PrefBlog

There are a few new tidbits of information coming out about the arrest of Navinder Singh Sarao, but nothing worth a complete post. I have updated the posts Scapegoat for Flash Crash Isolated! and Flash Crash: Incompetence, Position Limits, Retail. Seems to me to be a case of stupid people attempting to enforce stupid rules in a stupid manner and ending up with a severe case of stupid. So, yeah, the obvious solution is to toss some petty little clown in jail for thirty years or so. That’s justice.

FRBNY President William Dudley gave a speech Monday titled The U.S. Monetary Policy Outlook and its Global Implications which Bloomberg sumamarizes as ‘inflation will pick up due to oil, rent, jobs and expectations’. I was more interested in his endorsement of mission-creep, which I complained about yesterday:

A second area in which we can and must collectively do better is safeguarding global financial stability. Simply put, we failed to act both early enough and decisively enough to stem the credit excesses that spawned the financial crisis and the Great Recession. While the U.S. was not alone in this shortcoming, given our position in the global financial system we especially should have done a better job. We’ve taken important steps through new legislative mandates and a broader effort to rethink our regulatory and supervisory framework. In particular, systemically important banking organizations must now hold higher amounts of capital and liquidity that are better aligned with their risk profiles and the official sector is making progress in ensuring no financial firm will be too-big-to-fail.

Although this remains very much a work in progress, these efforts should help us to avoid repeating the mistakes of the recent past, and enable us to be more proactive in mitigating potential future vulnerabilities. Of course, we at the Fed are not alone here. Since the recent financial crisis, central banks worldwide have been engaged in a broad rethinking of how to better fulfill their mandates.

So it looks like all the central bankers of the world are going to have to go to stockbroker school: ‘Yes, it looks at first glance as if I’ve made some pretty horrible recommendations that have lost you a lot of money. But if you hadn’t done this and then that had happened, it would have been worse!’ Isn’t risk wonderful? There’s always a worse-case scenario you can point at.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 8bp, FixedResets gaining 6bp and DeemedRetractibles off 18bp. The Performance Highlights table continues to show extreme volatility. Volume was high.

PerpetualDiscounts now yield 5.11%, equivalent to 6.64% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.7%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 295bp,, a slight (and perhaps spurious) uptick from the 290bp reported April 8.

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 22.26 to be $0.41 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.39 cheap at its bid price of 14.42.

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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.I, resetting at +286 on 2017-9-19, bid at 25.06 to be $0.46 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.36 to be $0.69 cheap.

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This fit is actually quite good.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.15 to be $0.50 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.50 and appears to be $0.59 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 15.73, 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 21.01 and is $0.32 rich.

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Investment-grade pairs now predict an average over the next five years of about 0.30%. The DC.PR.B / DC.PR.D pair has reversed yesterday‘s nonsense and has returned to its customary outlier status, with a breakeven rate of -1.41%.

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

It is becoming increasingly fashionable to ascribe another mandate to central bankers:

“Society has given our central bankers worldwide the responsibility for macro-prudential risk, all the risk in the system, not just the risk in the banking system,” Fink said at the Credit Suisse Global Megatrends conference. “I don’t think there is enough talk about what are the costs of the low rate environment to the other components of our global society — pension funds, retirees, savers, and insurance companies.”

[Axa SA’s Henri] De Castries in 2013 called central bank policies a form of “financial repression” that forced savers to rescue the banking system.

A spokesman for Canada’s Ministry of Finance recently endorsed the idea:

Specifically, we use more and better data to assist our financial system monitoring, backed by deeper conversations and models where appropriate, to make more informed judgments about financial stability risks. We’ve added other potential sources of vulnerability, such as the balance sheets of households, companies and banks, to our macroeconomic models.

We’re also making progress toward a better understanding of how monetary policy actions influence risk taking. For example, when a central bank cuts interest rates to cushion the economy from a shock, the hope is that people will borrow more at that lower interest rate and spend more money. What this means is that financial imbalances are a necessary by-product of monetary policy action, especially if the action is prolonged, so these additional adjustment dynamics must be fully taken into account when conducting policy.

Clearly, though, incorporating financial stability into our monetary policy framework remains a work in progress. As a practitioner, it still feels to me like we are adding various rooms onto a house we love, rather than creating a new, elegant and coherent structure. We need to make sure there’s enough flexibility and clarity about the role of financial stability in our monetary policy framework. We need to better understand how macroprudential policies – such as mortgage insurance rules – that are aimed at promoting financial stability interact with monetary policy.
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The Bank has been setting policy with a view to balancing the risks facing both the outlook for returning inflation sustainably to its target, and the risks to financial stability such as those posed by the indebtedness of Canadian households. The sudden drop in global oil prices has increased both risks. The oil-price shock is an important setback in our progress toward full capacity, full employment and stable inflation because it is a net negative for economic growth. And because lower oil prices mean lower Canadian income, the shock will worsen the debt-to-income ratio of Canadian households, thereby increasing financial stability risks.

This is absurd mission-creep, which will lead to yet another layer of unaccountable bureaucrats stifling innovation and competition while bloating the financial system and collecting large pay-cheques.

For example, the reincarnation of King Canute rules in Denmark, holding back the tides of speculators responding to economic reality:

Denmark halted government bond auctions on Jan. 30 as part of a series of steps designed to deter investors from pouring into AAA-rated krone assets. Speculation the central bank may need to abandon its currency peg soared after Switzerland dropped its euro cap on Jan. 15. The International Monetary Fund has since declared Denmark triumphant in its battle against speculators, and said the central bank’s handling of the matter added to its credibility.

The central bank’s acknowledgment that Denmark’s bond market may need some liquidity support follows criticism from some of the country’s biggest institutional investors. PFA A/S, Denmark’s largest commercial pension fund, has said the suspension of bond sales is killing liquidity and creating an “unsustainable situation.”

Meanwhile, the Canadian government cemented the structural deficit:

Canada cut its projected surpluses by C$18 billion ($14.7 billion) over the next five years as the federal government copes with the impact of lower oil prices and seeks to finance new tax cuts ahead of an October election.

Canada’s federal government will post a surplus of C$1.4 billion for the fiscal year that began April 1, ending a seven-year run of deficits, aided by the sale of shares in General Motors Co. and by reducing its buffer for emergencies. Surpluses will grow to as high as C$4.8 billion by 2019 as government income recovers.
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Harper’s almost decade-long, three-term record of wholesale tax cuts has been marred by the run-up of debt totaling almost C$150 billion since the 2008-2009 recession.

Wow, $4.8-billion! I guess the take-away is that we only expect a recession every thirty years or so. Good times!

It was a moderately good day for the Canadian preferred share market, with PerpetualDiscounts winning 31bp, FixedResets gaining 3bp and DeemedRetractibles up 5bp. Volatility continued to be high, as reported on the Performance Highlights table, with FixedResets making up large complements of both winners and losers. Volume was very high, with TRP issues 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 22.30 to be $0.48 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.59 cheap at its bid price of 14.11.

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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.I, resetting at +286 on 2017-9-19, bid at 25.05 to be $0.43 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.55 to be $0.48 cheap.

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This fit is actually quite good.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.13 to be $0.42 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.40 and appears to be $0.54 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 15.65, looks $0.78 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.01 and is $0.32 rich.

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Investment-grade pairs now predict an average over the next five years of about 0.30%. The DC.PR.B / DC.PR.D pair is just a dumb number, since the Toronto Stock Exchange reports a bid of 15.00 for the latter issue, despite the fact that there were no trades today and the close Monday was 20.14. It is not clear whether the idiotic quote is due to the TSX’s peculiar reporting practices or their inadequate supervision of market makers.

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

There are signs of a recovery in US inflation:

The cost of living excluding food and fuel rose 0.2 percent in March for a third month, reflecting broad-based gains in rents, medical care, clothing and used vehicles, a Labor Department report showed Friday in Washington. The University of Michigan said its preliminary consumer sentiment index for April climbed to the second-highest level in more than eight years.
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On a year-over-year basis, consumer prices excluding food and fuel climbed 1.8 percent in March, the biggest 12-month advance since October. Over the past three months, so-called core costs were up at a 2.3 percent annualized rate, the most since June, compared with a 1.6 percent increase in February.

I certainly hope that the costly mission-creep at US universities becomes a political issue:

Most Americans believe people who want to go to college can get in somewhere—they just don’t think they’d be able to afford it, according to a new Gallup-Lumina Foundation poll.

While 61 percent of adults believe education beyond high school is available to anyone who needs it, only 21 percent agree that it’s affordable, according to the poll results, released on Thursday. Some racial groups were much more optimistic than others. Fifty-one percent of Hispanic adults said higher education is still affordable, Gallup found. Just 19 percent of black adults and 17 percent of white adults agreed.
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Tuition at public colleges has risen more than 250 percent over the last 30 years, the two organizations noted. At the same time, financial aid hasn’t kept up. Students have been leaving school with record amounts of debt: In a separate study, Gallup and Purdue University found more than a third of students who graduated college from 2000 to 2014 were saddled with more than $25,000 in loans. Even if Americans believe anyone, in theory, could find their way to a college classroom, they’re not optimistic anyone could pay to stay there.

Assiduous Readers with good memories will remember that S&P warned about financial repression, as discussed on August 31, 2012; that the banks had to jump through hoops to help clients meet the rules, as discussed on September 11, 2012; and that there have been rumblings about a similar effect in Canada, as discussed on October 15, 2013. Now the problem of financial repression is receiving broader attention:

Moreover, Gluskin Sheff + Associates chief economist David Rosenberg pointed out in a note to clients that 80 per cent of the new Treasuries supply over the past year have been bought by foreign central banks, pension funds, insurers, banks, and insurance companies.

These entities, in Mr. Rosenberg’s words, are ones “that need Treasuries, not want them.”

No less an authority than Ben Bernanke, Fed chairman-turned-blogger-turned-hedge fund adviser, concurred that price-insensitive buyers are playing a large role in the market.

“New regulations require banks to hold ample liquidity and securities dealers to post more collateral in derivatives transactions,” he wrote in a recent blog post. “Insurance companies and pension funds also face rules that effectively require them to hold significant amounts of safe, longer-term bonds. This mandated demand seems likely to put downward pressure on longer-term yields for the foreseeable future.”

Bernanke’s blog post is titled Why are interest rates so low, part 4: Term premiums .

What’s a Grecian Urn? Doesn’t matter, it will all be confiscated anyway:

Running out of options to keep his country afloat, Greek Prime Minister Alexis Tsipras ordered local governments to move their funds to the central bank.

With negotiations over bailout aid deadlocked, Tsipras needs the cash for salaries, pensions and a repayment to the International Monetary Fund. Greek bonds fell after the move, pushing three-year yields to the highest since the nation’s debt restructuring in 2012. The order was questioned by local officials and slammed by the leading opposition party.

The decree to confiscate reserves now held in commercial banks and transfer them to the central bank could raise about 2 billion euros ($2.15 billion), according to two people familiar with the decision. It shows how time is running out for Tsipras, a point made by European officials who addressed the matter at IMF meetings in Washington in recent days.

Geez, if I was Greek, everything I owned would be kept in a safe deposit box out of the country.

DBRS takes the view that Hydro One bonds are as good as they always were:

DBRS Limited (DBRS) today notes that the government of the Province of Ontario (the Province, rated AA (low) with a Stable Trend by DBRS) has announced its intention to broaden the ownership of Hydro One Inc. (Hydro One or the Company, rated A (high) with a Stable Trend, wholly-owned by the Province) through an initial public offering (IPO) that could see the Province gradually reduce its ownership in the Company to 40% over the next four to five years. DBRS has reviewed the details of the Province’s announcement together with the final recommendation of the Premier’s Advisory Council on Government Assets (the Council) released on April 16, 2015, and has concluded that the proposal as it currently stands has no material impact on Hydro One’s credit profile.

DBRS rates Hydro One on a stand-alone basis, independent of its ownership structure; however, the ratings are constrained by the rating of the Province, which acts as a ceiling. The Province provides indirect support to Hydro One with a flexible dividend policy which, given the Company’s heavy capital expenditure (capex) program, allows Hydro One to maintain its leverage below the 60% set by the Ontario Energy Board. At the same time, Hydro One’s current ownership structure limits its ability to access the equity markets directly and the Company’s additional funding needs are financed largely through a combination of operating cash flow and debt. Significant external funding is required to finance the Company’s capex program (nearly $5 billion over the next three years) to replace Hydro One’s aging electricity infrastructure. Maintaining adequate access to the public debt markets is therefore critical for the Company. DBRS notes that the proposed partial divestiture of ownership by the Province could provide the Company wider access to capital through the equity markets.

S&P begs to differ:

• •We are downgrading our long-term corporate credit rating on Hydro One Inc. to ‘A’ from ‘A+’. We are also revising our view on the likelihood of extraordinary government support from the Province of Ontario to “moderately high” from “high.”
• •In addition, we are affirming our ‘A-1’ short-term corporate credit and ‘A-1 (mid)’ commercial paper ratings on Hydro One.
• •The stable outlook reflects our view of the relatively stable regulatory regime that we believe contributes to predictable cash flows.

Standard & Poor’s Ratings Services today said it lowered its long-term corporate credit rating on Hydro One Inc. to ‘A’ from ‘A+’. The outlook is stable.

Standard & Poor’s also revised its view of the likelihood of extraordinary support to “moderately high” from “high.”

“These rating actions and revisions are in response to the Government of Ontario’s announcement that it has a clear intention to immediately conduct an initial public offering of 15% of Hydro One and ultimately to sell up to 60%,” said Standard & Poor’s credit analyst Stephen Goltz.
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We believe that the strength and durability of the link between the government and the company have weakened with the government’s announcement of its intention to privatize the majority of Hydro One. Accordingly, based on our criteria, we have revised our assessment of the link between the government and the company to “strong” from “very strong” (see “Rating Government-Related Entities: Methodology And Assumptions,” published March 25, 2015, on RatingsDirect). We continue to assess the role of the company to the government as “important.”

In addition, we have not changed our assessment of the ‘a’ SACP on the company. The sale of Hydro One Brampton Inc. is not material to this assessment.

Regulators will be thrilled to learn that the war on banks is having an effect:

HSBC Holdings Plc will consider whether to move its headquarters from London once the regulatory environment becomes clearer, Chairman Douglas Flint said.

“We are beginning to see the final shape of regulation, the final shape of structural reform and as soon as that mist lifts sufficiently, we will once again start to look at where the best place for HSBC is,” Flint, 59, told a shareholder meeting in Hong Kong on Monday after one investor urged him to quit London.

HSBC, Europe’s largest bank, has faced calls to move its domicile away from the British capital after the government increased the levy on bank’s balance sheets for an eighth time this year. HSBC is hit the hardest by the tax and paid 750 million pounds ($1.1 billion) last year. Both the Labour and Conservative parties have pledged a more onerous tax regime for banks in their manifestos for the May 7 U.K. election.
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Standard Chartered Plc, another British bank that like HSBC makes most of its profit in Asia, is also being urged by Aberdeen Asset Management Plc, its second-largest shareholder, to relocate to Asia because of the cost of being in London.

And now for something completely different:

Signs that prices are starting to firm prompted investors to pile into the iShares TIPS ETF, which is comprised of Treasury Inflation-Protected Securities. Shares of the fund looked like a better bet last week, after the Labor Department reported that March consumer prices excluding food and energy rose by more than expected from last year, and oil prices held above $50 a barrel for 10 days straight.
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The fund attracted $634 million last week, its biggest weekly inflow since it was created in late 2003.
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A market gauge known as the break-even rate, used as a proxy for inflation expectations over the life of five-year TIPS, last week touched the highest level October. The difference between yield on the security and fixed-rate Treasuries of similar maturity reach 1.7266 percent on April 17.

What a difference a day makes! It was a fine day for the Canadian preferred share market, with PerpetualDiscounts gaining 9bp, FixedResets winning 40bp and DeemedRetractibles up 13bp. The Performance Highlights table is suitably lengthy, with a good crop of losers to remind us that volatility remains at extreme levels. Volume was average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.35 to be $0.60 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.82 cheap at its bid price of 13.79.

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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.I, resetting at +286 on 2017-9-19, bid at 25.04 to be $0.48 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.55 to be $0.29 cheap.

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This fit is actually quite good.

The cheapest issue relative to its peers is BAM.PF.A, resetting at +290bp on 2016-9-30, bid at 22.95 to be $0.41 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.45 and appears to be $0.45 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 15.47, looks $0.91 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 20.98 and is $0.36 rich.

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Investment-grade pairs now predict an average over the next five years of about 0.30%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -1.57%.

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

Has deflation been cancelled?

Core consumer prices rose 2.4 percent in March from a year earlier, the most since December 2008, and February retail sales climbed 1.7 percent, Statistics Canada said Friday from Ottawa. Price gains showed up in everything from text messages to fresh meat to cars.

Consumer spending fueled by low interest rates has been among the biggest sources of growth since a recession that started at the end of 2008, with manufacturing and business investment curtailed by weak global demand. Today’s retail figures showed gains in every major category, from a 5.6 percent increase at general merchandise stores to 0.9 percent at automobile dealers.
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Canada’s currency climbed as much as 0.8 percent to C$1.2088 per U.S. dollar, the strongest since Jan. 21. It was down 0.4 percent at 1:36 p.m. in Toronto. Yields on benchmark government two-year bonds rose 5 basis points to 0.63 percent, the third straight increase.

We are told that it is it is hard to find a virtuous woman? for her price is far above rubies [sic]. Sadly, we are never given the salacious details of Ruby’s pricing, but modern market science allows us to infer that a little bit of liquidity, if you know what I mean, helps a lot:

For colored stones, prices often increase with supply as jewelers acquire enough stock to justify marketing the gems to customers. Take regular emeralds: their value has appreciated 1,000 percent in five years as Harebottle’s Gemfields Plc and peers expanded mines, while marketing campaigns fronted by Hollywood star Mila Kunis gave demand a boost.

Now Harebottle wants to bring the same game to rubies. Gemfields’ Montepuez in Mozambique, estimated to contain as much as 40 percent of the world’s known supply of the deep-red stones, could triple output from the 8 million carats targeted for this year, according to the executive.

The potential rewards are compelling. At its first Singapore auction last December, Gemfields sold high-quality rubies for an average $689 a carat, dwarfing the $66 a carat for comparable emeralds. Production growth is underpinned by rising demand in China, where the color red symbolizes prosperity, health and wealth, making rubies an auspicious investment.

Assiduous Reader HS sends me a couple of links (which is more than most of you have ever done). The first is a mainstream report on ENB preferreds and their credit woes:

Over the past two years, Enbridge has come to the market on eight separate occasions with offerings of rate reset preferred shares. The offerings featured a variety of currencies (US$ or C$), coupons (4 per cent or 4.40 per cent) and spreads above five-year Canada bonds — the yield that serves as the base rate for the prefs. The last issue for $200 million was completed last September.
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The Canadian restructuring was viewed as positive for Enbridge’s common shareholders – but not its debt holders. In other words, the drop down in assets wasn’t credit-friendly. Indeed, the pref share ratings are under review.

The restructuring at Enbridge occurred before the preferred share market was hit by the fallout from an unexpected 25 basis points cut in the bank rate made in January.

He also sends a link for a Schwab piece titled The Bond Investor’s Trilemma: Positioning for a Fed Rate Hike. I usually don’t pass brokerage analysis along – waste of time! – but brokerage work is useful for data and charts. In this case, there are three good charts:

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It is interesting that the market is so much more gloomy than the Fed.

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Schwab comments:

Market-based measures of inflation expectations have been edging lower lately, along with actual inflation readings.

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I’m almost getting tired of beating the drum on corporate bond liquidity … but one more time won’t hurt! Schwab comments:

One outgrowth of the financial crisis and its aftermath has been reduced liquidity in the bond market. Since the financial crisis, many banks have reduced their risk-taking and are not making markets in bonds or holding as many bonds as in the past. Consequently, there are fewer buyers and sellers in the market and if you want to sell a bond, you may have a difficult time finding a buyer at a reasonable price, especially during periods of market volatility.

Rob Carrick wrote a fairly lengthy piece in the Globe titled What investors should know about the recent plunge in preferred shares:

But rate resets have been trouble.

Investors clearly bought them with the expectation that the reset would help them tap into a higher yield down the line. Today, however, some of these shares are headed to a reset at a time when rates are at unexpectedly low levels. It all comes down to this: Five-year Canada bonds had a yield around 0.75 per cent at midweek, compared with about 3 per cent five years ago.

You can see the result of this rate decline in Fortis Inc.’s Series H five-year fixed rate reset shares (FTS.PR.H). They currently pay a dividend that yielded 4.25 per cent when issued at a value of $25 per share. The dividend on these shares will be reset on June 1 to produce a dividend yield of 1.45 percentage points above the five-year Canada bond yield. Based on recent bond yields, these shares would, after reset, have a yield of about 2.2 per cent based on the $25 issue price. In dollar terms, the dividend would fall to 55 cents from the current $1.06.

The shares traded this week in the $15.25 range, which meant their yield based on the current $1.06 dividend was 6.9 per cent. Mr. Nagel calculates their yield after the reset at about 3.6 per cent based on this week’s share price and a dividend of 55 cents. No matter how you look at it, investors are going to get less in dividends after the reset. Now, what should they do about it?
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Mr. Nagel lays out the decision on whether to choose the floating rate option like this: Do you want a lower yield now in exchange for the opportunity for increases if interest rates rise over the next five years, or would you prefer to lock in 3.6 per cent? The floating rate option could end up being the most rewarding, he argues. If rates do go up in the five years to come, you’ll benefit in the near term rather than having to wait until the next reset date. With floating rate shares, adjustments are made every three months.

Another thought from Mr. Nagel is to sell all or part of your rate reset preferred shares and put the money into straight preferreds, which pay a fixed dividend. Straight preferreds have benefited a little bit from lower rates – Desjardins data show they were up 2.5 per cent as a group for the year to April 10, while the preferred share universe was down 8 per cent.

Still another possibility would be to switch from preferred shares to dividend-paying common shares. They’ve had a rough go lately as well, but that’s a matter for a future column.

It appears that Mr. Nagel’s thinking has evolved since his exhortations in January, 2010:

On the other hand, if the bond yield is low and it looks like the shares will be reset, the best bet — available in the vast majority of cases — is to convert to floating rate preferred shares, which are usually pegged to the Government of Canada three-month treasury bills plus the spread.

But now market timing and return chasing is the recommended strategy. Market timing achieves the main objective of the investment industry, which is the generation of excessive commissions.

Dividend Growth Split Corp., proud issuer of DGS.PR.A, has been confirmed at Pfd-3 by DBRS:

DBRS Limited (DBRS) has today confirmed the Preferred Shares rating of Dividend Growth Split Corp. (the Company) at Pfd-3. In December 2007, the Company issued approximately 1.5 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). Subsequent to the initial public offering, the Company has completed six follow-on offerings. The total number of Preferred Shares and Class A Shares outstanding currently stands at approximately 18.7 million shares each. The scheduled redemption date for both classes of shares issued is November 28, 2019.
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The net asset value (NAV) of the Company has been volatile since the last rating confirmation in April 2014. As of April 9, 2015, the downside protection available to the Preferred Shares is approximately 45.2%, down from 46.7% on April 3, 2014. The dividend coverage ratio is approximately 0.99 times. The Pfd-3 rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 4bp, FixedResets down 38bp and DeemedRetractibles off 26bp. The Performance Highlights table is predictably dominated by losing FixedResets, but the recent high level of volatility manifests itself in a large number of winners as well – notably a few Enbridge issues. Volume was super-duper very extremely high.

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

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

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.68 to be $1.85 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.88 cheap at its bid price of 13.68.

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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).

Losses by the lower-spread issues have resulted in a sharp decrease in Implied Volatility, which was 17% yesterday and 19% on March 31.

Most expensive is MFC.PR.I, resetting at +286 on 2017-9-19, bid at 25.15 to be $0.47 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.15 to be $0.46 cheap.

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This fit is actually quite good.

The cheapest issue relative to its peers is BAM.PF.A, resetting at +290bp on 2016-9-30, bid at 23.13 to be $0.24 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.51 and appears to be $0.51 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 15.40, looks $1.00 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.05 and is $0.35 rich.

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Investment-grade pairs (including TRP.PR.A / TRP.PR.F, which is no longer an outlier) now predict an average over the next five years of about 0.28%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -1.57%.

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

Aston Hill is looking for a buyer:

Executives at Aston Hill Financial Inc. have been shopping their firm to other asset managers, hoping to find a buyer.

Over the past two months, senior employees at Aston Hill have reached out to several Canadian firms and expressed interest in selling their company, according to multiple people familiar with the discussions.

The overtures have been made at a volatile time for the company, which recently lost a high profile mandate to manage $2.2-billion ‎worth of funds for IA Clarington Investments Inc. which prompted Aston Hill to slash its dividend.

In January 2011, Aston Hill renamed its subsidiary, Catapult Financial Management Inc. to Aston Hill Investments Inc.

Catapult was mentioned on PrefBlog in February 2009 as offering a closed-end actively managed preferred share fund, Preferred Share Investment Trust. This fund now has $68.1-million under management and is still managed by Aston Hill Investments Inc. Performance has been disappointing.

It was another poor day for the Canadian preferred share market, with PerpetualDiscounts off 13bp, FixedResets losing 27bp and DeemedRetractibles down 15bp. The lengthy Performance Highlights table is dominated by losing FixedResets. Volume was extremely high.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 22.96 to be $1.11 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.98 cheap at its bid price of 13.50.

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.J, resetting at +261 on 2018-3-19, bid at 24.30 to be $0.49 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 25.12 to be $0.70 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 19.06 to be $0.56 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.61 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 15.25, 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 21.05 and is $0.46 rich.

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Investment-grade pairs other than TRP.PR.A / TRP.PR.F now predict an average over the next five years of about 0.30%, up marginally on the day. TRP.PR.A / TRP.PR.F remains an outlier, predicting 0.70%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -1.29%.

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

Today’s big news was the Bank of Canada rate decision:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

Total CPI inflation is at 1 per cent, reflecting the drop in consumer energy prices. Core inflation has remained close to 2 per cent in recent months, as the temporary effects of sector-specific factors and pass-through of the lower Canadian dollar have offset the disinflationary forces from slack in the economy.
…
The very weak first quarter has led to a widening of Canada’s output gap and additional downward pressure on projected inflation. However, the anticipated recovery in growth means that the output gap will be back in line with its previous trajectory later this year. Consequently, the effects on core inflation of the lower dollar and the output gap will continue to offset each other. As the economy reaches and remains at full capacity around the end of 2016, both total and core inflation are projected to be close to 2 per cent on a sustained basis.

Risks to the outlook for inflation are now roughly balanced and risks to financial stability appear to be evolving as expected. The Bank judges that the current degree of monetary policy stimulus remains appropriate and therefore is maintaining the target for the overnight rate at 3/4 per cent.

The loonie liked the news:

The Canadian dollar touched its highest level in two months after the central bank kept borrowing rates unchanged, pointing to signs damage from an oil-price shock may already be fading and manufacturing exports picking up.
…
In its monetary policy report, the Bank of Canada said the economy is responding to the stimulus it added to cushion Canada’s economy from the fall in oil, its largest export, and forecast faster growth later in the year.
…
The bank said in its quarterly MPR there were signs of improvement in the labor market and the non-energy exports it is counting on to drive economic expansion, with industries sensitive to a lower exchange rate, like aircraft and industrial machinery, expected to lead growth.

Parakeet Poluz had some good news for the electoral prospects of his masters:

Bank of Canada Governor Stephen Poloz is becoming Canada’s leading optimist projecting a faster return to target on inflation amid a generally improving economy.

Growth will quicken to a 2.8 percent annualized pace in the third quarter, the central bank said Wednesday, exceeding all forecasts in a Bloomberg survey. Poloz kept the benchmark interest rate at 0.75 percent and said the positive side of the story will dominate in the second half, lifting inflation back to the 2 percent target almost a year ahead of schedule.

It’s a stark change from January, when Poloz shocked markets by cutting rates by a quarter point, a move he called “insurance” against the economic damage wrought by collapsing oil prices. He also told the Financial Times last month Canada’s economy was atrocious in the first quarter. The statement released by the bank Wednesday signaled the worst of the oil-price shock may be over, with improvements ranging from early signs of labor-market strength to gains in the non-energy exporting sector.

My favourite SEC Commissioner, Daniel M. Gallagher, had some interesting things to say about supra-national regulatory bodies:

On its face, “regulatory harmonization” sounds like a noble goal: if jurisdictions could coalesce around a single set of high-quality standards, compliance burdens could be reduced with no real reduction of investor protections. Since the crisis, however, “regulatory harmonization” has taken on a new and worrisome meaning. Instead of facilitating cooperation among regulators from different jurisdictions, the concept of “regulatory harmonization” has morphed into a top-down, forcible imposition of one-size-fits-all regulatory standards on sovereign nations by opaque groups of global regulators. This “one world, one government” approach to regulation doesn’t allow itself to be bothered by musty old concepts like national sovereignty or consent of the governed.

In 2009, the G-20 directed the FSB to coordinate the work of national authorities and multinational standard-setting organizations in the development of effective financial services regulation, with an emphasis on promoting financial stability. However, in reality, the FSB has been doing far more than merely coordinate the efforts of national regulators.

Recently, as evidenced by a memorandum to FSB members from its chairman, Bank of England Governor Mark Carney, the FSB has removed all doubt of its real purpose: to direct national authorities to implement the FSB’s own policies.[3] Mr. Carney explained in his memo that the FSB’s decisions must receive “full, consistent and prompt implementation” in member nations, as this “is essential to maintaining an open and resilient financial system.”
…
Let me be clear: I am not calling for the disbanding of international financial regulatory organizations. Rather, we must return these entities to their original pre-financial crisis purposes of facilitating cooperation among regulators from different jurisdictions. The concepts that steered these efforts were regulatory equivalence and substituted compliance. The ultimate goal was for regulators in each jurisdiction to recognize that many of their foreign counterparts had regulatory goals similar to their own, and that their regulatory approaches were of a high quality despite their differences. Indeed, there is usually more than one way to achieve any given regulatory objective, and it’s not always clear which way is “best.”

Having acknowledged that there is more than one way to achieve the same goals, we as regulators could voluntarily choose to deem compliance with a high quality foreign regulatory regime to qualify as a substitute for compliance with our own domestic requirements. In doing so, we could avoid complicated cross-border regulatory disputes and lend greater certainty and predictability to cross-border transactions. By avoiding layered, duplicative, and sometimes incompatible regulations, we could facilitate smoother and more efficient interactions between our respective capital markets, and by allowing and even encouraging heterogeneity of regulation, we could foster robustness and innovation in our capital markets.

The current coercive approach to regulatory harmonization, on the other hand, is flawed as a matter of policy and will become increasingly impractical as the number of nations needing to be coerced grows. It is difficult enough to reach agreement on matters between the U.S. and Europe, despite their many similarities. Other markets, particularly in Asia, the Middle East, and other parts of the developing world, will undoubtedly — and in fact already have — considered going it alone. Others may not have been invited to the party in the first place, and so feel themselves under no obligation to play along.

In an effort to divine the future, Canadian preferred share investors turned to the tarot … two cards kept showing up:

Click for Big

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets off 98bp and DeemedRetractibles gaining 2bp. MFC, FTS and BAM FixedResets were notably prominent on an extremely lengthy Performance Highlights table, while volatility itself was underscored by the fact that there was an observable crop of winners as well. Volume was extremely high.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.50 to be $1.45 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.96 cheap at its bid price of 15.45.

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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.J, resetting at +261 on 2018-3-19, bid at 24.35 to be $0.52 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.12 to be $0.41 cheap.

Horrible performance by the MFC issues today resulted in a marked spread-widening; volatility was hardly affected. Yesterday’s figures were 223bp and 17%.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.07 to be $0.76 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.55 and appears to be $1.11 rich.

Again, horrible daily performance has manifested itself mainly in the spread. Yesterday’s figures were 303bp and 4%.

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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 15.30, looks $0.88 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.01 and is $0.46 rich.

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Investment-grade pairs other than TRP.PR.A / TRP.PR.F now predict an average over the next five years of just over 0.30%, up marginally on the day. TRP.PR.A / TRP.PR.F remains an outlier, predicting 0.89%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -1.11%.

Click for Big

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