PrefBlog

There is now a negative policy rate in Sweden:

Sweden’s central bank cut its main interest rate below zero and unveiled additional measures designed to jolt the largest Nordic economy out of a deflationary spiral.

The Riksbank lowered its repo rate to minus 0.10 percent from zero. A cut had been predicted by six of the 18 economists surveyed by Bloomberg, while the remainder forecast no change.

The bank said it will also make policy “more expansionary” by “soon” buying 10 billion kronor ($1.2 billion) in government bonds with maturities of one to five years. The rate will remain at minus 0.10 percent until underlying inflation is close to 2 percent, which the bank predicts will happen in the second half of 2016, the bank said.
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The bank, led by Governor Stefan Ingves, last year reversed course and scrapped a policy of keeping rates up to guard against a build-up in household debt. The reluctance to ease in the face of slowing inflation and high unemployment was characterized as “sadomonetarist” by Nobel laureate Paul Krugman.
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The bank said it sees its repo rate at minus 0.11 percent in the second quarter and minus 0.12 percent in the first quarter next year, signaling the chance for more cuts.

While inflation and unemployment, currently at about 7 percent, exceeded the central bank’s forecast at its December meeting, waning expectations for price growth combined with monetary easing elsewhere in the world have added to pressure on Sweden to cut rates.

The central bank in neighboring Denmark has lowered its main rate four times this year to minus 0.75 percent. That’s the same level as the Swiss National Bank, which is trying to fight capital flows after abandoning its euro cap. Adding to pressure to ease is the ECB’s decision to start an unprecedented bond-purchase program.

Swedish two-year inflation expectations fell to 1.1 percent in December from 1.4 percent in September, according to a survey by TNS Sifo Prospera of labor market participants, purchasing managers and money market players. Consumer prices fell an annual 0.3 percent in December. The Riksbank targets 2 percent.

There is still hope on the Greek tragedy:

Greece and Germany are pursuing a deal on the conditions required to continue the Greek bailout as each side signals a willingness to compromise, according to government officials taking part in the talks.

Germany won’t insist that all elements of Greece’s current aid program continue, said two officials in Berlin. As long as the program is prolonged, they said, Germany would be open to talking about the size of Greece’s budget surplus requirement and conditions to sell off government assets.

For its part, Greece is prepared to commit to a primary budget surplus, as long as it’s lower than the current 4 percent of gross domestic product, according to Greek government officials. Prime Minister Alexis Tsipras’s coalition also might be willing to compromise on privatizations, one of the officials said. All the officials asked not to be named because the deliberations are private and ongoing.

You know what this country needs? More economic stimulus, that’s what this country needs:

Building an opera house to stimulate an economy may be an odd idea — though not necessarily a bad one. In fact, more than 200 years after they were built, opera houses in Germany may still be helping their local economies.

That’s the conclusion of a new study by economists in Germany and the U.K. that found that cultural amenities such as a place to enjoy Wagner’s Ring Cycle are an important component in decisions by high-skilled workers about where to live.

Clusters of skilled workers also have positive knock-on effects on the local economy because their productivity tends to increase the output of companies, boosting the efficiency and wages of less-skilled local employees, the authors said.

Sounds better than kids at school sucking arse:

It can start with a visit to a secluded island off Colombia, like the sojourn that more than half of Stanford’s incoming MBAs spent last August. Or a weekslong trek in Australia and New Zealand, another in Dubai and Abu Dhabi, a foray to Thailand’s bays, and a stop in Munich for Oktoberfest—excursions taken this academic year by students at the University of Pennsylvania’s Wharton School. Plus countless ski trips—to resorts in Park City, Utah, Aspen, Colorado, and Lake Tahoe—that draw students for a weekend off, or more, from their studies at elite MBA programs across the country.

Travel to far-flung destinations and to swanky enclaves closer to home has become a hallmark of elite U.S. business schools, where the point of two years on campus can seem to be to spend as much time away from campus as possible. The better the school, apparently, the higher the premium on travel and fun: Students at top-tier business schools spend thousands of dollars each year on discretionary expenses and tend to spend considerably more than their peers at lower-ranked schools, according to Bloomberg Businessweek data.

Building friendships with the next generation of executives may be a worthy investment, but it’s not cheap.

You’d think more of them would have learned from stories about the ‘fast set’ in English university novels, but think again! The closest a millennial gets to literature is a video about a cat named Tom Jones, intensive research convincing them that it was named after a singer.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 18bp, FixedResets up 11bp and DeemedRetractibles gaining 2bp. The performance highlights table is short, by recent standards. 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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.70 to be $0.87 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is bid at 17.00 to be $0.50 cheap.

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Another excellent fit, but the numbers are perplexing. 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).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.70 to be $0.60 rich, while MFC.PR.H, resetting at +313 on 2017-3-19 is bid at 26.08 to be $0.37 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.67 to be $0.50 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.71 and appears to be $0.84 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 16.72, looks $0.96 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.54 and is $1.03 rich.

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All the break-even rates are scattered around negative 10bp – the market has started believing the deflation story again!

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:

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

Assiduous Reader B let me know that the Financial Post breathlessly informs us that FixedResets went down in January.

The Greek tragedy is headed for a showdown:

Euro region finance ministers failed to reach an agreement on how to keep bailout funds flowing to Greece and will resume talks next week.

“We covered a lot of ground but didn’t actually reach a joint conclusion on how to take the next steps,” Eurogroup Chairman Jeroen Dijsselbloem said at a press conference in Brussels. “There has to be a political agreement on the way forward.”

Earlier, four euro region officials said that ministers were moving toward an agreement on a bailout extension. A Greek official then said that no agreement had been made and the government won’t accept an extension of the existing bailout program.

Canadian Western Bank, proud issuer of CWB.PR.B, has sold its insurance subsidiary to Intact Financial, proud issuer of IFC.PR.A and IFC.PR.C:

Canadian Western Bank Group (TSX: CWB) today announced a refinement to its long-term growth strategy with a definitive agreement to sell its property and casualty insurance subsidiary, Canadian Direct Insurance (CDI), to Intact Financial Corporation (Intact) for $197 million in cash. The purchase price is approximately 2.5 times the net book value of CDI as at October 31, 2014. The transaction is subject to customary closing conditions, including regulatory approvals. The closing date is expected in mid-2015.

“This transaction is the result of a purposeful strategic assessment that we started over a year ago,” said Chris Fowler, CWB’s president and chief executive officer. “Our strategic direction is to increase the depth and breadth of client relationships through a focus on our core business banking platform with complementary financial services in personal banking, equipment finance and leasing, alternative mortgages, wealth management and trust services. These core areas provide the best opportunities to drive meaningful future growth and build long-term value for CWB shareholders, while the insurance business is much less strategically aligned. We believe this opportunity to monetize and redeploy the significant value created by CDI into our identified core areas will generate superior returns for CWB shareholders moving forward.”

“Upon closing, we estimate the capital generated from the expected gain on sale from this transaction will increase CWB’s common equity Tier 1 ratio by approximately 60 basis points. The gain will also drive considerable outperformance relative to our published 2015 key profitability targets and growth in earnings per common share. However, the resulting elevated capital level is expected to constrain our 2015 return on common shareholders’ equity from continuing operations. As stated, it is our intention to redeploy this capital in due course for strategic and accretive opportunities that are consistent with our risk appetite. This capital level will position us to move quickly on investment opportunities as they materialize. Our primary areas of interest for potential strategic acquisitions are centred on opportunities in equipment finance and leasing, and wealth management.”

DBRS regards the transaction as credit-neutral for CWB.

There was a pullback for the Canadian preferred share market today, with PerpetualDiscounts down 19bp, FixedResets losing 22bp and DeemedRetractibles off 7bp. There is yet another lengthy Performance Highlights table, dominated by losing FixedResets. Volume was average.

PerpetualDiscounts now yield 4.96%, equivalent to 6.45% 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 270bp, a narrowing from the 280bp reported February 4.

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 24.90 to be $1.20 rich, while TRP.PR.A, resetting 2019-12-31 at +192, is bid at 19.75 to be $0.66 cheap.

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Another excellent fit, but the numbers are perplexing. 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).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.80 to be $0.34 rich, while MFC.PR.H, resetting at +313 on 2017-3-19 is bid at 25.91 to be $0.50 cheap.

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The cheapest issue relative to its peers is BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 18.06 to be $0.53 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.95 and appears to be $1.07 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 17.00, looks $0.97 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.97 and is $1.16 rich.

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All the break-even rates are scattered around negative 10bp – the market has started believing the deflation story again!

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:

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

In Soviet Russia, television watches you! Also Japan:

Samsung Electronics Co. said its televisions can transmit user data to third-parties, becoming the latest technology company to face a backlash for how data is collected from users.

The world’s biggest maker of TVs said its Web-connected sets can collect private conversations when users activate its voice-recognition function. Consumers can turn the function on or off at any time, the Suwon, South Korea-based company said in an e-mailed statement.

It’s nice to see a bit more solar-energy-to-fuel proof of concept:

Photovoltaic cells have considerable potential to satisfy future renewable-energy needs, but efficient and scalable methods of storing the intermittent electricity they produce are required for the large-scale implementation of solar energy. Current solar-to-fuels storage cycles based on water splitting produce hydrogen and oxygen, which are attractive fuels in principle but confront practical limitations from the current energy infrastructure that is based on liquid fuels. In this work, we report the development of a scalable, integrated bioelectrochemical system in which the bacterium Ralstonia eutropha is used to efficiently convert CO2, along with H2 and O2 produced from water splitting, into biomass and fusel alcohols. Water-splitting catalysis was performed using catalysts that are made of earth-abundant metals and enable low overpotential water splitting. In this integrated setup, equivalent solar-to-biomass yields of up to 3.2% of the thermodynamic maximum exceed that of most terrestrial plants. Moreover, engineering of R. eutropha enabled production of the fusel alcohol isopropanol at up to 216 mg/L, the highest bioelectrochemical fuel yield yet reported by >300%. This work demonstrates that catalysts of biotic and abiotic origin can be interfaced to achieve challenging chemical energy-to-fuels transformations.

The US might be getting tough on other countries’ ‘Strong Dollar’ policies:

“I honestly reject the notion that I’m talking down the dollar,” Mr. Poloz said. “I reject the notion that we’re being purposeful about that.”

His comments came as the United States went on the offensive against countries slashing interest rates to make their exports more price-competitive, which it sees as a threat to U.S. growth as investors pile into the greenback amid the tide of monetary policy cuts in numerous major economies. U.S. Treasury Secretary Jack Lew issued a stern warning at the G20 meeting against using rates to drive currencies down at the expense of the United States, while Washington unveiled legislation that would treat “currency manipulation” as a form of trade subsidy that would face retaliatory U.S. import taxes. It suggested the emerging currency war could escalate into a trade war, which would pose a serious threat to the faltering global recovery.

There’s little doubt that currency devaluation was the goal of some of the recent rate cuts. When Australia lowered its key rate last week, central bank Governor Glenn Stevens said that the Australian dollar was overvalued and that “a lower exchange rate is likely to be needed to achieve balanced growth in the economy.” Rate cuts in Denmark and Switzerland were explicitly intended to cool their currencies.

Currency manipulation would be naughty:

Group of 20 finance chiefs stood by a two-year pledge not to resort to currency devaluations to spur economic expansion, signaling ease with the dollar’s recent surge and declines in the euro and the yen.

“We will stick to our previous exchange rate commitments and will resist protectionism,” the G-20s finance ministers and central bankers said in a statement after the talks ended.

The rationale for the bill is mercantilist. Consumers be damned!

Fred Bergsten, former U.S. Treasury assistant secretary for international affairs, said the bill would probably not have a huge effect on trade flows, but it was important to send a signal that currency manipulation would not be tolerated.

“Currency manipulation is the number one protectionist issue of the 21st century,” he said.

Bergsten and colleagues at the Peterson Institute for International Economics say trading partners’ currency manipulations have driven up the U.S. current account deficit by $200 billion to $500 billion per year, leading to the loss of 1 million to 5 million jobs.

But it’s clear that currency manipulation will draw attention from idiots, with unforeseen and uncared about consquences:

Some of the world’s biggest currency dealers are preparing to charge clients for trades at benchmark rates, according to people with knowledge of the matter.

Barclays Plc, Deutsche Bank AG, and JPMorgan Chase & Co. have told customers in recent weeks they may start charging fees for trades executed at the WM/Reuters rates, including the 4 p.m. London fix, said the people who asked not to be identified because the discussions are private. Citigroup Inc. is weighing similar plans, one of the people said.

The move follows a September report from the Financial Stability Board, a body made up of global regulators, which recommended banks introduce a transparent pricing mechanism on such trades to remove the incentive for dealers to manipulate the benchmark to make a profit. Clients have until now been able to trade at the WM/Reuters rates at no charge.

I don’t get it, frankly. How is this supposed to work? Is the idea that everybody puts in an order at the time of the fix, and the price does what it likes? Just like Lapdog Carney’s mum does when she’s buying 100 shares of BCE? Nobody, anywhere, is going to work an order and parcel it out through the day and try to make a dollar by getting good prices? Or is the fix going to be set by some committee of Wise Regulators, who will of course receive an honorarium, a mere trifle I assure you, for their acuity in being able to set a price to six decimal places without any of this ‘free market’ crap? How will an imbalance be avoided?

Maybe the Grexit is a big conspiracy by Illuminati members:

Currency volatility increased along with the dollar as Germany and Greece head for a showdown that is spurring traders to take out insurance against euro declines.

The premium to protect against a drop in the euro versus the greenback rose to the highest since Jan. 23 — the day after the European Central Bank announced it would buy sovereign bonds — before Greece’s official creditors hold an emergency meeting. A gauge of the dollar closed at its highest level in data going back to 2004 as comments from regional Federal Reserve presidents suggested policy makers could raise interest rates by mid-year.

“The outcome of the Greek bailout saga is highly uncertain,” said Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland. “You’ll get pre-positioning and repositioning after the event, depending on whether it’s a positive or negative surprise. It might cause some volatility,” and that would support dollar buying, he said.

Speaking of idiotic moronization of the capital markets, the SEC’s going to fix up bond trading:

“We spend a lot of time on equities, when there is a greater amount of efficiency,” Stephen Luparello, the Securities and Exchange Commission’s director of trading and markets, said Tuesday at a Investment Company Institute conference in New York. “We spend less time on fixed income, when there is a greater amount of inefficiency.”
…
The SEC last year outlined a sweeping agenda to improve transparency in the $24 trillion U.S. stock market, including giving investors more information about how their orders are filled. By comparison, the SEC has outsourced many fixed-income reforms to groups such as the Financial Industry Regulatory Authority.

Finra and the Municipal Securities Rulemaking Board have proposed requiring that brokers disclose markups on bonds they hold for no more than one day. While stock brokers must tell investors how much they earn, the same hasn’t been required of bond dealers, which have profited from an opaque market where most trades are completed by telephone.

It was another good day for the Canadian preferred share market, with PerpetualDiscounts gaining 17bp, FixedResets winning 27bp and DeemedRetractibles up 18bp. The Performance Highlights table is lengthy, but not as lengthy as it has been lately, suitably dominated by winning FixedResets.

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 24.58 to be $0.82 rich, while TRP.PR.A, resetting 2019-12-31 at +192, and TRP.PR.C, resetting 2016-1-30 at +154, are bid at 20.00 and 17.06, respectively, to be $0.43 cheap.

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Another excellent fit, but the numbers are perplexing. 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).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 25.00 to be $0.60 rich, while MFC.PR.H, resetting at +313 on 2017-3-19 is bid at 25.91 to be $0.44 cheap.

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Here’s another good fit to reasonable numbers (it’s the scale that makes it look so awful!). I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 22.00 to be $0.50 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.71 and appears to be $0.77 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 17.00, looks $0.85 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.65, and is $0.93 rich.

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All the break-even rates are scattered around zero – which is at least somewhat more reasonable than being negative!

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?

The major strength of capitalism is that people will make and sell what other people want. The major weakness of capitalism is that sometimes the appeal is not in the actual product. The random nature of mutual fund fees is basically a truism:

It seems reasonable to believe that investors would be willing to pay more if they received a higher rate of return. However, expense ratios and turnover are negatively correlated with return (Carhart, 1997; Dellva & Olson, 1998; O’Neal, 2004). Funds with low expense ratios outperform those with high expense ratios (Haslem, Baker, & Smith, 2008). Similarly, lower performing fund have higher fees, and high-quality funds do not charge comparatively higher fees (Gil-Bazo & Ruiz-Verdu, 2008). In general, mutual funds underperform by about the amount of fees and expenses (Carhart, 1997; Fama & French, 2008).
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Mutual funds on average underperform benchmarks by approximately the amount of fees and expenses (Fama and French, 2008). As a result of lower expenses, broad index funds tend to outperform actively managed funds with equivalent risk (Malkiel, 2003). Therefore, the best way for most investors to improve performance is to have a broad index fund with minimal costs (Malkiel, 2003).

Do consumers tend to follow this advice? Mahoney (2004) finds that mutual funds with low fees tend to be larger than funds with high fees, suggesting that many investors follow the wisdom of minimizing expenses. However, such investments in a broad market index fund do not necessarily coincide with low costs. For example, S&P 500 index funds are designed to follow the index and should be relatively similar. As a result, investors should seek the lowest costs for such funds. Surprisingly, returns vary by 2% per year, and expense ratios range from 6 bps to 135 bps per year (Elton, Gruber, & Busse, 2004). Even though less expensive alternatives exist, S&P fund investors also buy funds with loads and funds that spend more on marketing (Elton et al., 2004).

As noted above there is great emphasis on marketing:

Once invested in a high expense fund, investors may be less willing to search for lower cost alternatives. With thousands of mutual funds offered by hundreds of fund families, sorting through the choices is daunting. Sirri and Tufano (1998) contend that when search costs are high, individual investors turn to rating services and periodicals for advice. They document that fund flows relate directly to the size of the fund complex and level of media attention received by the fund. Since most mutual fund advertising focuses on past performance rather than cost, funds that spend disproportionately on marketing and distribution will tend to attract the less knowledgeable investors that rely on these publications.

This marketing-that-misses-the-point has spread to universities:

Harvard University said applications for this fall’s freshman class jumped 9 percent, to a record 37,305, after the school heightened recruiting on social media and publicized a $150 million gift mostly for financial aid.

Harvard joins six of eight Ivy League schools announcing more hopefuls this year, suggesting their admit rates may decline when decisions are announced next month. Columbia, Princeton, Brown and the University of Pennsylvania also reported records.

Colleges say they are increasing marketing efforts to reach top students, especially those from underrepresented groups. Some high school advisers wonder whether the institutions are trying to buff up their images of selectivity.

This has not gone unnoticed:

Colleges also boost applications by deluging students with brochures and book-length “viewbooks” featuring attractive students and famous alumni. Further tactics have included waiving application fees, making essays optional, and counting incomplete entries in application statistics. Colleges track down kids after buying names of students after they take SAT or ACT college entrance exams. Taking the bait isn’t cheap: Colleges typically charge from $50 to $75 to apply.

A survey last year of 1,500 university deans and high school counselors by the National Association for College Admission Counseling reported concern about a shift toward a “sales culture in college admission.” Non-emergency deadline extensions are the latest example, according to David Hawkins, the trade group’s executive director for policy.

Bloomberg’s got its own marketing to do … the phrase “sales culture” appears in the press release announcing the availability of survey report but not in the report itself.

But the report gets close enough:

College admission has become big business over the last decade. At some schools, vice presidents of enrollment oversee multi-million dollar admission budgets and hire high-priced marketing consultants to improve brand recognition and manage search campaigns. Our national conferences resemble trade shows, with massive vendor halls and corporate sponsors. Institutional pressures have increased in this competitive and public admission environment, leading to a shift in how admission offices operate. Institutional interest in selectivity and rankings can influence decisions on recruitment and review strategies.

This has bothered me for quite some time, and has come to a head with a report on Colby College:

Maine’s Colby College, founded in 1813, doubled its debt load last month by borrowing about $101 million for athletics, performing arts and other upgrades on its campus in Waterville. The plans reflect the ambitions of David Greene, the school’s president since last year, who’s seeking to boost applications and improve its standing in national rankings.
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“There is a tremendous risk taking on debt to build facilities that don’t serve the educational goals and are just to attract a particular type of student,” said David Bergeron, a vice president in Washington at Center for American Progress, a nonprofit that promotes access to higher education. “The bigger concern is that all of these efforts just lead to greater expense.”

This is craziness and just adds to the problem of student loan debt, which is beginning to have a significant economic effect as discussed on December 10, 2014. But it’s a crazy world.

The US Treasury is extending term:

As the insatiable demand for Treasuries pushes down yields, the U.S. has locked in low-cost financing for years to come by issuing more long-term debt. The average maturity of Treasuries is now poised to reach an all-time high this year.

The shift is saving money for American taxpayers — but it’s also made Treasuries more perilous for bond investors as the strength of the U.S. economy bolsters the Federal Reserve’s case for raising interest rates. Holders stand to lose about $570 billion if yields rise by a percentage point, data compiled by Bloomberg show. In 2009, it was $170 billion.
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The 30-year bond, the longest maturity security issued by the Treasury, returned 29 percent, double that for U.S. equities. The rally accelerated in 2015, pushing down yields to a record-low 2.22 percent on Jan. 30.

A year ago, yields were closer to 4 percent.
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Treasuries due three years or less make up 48 percent of the market for U.S. debt, versus 58 percent six years ago.

The share of bills, due in one year or less, is approaching the least since the 1950s.

That’s given the U.S. more time to repay its obligations. The average maturity has reached 68.7 months, or two months short of its high in 2001. With the U.S. budget deficit falling to a six-year low, the government is in better shape to finance its record debt burden when interest rates do rise.

The U.S. pays less in interest now than it did in 2008, even after the amount of U.S. debt outstanding more than doubled to $12.5 trillion.

There has been some echo of this in Canada:

In the 2012–13 Debt Management Strategy, the Government announced a temporary increase in 10-year bond issuance through an additional 10-year bond auction in the first quarter of 2012–13 and the discontinuation of regular bond buyback operations on a cash basis for the 10-year sector.

In September 2012, the Minister of Finance announced that a further $10 billion of issuance would be temporarily reallocated into 10- and 30-year nominal bonds (split 75/25 per cent) over a two-year period. Details were provided in a market notice accompanying the Quarterly Bond Schedule for the third quarter.[1]

These adjustments are advantageous and prudent because they contribute to a reduction in refinancing risk at a low cost, consistent with the key objectives of the Government’s medium-term debt strategy.

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.. and in 2013-14:

In 2013–14, there was a further transition towards a more even distribution of market debt by remaining term to maturity to help reduce exposure to debt rollover risk. As projected in the Debt Management Strategy for 2013–14, the stock of treasury bills declined mainly as a result of about $42 billion of mortgage-backed securities purchased under the IMPP maturing in the latter half of 2013–14. The increase in the stock of bonds with remaining terms to maturity of 10 years or more reflects the temporary increase in longer-term issuance first announced in Budget 2012 and confirmed again in Budget 2013 (see Chart 2).

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How the mighty have fallen! Sprott is accentuating its survivor bias:

Sprott Inc. has abruptly shuttered one of its hedge funds after it was hammered by the Swiss National Bank’s shocking mid-January decision to drop its currency peg to the euro.

The Sprott Absolute Return Income Fund, launched in Aug. 31, 2010, had $21-million in assets under management and a stated investment objective to “maximize absolute total returns on investments with low volatility” primarily by investing in fixed income securities, currencies and derivatives. It had just enjoyed a solid 2014, generating an 11.6-per-cent return – well in excess of the main hedge fund indexes – when disaster struck on Jan. 15.
…
Its managers had staked 10 per cent of the fund’s assets selling a Euro-Swiss franc put, an option that would generate value for the fund as long as the Swiss central bank held to the currency peg.
…
Sprott closed out the position at a huge loss: by the end of January, the fund’s assets under management had fallen by 17.8 per cent over the month, almost entirely due to the euro-Swiss franc put bet gone bad. By contrast, the index which tracks similar hedge funds, the HFRX Absolute Return Index, posted a 0.6 per cent gain.

Another media favourite is beating his breast and flaunting crocodile tears:

Famed investor Jeremy Grantham is still kicking himself for missing out on one of the more lucrative trading opportunities in recent years – buying put options on oil in 2014.

The sharp decline in crude prices was both inevitable and predictable, because global demand was not growing fast enough to absorb the increased supply coming from U.S. frackers, Mr. Grantham writes in his latest quarterly letter to institutional clients
…
He exclaims: “How on Earth did I miss this!” Psychologists might label this a classic case of hindsight bias – the tendency to regard market-shifting developments as entirely predictable.

If you can’t actually foresee anything, the next best thing is to tell your clients that to a person of your calibre it should have been obvious. But I’ve had a look at Grantham’s firm’s performance – well, he’s better than the average stockbroker, anyway. No more than that.

Longevity risk is getting more important all the time:

AT&T Inc. last month absorbed a $7.9 billion non-cash charge from rising pension costs, including retirees’ longer lifespans. At Northrop Grumman Corp., updated mortality estimates boosted its pension obligations by $1.8 billion to $30.5 billion, while shareholders in International Business Machines Corp. saw their equity shrink by around $6 billion after the company recalculated its pension bill, in part because of the mortality changes.
…
In September, Motorola Solutions Inc. cut its pension obligations by $4.2 billion by transferring responsibility for 30,000 retirees to Prudential Financial Inc. and offering others lump sum payments. Now, if Motorola retirees live longer, Prudential will be on the hook, not their former employer.

Dozens of additional deals are likely this year. In a MetLife Inc. survey of 228 pension plans, 29 percent said they are considering similar transactions over the next two years.

Demand for such pension risk transfer deals eventually will eclipse the insurance industry’s capacity and provide an opening for investment banks to sell securities known as “death derivatives,” some experts say.
…
The trigger for corporate pension plans to update their lifespan assumptions was the October release of new mortality tables from the Society of Actuaries in Schaumburg, Illinois. Starting in 2009, society researchers pored over private pension plan data on 220,000 deaths and 10.5 million life-years, said Dale Hall, the society’s managing director for research.

The new estimates, the first update since 2000, were designed to provide more realistic guidance for plan sponsors who have generally done a poor job of keeping pace with the steady improvement in life expectancy in recent decades.

A 65-year-old male now can expect to live 21.6 additional years, two years longer than in the old tables.

Publication of the new tables — a standard reference for plan sponsors — began having a financial impact in fourth-quarter earnings statements.

That’s a double whammy for some:

U.S. public pensions reported median returns of 6.8 percent last year, the sixth year in a row of gains after the financial crisis, according to Wilshire Associates.

The gains, though, are less than the annual investment returns of 7.5 percent to 8 percent that many state and local governments count on to pay benefits for teachers, police and other employees. In the 10 years through Dec. 31, public pensions had a median return of 6.6 percent.
…
Assets of the 100 largest U.S. public pension funds rose to $3.31 trillion in the third quarter of 2014 from $3.06 trillion in the same period of 2013, according to the U.S. Census Bureau. The average funding of state and local pensions has deteriorated even though investment returns have improved, partly because of inadequate contributions by governments, according to a report last year from Moody’s Investors Service on the 25 largest public plans. Unfunded liabilities tripled to almost $2 trillion from 2004 through 2013.

Nationwide, state and local pensions had a median allocation of 45.4 percent in U.S. stocks and 13 percent in foreign stocks, according to Wilshire’s Trust Universe Comparison Service.

Greece is planning to borrow now, default later:

Greece will seek about 10 billion euros ($11.3 billion) in short-term financing as it tries to stave off a funding crunch while buying time to push its creditors to ease austerity demands.

Greece’s Finance Minister Yanis Varoufakis will present a proposal at a Wednesday meeting of euro area finance ministers in Brussels that will ask for an 8 billion-euro increase in the stock of Treasury Bills the country is allowed, said a government official who asked not to be named as the negotiations are confidential. It will also seek the disbursement of 1.9 billion euros of profits that euro area central banks made on their Greek bonds holdings.
…
Investors are less enthusiastic. Greek government bonds fell for a fourth day on Feb. 9, with yields on three-year notes jumping 308 basis points to 21.08 percent, while bank stocks fell 12.2 percent in the Athens Stock Exchange.

And here’s some more proof that millennials are useless:

Click for Big

Note that the figures represent the percentage of respondents who have personally observed this behaviour, not the percentage of parents who indulge. Respondents were 725 employers who responded to the Michigan State University’s 2006-2007 recruiting survey.

It was another good day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets winning 22bp and DeemedRetractibles up 10bp. The Performance Highlights table is lengthy again, dominated by winning FixedResets. 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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.33 to be $0.85 rich, while TRP.PR.A, resetting 2019-12-31 at +192, is bid at a very suspicious 19.00 (with an enormous spread) to be $1.23 cheap.

Click for Big

Another excellent fit, but the numbers are perplexing. 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).

Most expensive is MFC.PR.J, resetting at +281 on 2018-3-19, bid at 25.45 to be $0.27 rich, while MFC.PR.K, resetting at +222 on 2018-9-19, is bid at 23.62 to be $0.50 cheap.

Click for Big

Here’s another good fit to reasonable numbers (it’s the scale that makes it look so awful!). I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.68 to be $0.45 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.34 and appears to be $0.68 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 17.00, looks $0.86 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.63, and is $0.96 rich.

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All the break-even rates are scattered around zero – which is at least somewhat more reasonable than being negative!

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?

Jobs, jobs, jobs!

The U.S. labor market leaped forward in January, capping the greatest three-month jobs gain in 17 years and delivering the biggest wage increase since 2008.

Payrolls advanced by 257,000 last month following increases in December and November that were even bigger than previously reported, figures from the Labor Department showed Friday in Washington. The unemployment rate rose to 5.7 percent from 5.6 percent as more than a million Americans streamed into the labor force seeking work.
…
Average hourly earnings jumped 0.5 percent, the most since November 2008, from the prior month. They were up 2.2 percent over the past year, the biggest advance since August.
…
A striking aspect of the report was a revision that added 147,000 jobs to the payroll tally for the previous two months, which also incorporated adjustments back to 2010.

Employment in November was revised up to a 423,000 gain, the most since May 2010. Private payrolls, which exclude government agencies, soared 414,000 that month, the biggest advance since September 1997.

Job gains in January were led by retailers, construction firms and health-care companies.

So, previously scheduled deflation has been cancelled:

After the jobs report, traders pulled forward their expectations for when the Fed will raise borrowing costs from near zero, where they’ve been since 2008. Futures contracts show a 27 percent chance of a June rate increase, up from 18 percent on Thursday.

It’s not just the labor market that’s giving ammunition to to the view that higher rates are coming. Oil is also headed for its biggest two-week rally since March 1998, alleviating concerns that the commodities drop will ruin the U.S. outlook.

The bond market is now pricing in annual inflation of 1.49 percent for the next five years, up from 1.07 percent just a month ago, according to break-even rates on Treasury Inflation Protected Securities. That’s a lot closer to the Fed’s 2 percent target.

At the same time, derivatives traders still don’t see the economy strengthening enough to compel the Fed to raise its benchmark rate above 2 percent by the end of 2018. The Fed’s longer-run forecast for rates is about 4 percent.

Canada was not left out – McJobs, McJobs, McJobs!

The Canadian economy created a greater-than-expected 35,400 jobs last month, fuelled by growth in part-time positions, the self employed and Alberta’s non-energy sector.

The country’s unemployment rate fell to 6.6 per cent in January from 6.7 per cent a month earlier, Statistics Canada said Friday.

The gains topped forecasts and show some resilience in the face of lower oil prices and weakening business investment. But some of the details were weaker, showing part-time work and self employment led last month’s gains while the country’s participation rate remains at its lowest level since 2000.
…
In the last year, full-time employment has risen 0.8 per cent and part-time climbed 0.6 per cent. The total number of hours worked is slightly higher, up 0.3 per cent.

The numbers come after Statscan recently revised its estimates for job growth in 2014. Employment gains were the slowest since 2009 last year, at 121,000, a third lower than the originally estimated increase of 186,000.

Canada’s participation rate was unchanged at 65.7 per cent last month.

So, given that future Canadian jobs will depend on demand for domestic staff in the States, the dollar fell:

The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, declined 0.8 percent to C$1.2529 per U.S. dollar at 2:52 p.m. in Toronto. One loonie buys 79.82 U.S. cents.
…
Canada’s currency depreciated 1.8 percent on Jan. 21 after the central bank trimmed its main rate to 0.75 percent from 1 percent. On Jan. 30 it touched C$1.2799 per U.S. dollar, the lowest level in nearly six years, part of the currency’s worst monthly start to a year in Bloomberg records going back to 1971.

Bank of Canada policy makers next meet March 4, with swaps traders seeing 60 percent chance they will cut the rate to 0.5 percent, according to Bloomberg calculations based on trading in overnight index swaps. Yesterday, the odds were 64 percent.

But we’re doing better than Greece!

Standard & Poor’s cut Greece’s long-term sovereign credit rating to B– from B on Friday, warning that liquidity restraints on Greek banks would limit the time the new government has to clinch a deal with its creditors.
…
“Liquidity constraints have narrowed the time frame during which Greece’s new government can reach an agreement with its official creditors.”

The rating agency said both Greece’s long and short-term ratings remained on creditwatch negative, meaning they could be lowered again, and warned that drawn out talks could produce a worsening economic situation in the country.

“A prolongation of talks with official creditors could also lead to … deposit withdrawals and, in a worst-case scenario, the imposition of capital controls and a loss of access to lender-of-last-resort financing, potentially resulting in Greece’s exclusion from the Economic and Monetary Union.”

I couldn’t find a news story on it – stories on Canada bonds are rare – but yields popped today CBID:

2 Year 0.49%
5 Year 0.78%
10 Year 1.45%
30 Year 2.03%

Which can be compared to the BoC’s numbers as of yesterday:

2 Year . 0.43%
5 Year 0.68%
10 Year 1.35%
30 Year 1.94%-ish

The Canadian preferred share market did very well again today, with PerpetualDiscounts and DeemedRetractibles both gaining 4bp and FixedResets up 65bp. The Performance Highlights table is suitably lengthy, suitably dominated by winning FixedResets. Volume was slightly 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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.32 to be $0.75 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is bid at 16.90 to be $0.57 cheap.

Click for Big

Another excellent fit, but the numbers are perplexing. 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).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.20 to be $0.41 rich, while MFC.PR.H, resetting at +313 on 2017-3-19, is bid at 25.80 to be $0.49 cheap.

Click for Big

Here’s another good fit to reasonable numbers (it’s the scale that makes it look so awful!). I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.63 to be $0.45 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.25 and appears to be $0.57 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 17.00, looks $0.87 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.73 after poor performance on the day, and is $1.11 rich.

Click for Big

All the break-even rates are scattered around zero – which is at least somewhat more reasonable than being negative!

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?

Despite the best efforts of the Europeans to prohibit criticism, DBRS placed Greece on Review-Negative:

DBRS, Inc. has today placed the Hellenic Republic’s long-term foreign and local currency issuer ratings of B and short-term foreign and local currency issuer ratings of R-4 Under Review with Negative Implications.

As defined in EU Regulation 462/2009, amending Regulation 1060/2009 on credit rating agencies, DBRS’s ratings on Greece are subject to certain publication restrictions, as set out in Article 8a of the Regulation, including publication in accordance with a pre-established calendar (see “2015 Planned Publication Calendar for EU Sovereign Rating Reports,” published 19 December 2014). Under Article 8a, deviation of the publication of sovereign ratings from the calendar must be accompanied by a detailed explanation of the reasons for the deviation. While the next scheduled publication date for our ratings on Greece is 12 June 2015, the deviation has been caused by DBRS’s elevated concern over the potential for a deterioration in Greece’s creditworthiness as a result of actions of the new Greek government following the general elections on 25 January 2015, and subsequent developments. Reviews are typically concluded within three months.

With respect to Greece:

If a bridging program can be agreed to at the Eurogroup meeting, there will then be some months of difficult negotiation ahead for Greece and its lenders. With Varoufakis today saying that he did not even reach an agreement to disagree with Schäuble, all parties still have a long way to go to reach the necessary common ground for a sustainable agreement.

Absent that agreement, Greek banks can continue to rely on ELA funding for the moment. (See an explainer here for how ELA works)

If there is a complete breakdown in negotiations, however, it is likely that the ECB will then take the view that the Greek banks will have become insolvent at that point, due to their holdings of Greek debt.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets winning 22bp and DeemedRetractibles up 13bp. Despite the relatively calm index numbers, the Performance Highlights table is quite lengthy, dominated by winning 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

The respite from bad behaviour for the TRP FixedResets is over; TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.30 to be $0.85 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is bid at 16.70 to be $0.48 cheap.

Click for Big

Another excellent fit, but the numbers are perplexing. 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).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.50 to be $0.44 rich, while MFC.PR.H, resetting at +313 on 2017-3-19, is bid at 25.71 to be $0.45 cheap.

Click for Big

Here’s another good fit to reasonable numbers. I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is now BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.49 to be $0.47 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.20 and appears to be $0.66 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 16.90, looks $1.03 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 24.20, and is $1.22 rich.

Click for Big

All the break-even rates are scattered around zero – which is at least somewhat more reasonable than being negative!

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?

The EU is tightening the screws on Greece:

The European Central Bank heaped pressure on Greece’s new government by restricting access to its direct liquidity lines, citing concerns about the country’s commitment to existing bailout pledges.

The decision marks an escalating standoff between Greek politicians and other officials in the euro area. It came hours after new Greek Finance Minister Yanis Varoufakis met ECB President Mario Draghi to garner support for his government’s plans to tear up its 240 billion-euro ($272 billion) rescue package and renegotiate the nation’s debt.

“The ECB today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic,” the Frankfurt-based central bank said in an e-mailed statement on Wednesday. “The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing Eurosystem rules.”

Greek lenders, who since 2010 had been able to access funds from the ECB against junk-rated collateral, must now apply for funding from their national central bank at higher rates. While a similar shut-off occurred briefly in 2012, the government and its creditors are this time at odds on how to proceed and the current move risks precipitating a Greek exit from the euro.

It was a rip-roaring day for the Canadian preferred share market, with PerpetualDiscounts winning 62bp, FixedResets up 57bp and DeemedRetractibles gaining 13bp. The Performance Highlights table is, well, about what you’d expect, heavily dominated by winning FixedResets. Volume was very high.

[Added 2015-2-5]: PerpetualDiscounts now yield 4.94%, equivalent to 6.42% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.6% (!) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 280bp, a significant widening from the 260bp reported January 28.

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

Still a very good fit for the TRP FixedResets; the maximum error is for TRP.PR.E, which resets 2019-10-30 at +235, bid at 23.92 to be $0.43 rich.

Click for Big

Another excellent fit, but this time the numbers are more perplexing. 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).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.34 to be $0.66 rich, while MFC.PR.H, resetting at +313 on 2017-3-19, is bid at 25.66 to be $0.61 cheap.

Click for Big

Here’s another good fit to reasonable numbers. I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is now BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 17.87 to be $0.36 cheap. BAM.PF.B, resetting at +263bp 2019-3-31 is bid at 24.46 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 17.00, looks $0.73 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.70, and is $0.92 rich.

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Three Investment Grade FixedReset/FloatingReset pair are now showing positive break-even average three month bill rates until interconversion!

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?