PrefBlog

There are many revolving doors in the world … this one is minor:

Michelle Choi, an analyst for Moody’s Investors Service, gave a credit rating to bonds issued by a New Jersey town in September. In October, she switched sides and started working for the town’s underwriter, Morgan Stanley.

Choi is one of hundreds of employees at Moody’s and other credit-rating companies, including Standard & Poor’s and Fitch Ratings, who’ve gone to work for Wall Street since the 2008 financial crisis exposed the conflicts at the heart of the ratings business.

While there’s no evidence that Choi’s job-hunting influenced the grade she gave Evesham Township’s debt, the rising number of job changes in the industry raises a question: can credit analysts be impartial about grading bonds while looking for employment at banks that underwrite them?

The ratings companies say the answer is yes. An academic study by longtime industry observers suggests otherwise.

Meanwhile, the SEC proudly trumpeted its compliance results:

Each year, the BSA Review Group makes hundreds of referrals based on information gleaned initially from SAR reporting. Some statistics drive home the usefulness of the information we receive through SARs:
• In the last six months or so we have been averaging around one temporary restraining order or asset freeze per month that was initiated based upon SARs reviewed by that group.
• In the last year or so, the SEC has brought actions against seven alleged Ponzi or pyramid schemes collectively involving over $100 million, and has opened a number of investigations or examinations into other possible Ponzi schemes, based on information we first obtained from SARs.
• Also in the last year or so, we’ve charged eight people with insider trading in cases where we allege they collectively earned well over $10 million – again based on information we first obtained from SAR reporting.
• Over the past three and a half years, the SEC has initiated hundreds of exams and investigations based on the leads generated by the group from SARs and other BSA reports.
• And the number of investigations or exams that the SEC has opened based on information first discovered in SARs has essentially doubled each of the past two years.

I share these statistics to illustrate the important point that the AML programs you oversee are critical in helping to expose fraud, the exploitation of vulnerable investors, and other misconduct. The quality of the reporting, and the industry expertise that you lend to your reports, often makes it possible for us to act more quickly than we otherwise could. And it increases the chance that we will be able to hold wrongdoers responsible and, we hope, recover investor losses.

It doesn’t sound like much to justify $7-billion in annual costs and the impetus given to terrorists, does it? And, of course, the whole programme was portrayed as an anti-terror weapon, since that is a more popular idea than just another intrusive “crime detection” programme.

And here’s a little more evidence that compliance costs are out of control:

Costs remain a challenge for the [HSBC] Group, with adjusted operating expenditure up by USD 2.2 billion, due to higher regulatory and compliance costs as well as inflationary pressures. Reporting a cost-income ratio of 67% in 2014 (59.6% in 2013), the Group has moved away from its previous target of a cost-income ratio in the mid-50s and is now just aiming to achieve positive jaws on an adjusted basis.

Who cares if any business gets done, as long as regulators are employed?

Here’s a view that the bond market doesn’t care much about the Fed:

Traders are taking the Federal Reserve chair’s comments over the past two days — labor market market isn’t fully healed and inflation is too low — as confirmation that the Fed is very unlikely to raise interest rates in the first half of the year. Economists including UBS Group AG’s Drew Matus and JPMorgan Chase & Co.’s Michael Feroli saw in her message reasons to reaffirm their calls for the first increase to come by June.

But there’s a third view about how Yellen’s testimony applies to the bond market, as expressed by Jim Bianco, the founder of Bianco Research LLC in Chicago: It doesn’t really matter.

In his alternative scenario, “everybody’s right,” Bianco said, in that the Fed could start raising its benchmark rate from near zero, like economists predict, and yields remain low, like traders seem to be anticipating.

With almost $2 trillion of sovereign debt in Europe offering negative yields, demand for U.S. fixed-income assets is unlikely to evaporate regardless of what the Fed does. That demand — coming in part from overseas — will ensure that bond prices remain high and yields low.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 13bp, FixedResets off 7bp and DeemedRetractibles down 10bp. The Performance Highlights table is lengthy, dominated by FixedResets on both sides of the fence. Volume was high.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.65%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, a sharp widening from the 260bp reported February 18.

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

The new issue has caused a large change in the curve-fitting for the TRP series of FixedResets, which is discussed at greater length on the post announcing the new issue. TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.40 to be $1.36 rich, while the new issue, resetting 2020-11-30 at +296, is $1.03 cheap at its issue price of 25.00.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. 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).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.00 to be $0.57 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.92 to be $0.57 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 17.51 to be $0.67 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.63 and appears to be $1.11 rich.

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 16.90, looks $0.80 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.63 and is $1.01 rich.

Click for Big

Most of the investment grade break-even rates are a little below zero.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Click for Big

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

Unintended consequences? Or a simple macro-economic effect on free markets?

When the federal government tightened mortgage rules in 2012, overheated condo markets in Toronto and Vancouver were widely seen as the main target. But little more than two years later, it’s many smaller cities that are bearing the brunt of stricter regulations.

Winnipeg, Montreal and Moncton are grappling with a surplus of unsold condo units driven by a surge in new construction and a dwindling supply of first-time buyers in the wake of Ottawa’s decision in June, 2012, to limit mortgage insurance to amortization periods of 25 years or less from 30 years.

Meanwhile…:

Home loans from $1 million to $5 million were the fastest growing part of the jumbo market in January, according to purchase application data from the Mortgage Bankers Association. Wealthy borrowers are seeking even bigger loans this year while luxury housing prices rise and lenders lure them with competitive terms.

As first-time homebuyers struggle to qualify for mortgages in a market that’s shrinking after the housing collapse, lenders are providing more multi-million dollar loans to Americans who pose less risk. These borrowers are using the loans to purchase high-end homes in cities such as San Francisco and Miami, where prices have been climbing.

Yellen spoke gentle words of dovish restraint in her Humphrey-Hawkins testimony:

The yield on the benchmark note fell below 2 percent for the first time in a week as Yellen repeated in testimony before Congress a pledge to be “patient” means an increase is unlikely for “at least the next couple” of meetings. She said the labor market wasn’t fully healed and that she saw no evidence that inflation was rising toward the central bank’s 2 percent goal.
…
The benchmark 10-year yield fell eight basis points, or 0.08 percentage point, to 1.98 percent at 1:32 p.m. New York time, according to Bloomberg Bond Trader data. It rose as high as 2.10 percent earlier. The price of the 2 percent note maturing in February 2025 rose 22/32, or $6.88 per $1,000 face amount, to 100 6/32.

Treasuries remained higher after the U.S. sold $26 billion of two-year notes at a yield of 0.603 percent as the Fed’s 22 primary dealers were left with their smallest share of the securities in almost a year.

“It is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings,” Yellen said. “We are reasonably confident that inflation will move back to our 2 percent inflation target over time.”

The Fed’s preferred gauge of inflation, the personal consumption expenditures index, has stayed below 2 percent since April 2012, and it rose just 0.7 percent in the year through December.
…
Traders saw a 45 percent chance the Fed will raise the benchmark rate from between zero to 0.25 percent by its September meeting, according to fed funds futures data compiled by Bloomberg. That’s down from 51 percent prior to Tuesday’s testimony.

Meanwhile, it appears that Lapdog Carney has received instructions to undermine capitalism in order to do his electoral duty for the guys that hired him:

Bank of England chief Mark Carney warned employers on Tuesday not to use near-zero inflation as an excuse to offer staff low wage settlements, as that might derail Britain’s economic recovery.

British wages have only recently started to rise faster than inflation after years of real-term falls.

Many firms will agree 2015 wage deals in coming months amid falling inflation and political uncertainty before national elections in May that are likely to be closely fought.
…
Carney said risks from low inflation in Britain related mainly to the labour market, not to deferred consumption as occurred in Japan, where deflation became entrenched.

Other policy makers are more concerned about the risk of inflation overshooting, however.

MPC member Martin Weale told the same parliamentary panel rates could rise sooner than markets expected. They currently price in a first rise in around a year.

Both Weale and fellow policy maker Ian McCafferty voted five times late last year to raise rates, before dropping this call in January in the face of tumbling oil prices.

Another MPC member, Kristin Forbes, said earlier on Tuesday that there could be a case to start raising rates soon due to potential future pressure from wages, financial stability risks or unsustainable borrowing patterns.

“Any could factor into a case to tighten monetary policy in the near future. But they do not currently appear to be generating a sufficient cost to merit a change in interest rates today,” she said.

This “supply and demand” nonsense is so old fashioned, isn’t it?

Speaking of government policy, it seems that Parakeet Poluz wants to be less accountable:

Stephen Poloz says the time has come for the Bank of Canada and other central banks to reinvent monetary policy by moving beyond solely targeting inflation.

Central bankers need do a better job of making sense of a host of new risks buffeting the financial system, such as exchange rate moves and globalized production chains, the Bank of Canada governor said Tuesday.

“We need to develop a monetary policy framework that integrates inflation risks and financial stability risks, both statically and dynamically, and captures much more accurately the uncertainties we face,” he said.

After all, OSFI is given a free ride on incompetence, as long as the whole system doesn’t blow up. Why shouldn’t everybody else?

However, reduced US expectations of tightening were met with reduced Canadian expectations of loosening:

Market participants, however, keyed in on one statement that strongly suggests another rate cut from the central bank is not as imminent as one would have imagined.

“So the downside risk insurance from the interest rate cut buys us some time to see how the economy actually responds,” Mr. Poloz said in his concluding remarks.

The implication of this statement is that the central bank will wait to determine whether more monetary stimulus is required to offset the “unambiguously negative” effect of the decline in oil prices.

Market participants quickly digested this new information and began to bet against a Bank of Canada rate cut next week.

On Monday, the overnight index swap market was pricing in an 82 per cent chance of 25 basis point reduction in the overnight rate to 0.5 per cent on March 4th. This belief was supported by persistently low oil prices and underwhelming economic data. Soon after Mr. Poloz’s remarks were released, the overnight index swaps suggest the consensus view is for the bank to stand pat: the implied odds of a rate cut, as of the close on Tuesday, stand at 42 per cent.

And the feds continue to make taxation more regressive:

Parliamentary Budget Officer Jean-Denis Fréchette says the Conservative government’s plan to double the contribution limit for tax-free savings accounts would cost Ottawa and the provinces billions in revenue.

In a new report released Tuesday, the PBO notes that if the current annual limit of $5,500 is doubled to $11,000, Ottawa would lose $14.7-billion a year in federal revenue by 2060 and the provinces would lose $7.6-billion a year.

The PBO also notes that doubling the contribution rate would primarily benefit well-off Canadians, making the tax break “much more regressive.”

“By 2060, gains for high wealth households project to be twice the median and ten times that of low-wealth households,” the report states.

The PBO report comes on the same day as a similar report from Simon Fraser University Professor Rhys Kesselman, who also noted that while the program’s cost in terms of lost revenue is relatively small for now, it will grow significantly over time.

“Like a little baby who looks cuddly and cute, this proposed initiative would grow up to be the hulking teenager who eats everyone out of house and home,” Dr. Kesselman’s report for the SFU School of Public Policy states.

I have no objections at all to tax expenditures that encourage Canadians to save for a comfortable retirement – that strikes me as being very good political policy. However, I have seen very little discussion of proposed limits in terms of actual outcomes – and no, I’m not so short-sighted and ignorant as to suggest the outcome is ‘saving a few thousand in tax this year’. The actual outcome is measured in terms of the standard of living in retirement; while I am all in favour of programmes that will help Joe Lunchbucket save a bit so he can have total retirement income of $50,000 p.a., I am firmly opposed to tax expenditures that help Edwin Plutocrat III to have total retirement income of $150,000 p.a. But we never see discussion – by which I mean actual evidence and analysis – of the cost effectiveness of this.

Just as an example – and this is not only not an actuarial study, it’s also not an intensively researched post – look at the OTPP contribution limits:

This chart shows the total contributions that will be deducted in 2015 for your Teachers’ pension based on various gross salaries.

	Annual contributions
Annual salary	2015*	2014**
$30,000	$3,450	$3,450
$40,000	$4,600	$4,600
$50,000	$5,750	$5,750
$60,000	$7,002	$7,020
$70,000	$8,312	$8,330
$80,000	$9,622	$9,640
$90,000	$10,932	$10,950
$100,000	$12,242	$12,260

The Ontario government and other employers match total annual member contributions.

So, making the (possibly erroneous) assumption that the contribution rates are intended to maintain the standard of living implied by the related salary, this leads me to conclude that RRSP contribution limits should be about $14,000 p.a.; and that this limit should be adjusted downward to reflect the impact of TSFAs. Why are we taxing Joe Lunchbucket extra in order to assist Edwin Plutocrat III to achieve retirement income far in excess of the average Canadian salary?

However, just so you know … I think that when retirees downsize their home, the cash they take out on the transaction should be eligible (up to limits reflecting the above principles) for rollover to a TSFA. Saving via mortgage payments is still saving!

S&P has given something called the Floating Rate Investment Grade Preferred Fund a rating of P-2f, but I can’t find anything more regarding this new entrant.

There were modest gains in the Canadian preferred share market today, with PerpetualDiscounts gaining 8bp, FixedResets up 9bp and DeemedRetractibles winning 17bp. The Performance Highlights table continues to be lengthy, with ENB FixedResets prominent among the winners. Volume was above average; it is noteworthy that the larger blocks changed hands well below the closing bids.

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

The new issue has caused a large change in the curve-fitting for the TRP series of FixedResets, which is discussed at greater length on the post announcing the new issue. TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.43 to be $1.40 rich, while the new issue, resetting 2020-11-30 at +296, is $1.15 cheap at its issue price of 25.00.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. 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).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.75 to be $0.65 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.91 to be $0.57 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 25.31 to be $0.46 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.50 and appears to be $0.92 rich.

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 16.57, looks $1.05 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.50 and is $0.96 rich.

Click for Big

Most of the investment grade break-even rates are a little below zero.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Click for Big

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

Charles Kenny, a Senior Fellow with the Center for Global Development (a quite respectably ranked think-tank) writes a very good piece on Bloomberg about money laundering and regulations thereof:

In the best of cases, anti-money-laundering efforts are likely to do no more than raise the cost of transactions. A system that misses all but a fraction of a percent of criminal financial flows is almost guaranteed to miss terrorism finance in particular, which involves very small sums: The Madrid and London terror bombings cost no more than $10,000 to finance; the Sept. 11 attacks, less than $500,000. That may be one reason why none of the reported money laundering prosecutions to date have involved terror finance.

Though the regulations have limited impact on criminal activities, they still cost money. Tracking illicit money flows requires a considerable bureaucracy. Enforcing the regulations cost an estimated $7 billion in the U.S., and probably far more. Mauritius, a small, middle-income country of just 1.3 million people, has 25 government officials working on FATF implementation. That’s more people than are listed as opticians in the country. Each bank in Mauritius will also have staff tasked with carrying out customer investigations.

Perhaps most insidious, the regulations have disproportionately affected the kinds of business transactions that serve small, poor economies. FATF rules are why Merchants Bank of California cut off money transfers to Somalia last week, the last U.S. financial institution to do so. Between $160 million and $180 million of remittances will be affected by Merchants Bank’s action, but from its point of view, cutting services is the only safe course. It faced immense potential liabilities if it turned out that one of the accounts receiving funds in Somalia was linked to terrorist activity. Yet there’s no evidence any of the remittances were going to fund terror groups; most were being used to support schooling, housing, food, and other living costs for Somalis. The country is one of the poorest in the world and remittances are equal to about one-third of the country’s GDP.

No doubt, Somali expatriates will find other ways to send the money, but they will cost more and are likely to involve less savory financial institutions as intermediaries. Given that, and the link between people losing their livelihoods and terror recruitment, it is all too possible the FATF regulations will give rise to better-funded and larger terrorist groups.

Does anybody else remember 1994? And Orange County’s infamous carry-trades? It will be interesting to see what happens when policy rates rise:

Growth is on a tear, hiring is the strongest in decades and households are the most upbeat since 2011. Yet banks such as Bank of America Corp. keep plowing their burgeoning deposits into U.S. government and related debt — pushing the industry’s holdings past $2 trillion — instead of lending it all out.

Part of the buildup has to do with rules that require banks to hold more high-quality assets in the wake of the worst financial crisis since the Great Depression. But it also reflects how borrowers, particularly among Americans scarred by the housing bust, are still repairing their finances rather than going into debt to splurge on big-ticket items. And that may mean the U.S. recovery isn’t quite as robust as all the upbeat data would suggest.
…
Investing in government bonds is proving to be a profitable move for banks. They’re making over a full percentage point more by purchasing five-year Treasuries instead of leaving the idle cash parked at the Fed, where they earn only 0.25 percent. U.S. commercial banks held $2.83 trillion in cash as of Feb. 11, versus $2.57 trillion at the end of last year.

Having cash invested in five-year Treasuries is also netting banks an attractive spread over what they are paying depositors. The yield advantage for the notes over the average deposit rate for the four largest U.S. banks is above the norm over the past decade.

For Bank of America, the spread is about 1.44 percentage points, data compiled by Bloomberg show.

Pension troubles in New Jersey are getting harder to defer:

New Jersey Governor Chris Christie must make a $1.57 billion payment this year to the state pension system, a judge ruled while decrying the failure of the state to address a looming crisis.
…
“Because the state will now make nearly 70 percent less than the statutorily required $2.25 billion payment,” the expectations of workers have been “substantially impaired,” the judge ruled. “In short, the aim of the legislation is not being met.”

Jacobson’s ruling contrasts with her decision days before the last fiscal year ended June 30, when Christie said he faced a fiscal emergency. Workers sued then as well, and the judge said Christie acted reasonably in paying $696 million to the pension system to cover current employees while deferring $887 million to help close the gap left by previous governors.

The legislative and executive branches “have now had almost 10 months to find a solution to the pensions crisis for FY 2015,” Jacobson said in the latest ruling.

DBRS has confirmed Fairfax with a stable trend. I have updated the post regarding S&P’s revision to ‘Outlook Negative’.

Preferred share investors rushed to their monitors this morning to see what would happen at the start of a new week:

Click for Big

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets losing 67bp and DeemedRetractibles off 2bp. ENB and TRP issues are prominent on the bad side of a suitably lengthy Performance Highlights table. Volume was high, with ENB issues again prominent – it looks like people are getting increasingly nervous about a possible downgrade.

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

The new issue has caused a large change in the curve-fitting for the TRP series of FixedResets, which is discussed at greater length on the post announcing the new issue. TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.28 to be $1.37 rich, while the new issue, resetting 2020-11-30 at +296, is $1.07 cheap at its issue price of 25.00.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. 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).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.68 to be $0.55 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.97 to be $0.62 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 25.45 to be $0.41 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.52 and appears to be $0.97 rich.

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 16.61, looks $1.01 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.50 and is $0.96 rich.

Click for Big

Most of the investment grade break-even rates are scattered around zero.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Click for Big

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

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets off 31bp and DeemedRetractibles gaining 3bp. The Performance Highlights table is its usual lengthy self, with Enbridge FixedResets prominent on the downside and Floaters, of all things, prominent winners. Volume was below average, but Enbridge issues were again prominent.

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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.52 to be $0.91 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is bid at 16.68 to be $0.66 cheap.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. 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).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.30 to be $0.35 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 26.15 to be $0.52 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 17.84 to be $0.54 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.80 and appears to be $1.15 rich.

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 16.70, looks $0.98 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.62 and is $1.05 rich.

Click for Big

Most of the investment grade break-even rates are scattered around negative 10bp, but the BNS.PR.P/BNS.PR.A pair is an outlier at +36bp.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Click for Big

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