of airport wars:

AGF Management Ltd. and billionaire investor Larry Tanenbaum are part of an investment group that agreed to buy Toronto Island’s Billy Bishop airport terminal from Porter Aviation Holdings Inc.

The terms of the deal weren’t disclosed, according to a statement today from the buyers, known as Nieuport Aviation Infrastructure Partners GP. People familiar with the matter said this month the sale of the terminal was expected to raise more than C$750 million ($605 million).

Robert Deluce, Porter’s chief executive officer, declined to comment on the price, saying the matter was confidential.
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He said the airline remains focused on getting the go-ahead to expand the runway at Billy Bishop to accommodate the use of Bombardier Inc. (BBD/B) CSeries jets. He expects the matter will go before a vote at Toronto’s city council in the second half of 2015.

Deluce said he hoped the addition of a new terminal owner at the airport will bolster efforts to expand it.

The investment group included InstarAGF Asset Management Inc., a joint venture between AGF and Instar Group Inc. The group said it contributed C$105 million of capital to acquire the terminal.

AGF, based in Toronto, is a money manager with more than C$34 billion in assets under management. InstarAGF and Instar Group are run by Gregory Smith, a former executive at Brookfield Financial and Macquarie Capital Funds Canada Ltd. Tanenbaum is chairman of Kilmer Van Nostrand Co., a Toronto-based private equity firm, and is also chairman of Maple Leaf Sports & Entertainment Ltd., owner of the Toronto Maple Leafs and Toronto Raptors sports franchises.

The terminal will become the cornerstone asset in InstarAGF’s infrastructure fund established last year, in part to target infrastructure assets that are too small to get the attention of larger pension funds, Smith said in an interview.

The Globe has some interesting commentary on Canadian corporate issuance:

Canadian corporates have floated just $2.8-billion worth of fixed income securities in Canada this month, compared to $7.4-billion at the same time last year and $11-billion in the same periods in 2013 and 2012, Desjardins says. Meanwhile, there has been an almost 100 per cent jump year-over-year in fixed income issuance by Canadian corporates. So far, the tally is $19.5-billion beyond Canada’s borders – more than three-quarters of that from banks and other financial firms – compared to $10-billion by this point last year, according to Desjardins’ vice president and senior analyst, Jean-Francois Godin. “This is taking a lot of refinancing money out of the [domestic] market,” he said.

There are two reasons for this, according to senior figures in the Canadian bond world. The biggest factor is that Canadian banks have found a huge appetite for their debt internationally, particularly covered bonds, which are triple-A-rated fixed income instruments backed by mortgages. Central banks in Europe apparently can’t get enough of them, particularly as the European Central Bank cranks up its asset-buying machine to bolster the continent’s sluggish economies. In the last 20 days, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Commerce have issued €4.50-billion ($6.3-billion) in covered bonds to banks in Europe, which are drawn to the high ratings and ability to earn a slightly better return compared to European debt securities.

Happy preferred share investors held a meeting today:

It was carnage for the Canadian preferred share market today, with PerpetualDiscounts down 32bp, FixedResets losing 87bp and DeemedRetractibles off 7bp. A very lengthy Performance Highlights table is suitably dominated by losing FixedResets. Volume was high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

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So according to this, TRP.PR.A, bid at 20.75, is $0.58 cheap, and will reset again 2019-12-31 at +192. TRP.PR.E, bid at 25.15 and resetting at +235bp on 2019-10-30 is $0.39 rich. In the interim, TRP.PR.E pays about $0.25 p.a. more than TRP.PR.A, which is not incorporated in the calculation of these numbers. Still, the yield to perpetuity (which does include the different dividends until reset) is 3.44% for TRP.PR.A and 3.22% for TRP.PR.E.

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MFC.PR.F continues to be near the line defined by its peers, but underperformed today as Implied Volatility declined.

Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

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There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.25 and appears to be $0.38 cheap, while BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 24.63 and appears to be $0.80 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 17.28 after getting hammered today, looks $1.36 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 24.95, looks $1.39 expensive and resets 2019-3-1.

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The point representing the DC.PR.B / DC.PR.D pair, interconvertible 2019-9-30, is not shown: it has an implied three-month bill yield of negative 1.56% – rather an extreme view for the market to take!

Pairs equivalence is looking more rational, with the investment grade pairs (which are presumably more closely watched and easier to trade) do show a rising trend with increasing time to interconversio which, qualitatively speaking, is entirely reasonable, although the increase (over five years-odd) looks pretty substantial given the scale of the chart (two years-odd). The average break-even rate is way down from recent levels again today

These are deflationary times in Europe:

Professional forecasters surveyed by the ECB before the QE announcement saw price growth of 0.3 percent this year and 1.1 percent in 2016. The bond-buying program is seen adding 0.4 percentage point and 0.3 percentage point respectively, according to a euro-area central bank official who has seen the ECB’s internal calculations.

In a Bloomberg News survey of 38 economists, the median forecast for January is for prices to drop 0.5 percent from a year earlier. That would follow a 0.2 percent decline in December and mark the second-biggest decrease since the creation of the euro in 1999. The record drop was in the depths of the recession, when prices fell 0.6 percent in July 2009. The data will be published at 11 a.m. in Luxembourg on Friday.

A separate report will show that unemployment in the region held at 11.5 percent in December, still near its record high of 12 percent. Persistently high joblessness, along with a backlash against austerity, was one of the key factors behind the victory of the Syriza party in elections in Greece on Sunday.

Some investors have become emboldened to justify their holdings of negative-yield debt:

Mike Amey never thought he’d buy bonds from countries like Germany and Switzerland when losses were all but guaranteed.
…
“It’s not a good feeling,” said Amey, whose firm runs the world’s biggest bond fund and is one of the largest investors in nations with negative yields. Others include BlackRock Inc., Deutsche Asset & Wealth Management and Vanguard Group, data compiled by Bloomberg show.

The seemingly insatiable demand for only the safest assets underscores the challenge the European Central Bank faces in convincing bond investors it has the wherewithal to jump-start the euro region after consumer prices fell for the first time in five years. Last week, ECB President Mario Draghi pledged to pump 1.1 trillion euros ($1.2 trillion) into the region’s economies by buying public and private debt.

Although the ECB’s move may push more investors into riskier assets, JPMorgan Asset Management’s David Tan says it’s possible to profit from holding negative-yielding debt.

The central bank’s full-scale quantitative easing, which starts in March, will lift prices of even the most-expensive bonds, while the potential for deflation to persist in the euro area means investors will see their purchasing power increase.

“It still makes sense to hold the bonds” when the alternative is the ECB’s deposit rate of minus 0.2 percent, said Tan, the London-based head of global rates at JPMorgan Asset, which oversees about $1.7 trillion.

Tan purchased German five-year notes when yields plunged to zero this month. The debt has since rallied, pushing yields to an all-time low of minus 0.06 percent last week. The rate was 0.01 percent at 10 a.m. in New York.

Fans of negative yields will be please to note that, given the recent 50bp-odd decline in five-year Canada yields, five year mortgages have come down a whopping 10bp:

Royal Bank of Canada is the first major lender to lower mortgage rates after five-year bond yields fell in the wake of a surprise cut by the Bank of Canada last week, according to rate-monitoring websites.

Royal Bank, the country’s second-biggest lender by assets, offered a five-year fixed rate of 2.84 per cent on Jan. 24, down from 2.94 per cent last week, according to rate-tracking website Ratespy.com. That’s below RBC’s posted rate of 4.84 per cent. The bank also trimmed its three-, seven-, and 10-year rates, according to CanadianMortgageTrends.com, an industry news website.

And S&P cut Russia to junk:

S&P, which last downgraded Russia in April, cut the sovereign one step to BB+, according to a statement released on Monday, the same as countries including Bulgaria and Indonesia. The ratings firm said the outlook is “negative.” Russian stocks on U.S. exchanges tumbled with the ruble following the announcement which came after the close of equity trading in Moscow.
…
“Russia’s monetary-policy flexibility has become more limited and its economic growth prospects have weakened,” S&P said in a statement. “We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy.”

The ruble, the world’s second-worst performer last year after a 46 percent plunge against the dollar, plummeted after the S&P decision and closed 6.6 percent weaker at 68.7990 versus the U.S. currency on Monday. A Bloomberg index of the most-traded Russian stocks in the U.S. ended a three-day gain, tumbling 5.5 percent.

Bombardier, proud issuer of BBD.PR.B, BBD.PR.C and BBD.PR.D, has been placed on Review-Negative by Moody’s. I have updated the post that reported S&P’s downgrade of BBD earlier this month.

Brookfield Office Properties Inc., proud issuer of BPO.PR.A, BPO.PR.H, BPO.PR.J, BPO.PR.K, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T,BPO.PR.W, BPO.PR.X and BPO.PR.Y, has been confirmed at Pfd-3 by DBRS:

DBRS Limited (DBRS) has today confirmed the Senior Unsecured Notes of Brookfield Office Properties Inc. (Brookfield or the Company) at BBB and its Cumulative Preferred Shares, Class AAA at Pfd-3, both with Stable trends. The confirmation reflects the successful re-leasing of the Bank of America/Merrill Lynch space at Brookfield Place New York. The confirmation also acknowledges that Brookfield’s coverage ratios will remain under pressure in the near term because of the re-leasing transition period of the aforementioned space. DBRS expects that coverage ratios should recover following this transition period but will remain at weak levels for the current rating category. DBRS notes that a prolonged weakness in operating performance (excluding the lease transition period of Brookfield Place New York) and/or a change in financial policy that results in further deterioration of key credit metrics could result in a Negative trend change.

The current ratings are based on Brookfield’s large, premier office portfolio, its presence in relatively stronger office markets and long-term leases to high quality tenants. DBRS expects these attributes to provide reasonable underlying support to the Company’s earnings profile. In addition, DBRS notes that Brookfield should also benefit from improving office fundamentals in the Company’s major U.S. markets, particularly downtown New York. Lower unemployment levels and a recovering economic environment in the United States should contribute to higher rental rates.

It was another violently mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 38bp and DeemedRetractibles gaining 9bp. There is what has become the usual lengthy list of performance highlights, dominated by FixedReset losers. Volume was above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

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So according to this, TRP.PR.A, bid at 20.80, is $0.77 cheap, but it has already reset (at +192). TRP.PR.C, bid at 18.90 and resetting at +154bp on 2016-1-30 is $0.37 rich.

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MFC.PR.F continues to be near the line defined by its peers.

Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

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There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.25 and appears to be $0.46 cheap, while BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 24.63 and appears to be $0.71 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.22, looks $0.94 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.16, looks $1.13 expensive and resets 2019-3-1.

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Pairs equivalence is looking more rational, with the investment grade pairs (which are presumably more closely watched and easier to trade) do show a rising trend with increasing time to interconversio which, qualitatively speaking, is entirely reasonable, although the increase (over five years-odd) looks pretty substantial given the scale of the chart (two years-odd). The average break-even rate is way down from recent levels again today.

I continue to be fascinated by negative yields:

Want proof we’re still living in abnormal times? The bond market is telling us that many advanced economies won’t see much in the way of nominal growth over the next decade.

In the wake of the Swiss National Bank’s decision to ditch its currency floor and move deposit rates further into negative territory, investors actually lined up to pay the government for the privilege of holding on to their money for a period of 10 years.

According to Bank of America Merrill Lynch, there is now $7.3-trillion (U.S.) in debt that has a minus sign in front of the yield, courtesy of the euro zone, Japan and Switzerland.
…
While the Swiss move got all the headlines last week, India’s central bank governor Raghuram Rajan also surprised with a rate cut. Although this was cast as a response to sliding inflation in light of the slump in oil prices, the governor’s op-ed published prior to this announcement told a different tale. In fact, his reasons were very similar to those of his counterpart in Switzerland: A desire to prevent a wave of inflows into the nation.

“If not properly managed, these flows can precipitate a credit and asset-price boom and drive up exchange rates,” he wrote. “When developed-country monetary policies are eventually tightened, some of the capital is likely to depart.”

The Economist provides a little colour:

Some banks and institutions are also forced to hold government bonds, regardless of their yield, because of regulations and liquidity requirements.

The final possibility, and the most obvious explanation in the short term, is that investors have been anticipating the introduction of quantitative easing by the European Central Bank. If experience in America and Britain is any guide, purchases by the ECB will eventually drive prices up and yields down. Why worry about the theoretical loss involved in holding a bond till maturity if the investor knows he can offload the bond to his friendly neighbourhood central bank?

There are risks involved, of course. If the global economy returns to normal, then losses on government bonds will be substantial. The same would be true if inflation ever reappears. M&G says that if German bond yields merely rose back to the levels that prevailed at their previous trough, in 2012, when it was feared the euro might break up, investors would suffer a capital loss of 7%. Whatever else European government bonds may be, they are not risk-free.

Canadian inflation is lower than expectations:

Canadian inflation slowed to 1.5 percent in December as cheaper gasoline countered accelerating prices on most other items, reinforcing Bank of Canada Governor Stephen Poloz’s argument the economy needs lower interest rates.

The core inflation rate, which excludes eight volatile products such as energy, quickened to 2.2 percent from November’s 2.1 percent pace, Statistics Canada said today from Ottawa. Economists in a Bloomberg News survey forecast the total rate would slow to 1.6 percent from 2.0 percent and core prices would rise 2.3 percent.

Valener Inc., proud issuer of VNR.PR.A, was confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed Valener Inc.’s (Valener or the Company) Cumulative Rate Reset Preferred Shares, Series A rating at Pfd-2 (low) with a Stable trend. The rating is based on the stability of dividends distributed to the Company from its 29% interest in Gaz Métro Limited Partnership (GMLP), which guarantees the First Mortgage Bonds and Senior Secured Notes (rated “A”) of Gaz Métro inc. (GMi). The rating also reflects Valener’s low non-consolidated leverage. GMi owns the remaining 71% of GMLP.

It was another violently mixed day for the Canadian preferred share market, with PerpetualDiscounts up 41bp, FixedResets down 14bp and DeemedRetractibles off 7bp. Yet another lengthy Performance Highlights table was dominated by losing FixedResets and winning Straight Perpetuals. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.99, is $0.71 cheap, but it has already reset (at +192). TRP.PR.C, bid at 19.47 and resetting at +154bp on 2016-1-30 is $0.82 rich.

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MFC.PR.F continues to be near the line defined by its peers despite its very poor performance today, as Implied Volatility declined again from 24% yesterday to 20% today.

Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.62 and appears to be $0.35 cheap, while BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 24.91 and appears to be $0.67 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.28, looks $0.88 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.15, looks $1.12 expensive and resets 2019-3-1.

Click for Big

Pairs equivalence is all over the map, but the investment grade pairs (which are presumably more closely watched and easier to trade) do show a rising trend with increasing time to interconversio which, qualitatively speaking, is entirely reasonable. The average break-even rate is way down from recent levels again today, reinforcing yesterday’s move. And it’s kinda neat to see that the DC.PR.B / DC.PR.D pair is now priced for a negative three-month bill rate over the next four and a half years-odd.