PrefBlog

So the banks are taking advantage of the anti-competitive Bank Act ownership provisions to increase their mortgage margins as well as their margins on Prime:

But now, all in mortgage-land are waiting and wondering if Canada’s major banks will actually pass along that rate cut. The Globe and Mail’s Streetwise reported Wednesday that TD Canada Trust may not reduce its prime rate. (TD sent me a statement this morning confirming that it is not changing prime rate “at this time.”)
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We’re in a different world this time around. The average home price is 44 per cent higher than 2008, debt levels are at a record, bank revenue is pressured by multi-year lows in mortgage growth, competition has shrunk net interest margins and Ottawa had burdened banks with heaps of regulatory, capital and securitization restrictions. That makes banks and the federal government quite reluctant to see a lower prime rate.

The housing policy factor cannot be underestimated, not with the Bank of Canada admitting that certain regions’ home values may be up to 30 per cent overvalued. I spoke with one capital markets executive Thursday. He said, “I wouldn’t be surprised if the Bank of Canada called all the major banks and said, ‘Don’t use this rate cut as fuel to get more debt in consumers’ hands by lowering rates.”

Yes, if there were more banks, then the bureaucrats at the BoC and the politicians would have to make more than six calls, which would be too much like work. After all, when you’re busily micro-managing the economy and it turns out you need a two-tier interest rate policy like any other proud member of the third world, you don’t have time to waste talking.

Regrettably, there still a few members of the private sector who have not yet been re-educated:

Mortgage brokers, however, say it is only a matter of time – anywhere from a few days to a few weeks – before banks start slashing their rates, with some predicting that as Government of Canada bond yields plummet below 1 per cent, five-year fixed rates could hit a new record-low 2.5 per cent, reigniting a fierce competition for new borrowers.
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Some small non-bank lenders have already begun cutting their fixed-mortgage offerings, said Drew Donaldson, a mortgage broker and executive vice-president Safebridge Financial Group. Consumers with variable-rate mortgages and preapprovals have been calling Mr. Donaldson’s office in droves looking to find out when their rates might drop.
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Some industry officials say that while banks will inevitably be forced to drop their fixed mortgage rates if bond yields settle at record lows, they may put off dropping their prime rate, which affects variable-rate mortgages along with a host of non-mortgage lending, such as car loans and personal lines of credit, in order to protect their non-mortgage profits and push borrowers toward longer-term fixed rate mortgage contracts.

Others speculated that federal regulators may be pressuring banks not to lower their rates too drastically by warning that they could introduce tighter lending rules to avoid driving up already high levels of household debt.
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But with the average five-year rate among the major banks now sitting around 195 basis points above five-year government bond yields, well above the historical range of between 150 and 160 basis points, most expect the banks to eventually bow to consumer pressure to slash their rates, sending potential buyers running back into the housing market.

“You’ll definitely get more interest in homebuying when you see rates go below 2.5 per cent,” Mr. McLister said.

“It’s going to be a huge flood of buyers.”

It was another violently mixed day for the Canadian preferred share market, with PerpetualDiscounts up 74bp, FixedResets off 11bp and DeemedRetractibles down 20bp. Yet another lengthy Performance Highlights table is predictably dominated by FixedReset and Floating Rate losers and Straight Perpetual winners. Volume was 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 20.92, is $0.85 cheap, but it has already reset (at +192). TRP.PR.C, bid at 19.96 and resetting at +154bp on 2016-1-30 is $1.19 rich.

Click for Big

MFC.PR.F continues to be near the line defined by its peers despite its very poor performance today, as Implied Volatility declined dramatically from 30% yesterday to 24% 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 21.58 and appears to be $0.36 cheap, while BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 24.92 and appears to be $0.74 rich.

Relative value changes were unusual today: the bid for BAM.PR.X gained $0.07 on the day, while BAM.PR.T’s bid is down $0.28, reinforcing yesterday’s moves. Sell on rumour, buy on news?

Click for Big

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 18.11, looks $1.04 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.32, looks $1.30 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.

The big news today was the Bank of Canada rate cut:

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.

Inflation has remained close to the 2 per cent target in recent quarters. Core inflation has been temporarily boosted by sector-specific factors and the pass-through effects of the lower Canadian dollar, which are offsetting disinflationary pressures from slack in the economy and competition in the retail sector. Total CPI inflation is starting to reflect the fall in oil prices.

Oil’s sharp decline in the past six months is expected to boost global economic growth, especially in the United States, while widening the divergences among economies. Persistent headwinds from deleveraging and lingering uncertainty will influence the extent to which some oil-importing countries benefit from lower prices. The Bank’s base-case projection assumes oil prices around US$60 per barrel. Prices are currently lower but our belief is that prices over the medium term are likely to be higher.
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Although there is considerable uncertainty around the outlook, the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015. The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response. The Bank expects Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016. The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.

Weaker oil prices will pull down the inflation profile. Total CPI inflation is projected to be temporarily below the inflation-control range during 2015, moving back up to target the following year. Underlying inflation will ease in the near term but then return gradually to 2 per cent over the projection horizon.

The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon.

Prime did not follow, since the banks factor the near-total lack of competition in Canada into their decisions:

It is not clear yet if Canada’s big banks will lower their rates. Historically, Canada’s largest lenders have followed suit when the central bank cut its key interest rate. However, Toronto-Dominion Bank said Wednesday that it now weighs many factors before cutting its prime rate, sending the message that it would like to keep the status quo in order to sustain healthy loan margins. Officially, the remaining Big Six banks declined to comment, but some privately expressed a similar sentiment as TD.

When the overnight rate target was increased to 1% in 2010, prime followed, but things are different now for um, lots of reasons! Yes, lots. So suck it up, turds.

The BoC cut was not widely expected and the bond market went nuts:

The currency reached the weakest level in almost six years after the Bank of Canada reduced economic forecasts and lowered the benchmark rate target to 0.75 percent, from 1 percent, where it’s been since 2010. Government bonds climbed, pushing yields on two-, 10- and 30-year debt to record lows. Crude, Canada’s biggest export, has tumbled more than 50 percent since June amid a global glut.
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The currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, depreciated 1.8 percent to C$1.2340 per U.S. dollar at 5 p.m. Toronto time. It slid as much as 2.3 percent, the most since September 2011, to C$1.2394, the weakest level since April 2009. One Canadian dollar buys 81.04 U.S. cents.
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The yield on Canada’s benchmark 10-year (GCAN10YR) bond dropped to as low as 1.365 percent before trading at 1.43 percent, 0.44 percentage point below the U.S. 10-year note yield. It’s the biggest difference since 2007.

Yields on Canadian two-year securities touched 0.536 percent, and 30-year bond yields reached 2 percent.

None of the 22 economists in a Bloomberg News survey predicted the cut. The interest rate, which influences everything from car loans to mortgages, had been unchanged since September 2010. The last reduction was in April 2009.

At the close yesterday, the five-year was bid at 1.04%, and today’s closing bid was 0.86%. Eighteen basis points on the five year in a day? Twenty-three years I’ve been in the business, and while I no longer keep day-to-day records of Canada yields, I’ll guess I could count the number of days with that sort of move without having to take off my socks.

It’s a global thing:

In Tokyo, BOJ Governor Haruhiko Kuroda and colleagues cut their core inflation forecast to 1 percent for the fiscal year starting in April, from 1.7 percent, and maintained a pledge to increase the monetary base at an annual pace of 80 trillion yen ($674 billion). They also said they will boost the main part of a program to support economic growth to 10 trillion yen from 7 trillion yen. Eligibility for a facility aimed at stimulating bank lending was also widened.

Hours later in London, the Bank of England said policy makers Martin Weale and Ian McCafferty this month stopped voting for a rate increase. That left the nine-member Monetary Policy Committee unanimous for the first time since July as it warned U.K. inflation may drop to zero in the first quarter.

Inflation is slowing around the world. Malaysia on Wednesday reported that consumer prices rose 2.7 percent in December from a year earlier, the second-weakest pace in 2014. New Zealand’s fourth-quarter prices increased 0.8 percent from a year earlier, the slowest rate in six periods.

The Bank of Korea will seek an inflation target that is optimal for the economy, Governor Lee Ju Yeol said on Thursday, adding that the possibility of deflation is “limited.”

And Draghi wants US-style quantitative easing:

Mario Draghi called on the European Central Bank to make its biggest push yet to fend off deflation and revive the economy by unleashing a debt-buying spree of 1.1 trillion euros ($1.3 trillion).

The ECB president and his Executive Board proposed spending 50 billion euros a month through December 2016, two euro-area central-bank officials said. The plan still faces a tense debate in the Governing Council and may change before the final decision on Thursday, the people said, asking not to be identified as the talks are private. An ECB spokesman declined to comment.
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The council’s debate will be complicated by arguments over whether the risks incurred in the new bond-buying plan should be shared across the region’s 19 central banks or kept within national boundaries. Dutch central-bank Governor Klaas Knot has said any decision to mutualize risk should be taken by elected politicians, not unelected central bankers.

But what about the Danes?

As Denmark tries to silence speculation it may follow Switzerland and abandon its euro peg, the nation’s business leaders are adding their voice to the debate.

The Confederation of Danish Industry, which represents about 10,000 companies, says the long-term cost of discarding the euro peg far outweighs any potential short-term benefit.
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The central bank fought back speculation it might run out of ammunition to defend its peg by delivering a surprise rate cut on Monday, lowering its benchmark deposit rate to minus 0.2 percent. Danske Bank A/S, the country’s biggest lender, says the rate may be cut again tomorrow, to minus 0.3 percent as the ECB prepares to unveil the details of its bond-purchase program.
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Denmark relies on trade with the European Union for about 70 percent of its total exports, meaning the country’s de facto euro membership saves its companies billions in exchange-rate hedges.

All these pegs … reminds me of my father’s commentary on political guidance with respect to currency movements under the Bretton Woods regime … “We will not devalue, we will not devalue, we will not devalue, whoops, we will not devalue again, we will not devalue again, we will not devalue again …”. If I ran a FX brokerage, I’d be hiking the margin on pegged currencies instead of all of them. Free markets are more reliable than politicians:

FXCM Inc., the New York-based retail broker, said Wednesday it’s increasing margin requirements for clients who trade currencies and gold after customers’ losses forced it to seek a $300 million lifeline. CME Group Inc., owner of the Chicago Mercantile Exchange, is altering how it handles volatility in emergencies after it was buffeted by trading halts last week.
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The turmoil shows regulators need to consider boosting oversight of retail trading platforms such as FXCM, a member of the U.S. Commodity Futures Trading Commission said.

“I am concerned that lower standards are putting this industry in a precarious position and placing retail foreign-exchange investors unnecessarily at risk,” said Commissioner Sharon Bowen, a Democrat who joined the CFTC last year. That market “is the least regulated part of the derivatives industry,” she said.

The National Futures Association, the U.S. derivatives industry’s self-funded market overseer, temporarily boosted the amount of money traders must put down to back currency transactions. The more stringent requirements apply to the Swiss franc, Swedish krona and Norwegian krone, the group said in a statement. The changes apply to retail trading.

So fear not. This gross failure of the political class to restrain markets will be lead to increased regulation, because if at first you don’t succeed, it’s the fault of them durn speculators.

It was a violently mixed day for the Canadian preferred share market, with PerpetualDiscounts up 90bp, FixedResets off 17bp and DeemedRetractibles gaining 64bp. A very lengthy Performance Highlights table is dominated by FixedReset and Floating Rate losers and Straight Perpetual winners. Volume was average.

Given the size of the move in the GOC yields, I amended my usual practice and entered a mid-week change in HIMIPref™’s rate assumptions – all yields given in the tables are performed with GOC-5 = 0.85% and 3-Month Bills = 0.59%. Prime remains at 3%, so it’s an ill wind that blows nobody any good!

PerpetualDiscounts now yield 4.94%, equivalent to 6.42% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.75% (!) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 265bp, unchanged from January 14.

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 20.90, is $1.02 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.31 and resetting at +154bp on 2016-1-30 is $1.38 rich.

Click for Big

[Update, 2015-1-22: The wrong chart was here yesterday, being a repeat of the TRP chart. I am considering executing the proofreader.

MFC.PR.F continues to be near the line defined by its peers, although it drifted up today and is having an effect on the calculation. Implied Volatility continues to be a conundrum. It is far 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 21.51 and appears to be $0.53 cheap, while BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 25.20 and appears to be $0.89 rich.

Relative value changes were unusual today: the bid for BAM.PR.X gained $0.11 on the day, while BAM.PR.T’s bid is down $0.49. Sell on rumour, buy on news?

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 18.55, looks $0.83 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.15, looks $1.04 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.

The loonie got hammered today:

Canada’s dollar weakened to the lowest in more than five years on speculation the central bank may signal it’s more likely to lower interest rates than raise them when it releases a growth outlook tomorrow.

The currency sank as much as 1.5 percent, the most since Jan. 2, before the Bank of Canada updates quarterly inflation and growth projections to factor in the crude-oil slump.
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The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated 1.4 percent to C$1.2113 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.2115, the weakest level since April 2009.
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One Canadian dollar purchases 82.71 U.S. cents.

Yields on 30-year government bonds touched a record low of 2.04 percent, before trading at 2.05 percent.

Crude oil, Canada’s biggest export, traded below $50 a barrel in New York, from $107.73 in June. The central bank’s October forecast of growth of 2.4 percent this year was underpinned by an assumption U.S. benchmark crude would trade at an average of $85 a barrel.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 5bp, FixedResets off 4bp and DeemedRetractibles gaining 7bp … BORRRR-RING! However, the Performance Highlights table, while shorter than it has generally been for the past few weeks, still manages to produce an entertaining list with FixedResets highlighted for volatility. 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 20.46, is $1.30 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.51 and resetting at +154bp on 2016-1-30 is $1.54 rich.

Click for Big

MFC.PR.F continues to be near the line defined by its peers, although it drifted up today and is having an effect on the calculation. Implied Volatility continues to be a conundrum. It is far 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 21.50 and appears to be $0.90 cheap, while BAM.PR.T, resetting at +231bp 2017-3-31 is bid at 25.69 and appears to be $1.24 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

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 18.55, looks $1.03 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.35, looks $1.23 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.

Those who live by the sword…

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging market debt crises, is closing his largest hedge fund after losing virtually all its money this week when the Swiss National Bank unexpectedly let the franc trade freely against the euro, according to a person familiar with the firm.

Everest Capital’s Global Fund had about $830 million in assets as of the end of December, according to a client report. The Miami-based firm, which specializes in emerging markets, still manages seven funds with about $2.2 billion in assets. The global fund, the firm’s oldest, was betting the Swiss franc would decline, said the person, who asked not to be named because the information is private.
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Last year, the main fund rose 14.1 percent, driven by Chinese equities and bets against currencies, including a wager that the Swiss franc would fall after citizens rejected a referendum that would require the central bank to hold at least 20 percent of its assets in gold, the investor report said.

There may be a Chinese straw in the wind:

A missed $23 million interest payment by Kaisa Group Holdings Ltd. (1638) earlier this month puts it at risk of being the first Chinese real estate company to default on its dollar-denominated bonds. That may signal deeper risks for China’s already fragile and corruption-prone property market, which according to World Bank estimates accounts for about 16 percent of economic growth.
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Kaisa’s woes began late last year when the government in Shenzhen, less than 25 kilometers (15.5 miles) from Hong Kong, blocked approvals of its property sales and new projects in the city. It’s also being probed over alleged links to Jiang Zunyu, the former security chief of Shenzhen who was taken into custody as part of a graft probe, two people familiar with the matter said last week, asking not to be named because the connection hasn’t been made public.
…
Concern is mounting that increasing financial stress among builders could spill over into a broader credit crisis in China. New-home prices fell in 65 of the 70 cities monitored in December and were unchanged in four, the National Bureau of Statistics said in a statement yesterday. Shenzhen recorded higher prices, the first city to see an increase in four months.
…
Some of Kaisa’s Chinese creditors, meanwhile, have asked a court to freeze the company’s assets. In a statement on Jan. 9, the developer said that “several bank accounts of the group” had been frozen.

It’s a reminder of the risks overseas bondholders face when Chinese companies run into trouble. China’s bankruptcy laws favor local creditors while offering fewer protections to foreign debt claims. Kaisa has a 30-day grace period to make its missed payment.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 13bp, FixedResets down 38bp and DeemedRetractibles off 9bp. A lengthy Performance Highlights table is dominated by losing FixedResets. 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 20.55, is $1.18 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.71 and resetting at +154bp on 2016-1-30 is $1.74 rich.

Click for Big

MFC.PR.F continues to be near the line defined by its peers, although it drifted up by a small amount today. Implied Volatility continues to be a conundrum. It is far 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 21.53 and appears to be $0.80 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.30 and appears to be $0.88 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

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 18.46, looks $1.11 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.36, looks $1.29 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.

And I now have my regular high speed connection back! They tell me that the power supply on my old modem blew. Of course, virtually everything about Bell Canada blows, but that’s another story…

News is starting to trickle in regarding casualties of the Swiss Franc move yesterday:

The Swiss National Bank’s abrupt move on Thursday to abandon its cap on the Swiss franc led to massive losses, and at least one insolvency, among retail foreign exchange brokers and trading houses across the globe.

Alpari UK

Online foreign exchange Broker Alpari UK said on Friday it had entered into insolvency after clients sustained losses on the Swiss franc. It said volatility and lack of liquidity had “resulted in the majority of clients sustaining losses which exceeded their account equity.”

FXCM Inc
…
Global Brokers NZ Ltd

The New Zealand foreign exchange dealer was forced to close due to hefty losses incurred due to the SNB’s policy reversal. It said the franc’s move had wiped out the equity of most of its clients with franc positions and left it without the ability to meet minimum capital requirements of 1 million New Zealand dollars ($780,000). New Zealand’s regulator is seeking a status update on client funds from the broker.
…
Swissquote
…
OANDA
…
Saxo Bank
…
IG Group

… and at least one fund:

IG Group shares fell 4.4 percent yesterday. The U.K. spread-betting firm said the financial impact from the surge in the Swiss franc was partially dependent on its ability to recover client debts.

The market turmoil turned the $1.9 billion John Hancock Absolute Return Currency Fund into the biggest loser among U.S. peers. It tumbled 8.7 percent yesterday, the steepest drop on record and the most among more than 2,000 U.S.-domiciled funds tracked by Bloomberg with at least $1 billion under management. The fund had its second-biggest short position in the franc at the end of November, according to the latest fact sheet on John Hancock’s website.

The FXCM problem is attracting some notice:

FXCM Inc. (FXCM), the brokerage facing a shortfall of nearly a quarter-billion dollars after highly-leveraged investors made losing bets on the Swiss franc, pushed back against U.S. regulatory efforts that likely would have left it less vulnerable.

In 2010, the Commodity Futures Trading Commission sought to force individual investors trading currencies to give their broker 10 cents in capital to back every $1 in positions. The regulator failed to accomplish that amid pressure from New York -based FXCM and other brokers, meaning only 2 cents must be pledged.
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The client losses are shining a spotlight on U.S. regulators’ oversight of retail currency trading and whether they stopped short of necessary curbs to protect customers. In contrast to other markets, investors buying stock with borrowed money must put up at least 50 percent of the purchase price under Federal Reserve rules. The CFTC will probably move to review past efforts to limit currency-trading risks, former officials say.

“Leverage is a big issue that CFTC probably will want to look at as well as increasing transparency and maybe the capital buffer,” Sharon Brown-Hruska, a former commissioner at the CFTC and vice president at the NERA Economic Consulting firm, said in a phone interview.
…
While FXCM announced the customer losses and possible breach of capital requirements Thursday, GAIN Capital Holdings Inc. (GCAP) said it generated a profit. GAIN said in a statement that it had reduced traders’ ability to use leverage last September for Euro-Swiss Franc trades.

We can only hope that the regulators are not able to use this fiasco as a cause celebre to destroy the retail FX market. I see no problem with a 2% margining requirement for FX … but it also seems to me that FXCM had absolutely no protection against a big move … a deep out-of-the-money call, for instance.

Even with Goldman’s exemplary conduct in hedging risk during the crunch as an example (as discussed on July 26, 2010), FXCM managed to screw things up. So the sharks smile:

Leucadia National Corp. gave FXCM Inc. a $300 million cash infusion, extending a lifeline to the currency brokerage hobbled by the Swiss central bank’s decision to let the franc trade freely against the euro.

Leucadia, which owns New York-based investment bank Jefferies Group, extended FXCM a two-year, $300 million senior secured term loan with an initial coupon of 10 percent, according to a statement Friday. The transaction allows FXCM, the largest U.S. retail foreign-exchange broker, to “continue normal operations,” according to the statement.

Shares of New York-based FXCM had tumbled as much as 92 percent to 98 cents Friday morning before they were halted. After the Leucadia deal was released, FXCM’s stock rebounded to $4.44 as of 5:40 p.m. New York time. That’s still down from the prior day’s closing price of $12.63

… and, just so we can keep up to date on an old story, Moody’s cut Russia to Baa3:

Moody’s lowered the country to Baa3, one step above junk, from Baa2. The credit grade matches those of Standard & Poor’s and Fitch Ratings. The rating, on par with India and Turkey, is on review for a further reduction, the ratings company said in a statement.

“The severe — and likely to be sustained — oil price shock, alongside Russian borrowers’ highly restricted international market access due to ongoing sanctions, is undermining economic fundamentals and increasing financial stresses on both the public and private sectors,” Moody’s said in a report

Holy smokaramaville, it was a hot day for the Canadian preferred share market! PerpetualDiscounts won 61bp, FixedResets gained 21bp and DeemedRetractibles were up 46bp. The Performance Highlights table is enormous, with a great many low-spread FixedResets on the bad side, with the good side containing Straight Perpetuals of all flavours and a fair smattering of high-spread FixedResets. Volume was very 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:

Click for Big

So according to this, TRP.PR.A, bid at 20.45, is $1.29 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.35 and resetting at +154bp on 2016-1-30 is $1.36 rich.

Click for Big

MFC.PR.F continues to be near the line defined by its peers, although it drifted up by a small amount today. Implied Volatility continues to be a conundrum. It is far 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 21.56 and appears to be $0.89 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.59 and appears to be $0.97 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

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 18.75, looks $0.89 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.35, looks $1.22 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell claims there’s no network problem in Toronto, but I am still forced to use my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

I’m spending $25 a day on cell phone data charges. I wonder if Bell will give me a refund.

There’s some disinflationary news from India:

Reserve Bank of India Governor Raghuram Rajan cut interest rates in an unscheduled review to revive growth in Asia’s third-largest economy after inflation eased. Stocks, bonds and the rupee surged.

Rajan lowered the benchmark repurchase rate to 7.75 percent from 8 percent, he said in a statement today, the first reduction since May 2013. Consumer-price inflation will probably be below the central bank’s target of 6 percent by January 2016, he said.
…
Rajan has focused on quelling inflation since taking office in September 2013, and today’s move signals confidence that price pressures will remain under control. It sets India on a different path from Brazil and Russia, which raised rates in December to tame inflation and support their currencies.

And here’s a new twist to currency wars:

At 9:30 a.m. today, trading floors across the City of London erupted.

Outbursts of obscenities and confusion followed the Swiss central bank’s surprise decision to abolish its three-year-old policy of capping the Swiss franc against the euro, according to traders in London’s financial district. The U-turn sent the franc as much as 41 percent up against the euro, the biggest gain on record, a move that one trader estimated may cause billions of dollars of losses for banks and their customers.
…
As the franc spiked, investors said they found themselves unable to trade it amid a lack of price quotes.

“There was a good hour when euro-swiss was untradeable,” said Chris Morrison, London-based head of strategy at Omni Macro Fund, a hedge fund which oversees $550 million. “Clearly there was no liquidity.”

Forex.com, a currency-trading website, said it halted services briefly “until we get confirmation from our liquidity providers that we can get Swissie liquidity.” Dealing resumed at about 10:30 a.m. London time.
…
Anthony Peters, a broker at Swiss Investment Corp., said firms that were selling options tied to the Swiss franc may be among today’s losers. They would have lost money as volatility surged.

“Selling puts or vol on the franc was deemed to be SNB guaranteed money for old rope,” he wrote in a note to clients today. “There will be some very red faces around as it begins to transpire who should not have been playing that game.”

Sometimes we have to leave Never-Never Land:

“The decision has been a surprise for markets — you can’t do it in any other way,” SNB President Jordan told reporters in Zurich today. “We came to conclusion that it’s not a sustainable policy.”

The change comes just one week before ECB policy makers meet to discuss new stimulus, including quantitative easing, a move that may add to pressure on the franc against the euro.

The SNB spent billions defending the cap after introducing it in September 2011. Jordan said today it may intervene again.

“The SNB doesn’t see any future any more for their floor with the strong U.S. dollar and the QE ahead at the ECB,” said Alessandro Bee, strategist at Bank J Safra Sarasin AG in Zurich.

I tip my hat to those who followed the example of George Soros and decided that the CHF/EUR rate was unsustainable. Sometimes the politicians and bureaucrats just need to be TOLD!

It looks like Canada is off Target:

Target Corp. (TGT) will walk away from Canada less than two years after opening stores there, putting an end to a mismanaged expansion that racked up billions in losses.

The Canadian division, which employs 17,600 people, is seeking court approval to begin liquidation, the Minneapolis-based retailer said today in a statement. Dismantling operations north of the border will lead to a $5.4 billion writedown this quarter, though it will boost profit by next year, Target said.

Fixing the Canada unit, which had amassed more than $2 billion in operating losses since 2011, has been a top priority for Chief Executive Officer Brian Cornell. After taking the reins in August, he spent a portion of his early days at the company touring operations in the country. The woes plaguing the chain’s 133 stores there ranged from empty shelves to prices being higher than at locations in the U.S.

“We were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021,” Cornell said today. “This was a very difficult decision, but it was the right decision for our company.”

DBRS comments:

DBRS therefore believes that Target’s decision to wind down its Canadian business is more reflective of the Company’s inability to achieve its own strategic, operational and financial milestones within this market rather than any indication of broader weakening of the Canadian retail sector.
…
This event, however, has no effect on ratings in the retail sector at the present time because DBRS believes that the business risk profile of the overall sector should remain within its current bandwidth over the near to medium term. This outlook is based on DBRS’s:
— view that new competition will emerge (including the impact of growing online retailing) and that the trend toward equilibrium in the sector will continue after this temporary reduction in competition;
— and concern about Canadian consumers becoming more challenged because of high debt levels as well as potentially higher interest rates and lower residential real estate prices in the future.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 23bp, FixedResets off 12bp and DeemedRetractibles gaining 4bp. The Performance Highlights table is lengthy yet again, dominated by low-spread FixedReset losers as the Canada 5-Year yield dropped to an incredible 1.02%. Will we go below 1%? Place yer bets, gents, place yer bets! Volume was low.

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 21.53, is $0.69 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.48 and resetting at +154bp on 2016-1-30 is $1.09 rich.

Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far 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 21.12 and appears to be $0.87 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.18 and appears to be $0.89 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

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 18.75, looks $0.79 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.20, looks $1.08 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

I’m spending $25 a day on cell phone data charges. I wonder if Bell will give me a refund.