PrefBlog

Nothing happened today.

The Canadian preferred share market took another whacking to close the month, with PerpetualDiscounts losing 58bp, FixedResets down 56bp and DeemedRetractibles off 23bp. The Performance Highlights table is suitably horrible. Volume was very 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.B, which resets 2020-6-30 at +128, is bid at 24.56 to be $0.76 rich, while TRP.PR.D, resetting 2019-4-30 at +238, is $0.84 cheap at its bid price of 20.00.

Click for Big

Another good fit today!

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 16.95 to be 0.62 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 20.80 to be $0.79 cheap.

Click for Big

The fit on the BAM issues was particularly horrible today.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.37 to be $1.49 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 23.45 and appears to be $1.30 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 21.40, looks $0.81 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.25 and is $0.84 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of +0.02%, with one outlier above 1.00%. There are no junk outliers.

Click for Big

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

Too bad none of this activity is taking place in Canada. We spend our billions on pipelines to ship the raw material out of the country.:

While the collapse in oil and gas prices since the middle of last year caused energy companies to slash investment in oil wells, Thursday’s report on second-quarter GDP showed an interesting dynamic taking shape — investment in factories has been running full bore.

It may be surprising on the surface, given that manufacturing has simmered down this year on the heels of a weaker global economy, but spending on all types of production facilities increased at a 65 percent annualized pace in the second quarter. That was almost enough to offset a 68 percent plunge in investment in wells and mines that marked the biggest drop in 29 years.

Outlays for factory-related structures jumped even more from January through March — surging at a 95 percent pace. Over the last four quarters, investment in plants increased an average 64 percent, the strongest since records began in 1958.
…
Spending on chemical plant construction in the private sector stood at a seasonally adjusted annual rate of $48.4 billion in May, up almost 10 percent from a month earlier, according to the latest data from the Census Bureau. During the first five months of this year, an unadjusted $15.9 billion was spent on chemical plants, more than double the $7 billion for the same period in 2014.

In another bit of sensible news that is, obviously, not from Canada, electric car owners are being paid for flex-time:

One hundred owners of BMW AG’s i3 hatchback receive $1,000 upfront to participate in Pacific Gas & Electric Co.’s 18-month trial, which starts this week and is confined to the San Francisco Bay Area. Peter Berman, a 70-year-old, semi-retired Los Altos psychologist, was selected from about 400 applicants.

“My understanding is that we’ll get a text message that says ‘Hey, you’re charging your car right now, can you back off for an hour?’” said Berman, who began leasing his $40,000-plus i3 in October. “This is the wave of the future. We can’t continue to be dependent on gas and oil and coal for our energy use. I’m really curious as to how this is all going to unfold.”

The PG&E-BMW pilot is one of myriad experiments under way worldwide as utilities try to anticipate what will happen if (or when) millions of electric vehicles pour onto city streets and highways. Power companies see both challenge and promise. Yes, electric cars could put more pressure on the grid if everyone plugs them in at the same time. But utilities could also tap batteries for backup power when the grid is under strain or temporarily knocked out in an emergency, paying drivers for the electricity harvested from their parked cars.

But how about the Pan-Am Games, huh? Weren’t they something? The memories will distract us from obsessing over the fact that even the Brits are moving ahead of us in ejector bed technology.

I haven’t passed on any drone news in almost a week now, so here’s some more on air traffic control:

The Google concept, called Project Wing, would enable people to get products delivered “in short order,” even in the most populated areas, Dave Vos, the project’s leader, said here today (July 29) at a NASA-sponsored conference on drones. Project Wing was first described publicly in August 2014, when test flights of early prototypes were conducted in Australia, The Atlantic reported.

In order to take to the skies, drones need to not only communicate with people on the ground, but also with other high-fliers that are delivering small packages, taking aerial surveys or doing other work, Vos said.

Key to this vision of a drone-filled future is the use of existing cellular phone infrastructure.

“We don’t need to develop new protocols,” Vos said at the conference.

In his vision, drones would be outfitted with an automatic dependent surveillance-broadcast (ADS-B) receiver that would enable the unmanned fliers to communicate with each other, as well as with ground-based systems. Existing ADS-B systems in aircraft allow them to locate their position using satellites, and then rebroadcast that location to a ground-based station. This type of multi-way communication could enable the drones to avoid obstacles in midflight and fly safely to their destination, Vos said.

A drone equivalent of air traffic control systems will also be needed, Vos said. Google envisions cellular carriers and other private companies collaborating with the Federal Aviation Administration (FAA) to craft a drone air traffic safety system.

Nowadays, of course, there are only two things worth reading: technology news and um, something else, probably. So here’s an insurance industry projection:

A black Volkswagen Golf rolls along at 12 mph on an empty road in the heart of Virginia’s horse country. Suddenly the dashboard lights up, and there’s a warning sound. The driver ignores it. A moment later, the VW brakes hard—all on its own—and comes to a stop a foot in front of an inflated box painted to look like the rear end of a car. The Insurance Institute for Highway Safety (IIHS) has been running tests like this a few times a month at its research center in Ruckersville, Va. The objective is to vet automakers’ latest crash avoidance technologies, like the one in the Golf, to identify the most effective ones.

The auto insurance industry is having its Napster moment. Like record companies at the dawn of online music file sharing, Allstate, Geico, State Farm, and others are grappling with innovations that could put a huge dent in their revenue. As carmakers automate more aspects of driving, accidents will likely plunge and car owners will need less coverage. Premiums consumers pay could drop as much as 60 percent in 15 years as self-driving cars hit the roads, says Donald Light, head of the North America property and casualty practice for Celent, a research firm. His message for insurers: “You have to be prepared to see that part of your business shrink, probably considerably.”
…
For example, a system introduced on the 2013 Honda Accord beeps when cars get too close to traffic ahead or leave their lane without signaling. It has had a measurable effect on the frequency of some types of claims: Bodily injury liability losses dropped 40 percent and medical payments decreased 27 percent, according to a 2014 study of insurance claims data by the Highway Loss Data Institute, IIHS’s sister organization.
…
The bottom line: Insurers collected $195 billion in auto premiums from U.S. drivers last year. By 2030, consumers could pay 60 percent less.

It was a grim day for the Canadian preferred share market, with PerpetualDiscounts losing 82bp, FixedResets down 42bp and DeemedRetractibles off 36bp. Floaters were taken outside and shot. The Performance Highlights table is lengthy. Volume was above average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 21.60 to be $0.58 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.04 cheap at its bid price of 14.90.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.90 to be 0.48 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 24.21 to be $0.39 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 22.22 to be $0.89 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.85 and appears to be $1.27 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 21.41, looks $0.84 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.24 and is $0.84 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of +0.03%, with one outlier above 1.00%. There is one junk outlier, also above +1.00%.

Click for Big

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

The FOMC release was equivocal:

Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey‑based measures of longer-term inflation expectations have remained stable.
…
The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.
…
The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

There was no dissent.

Treasuries eased slightly on the news, but nothing special:

The 10-year note yield rose three basis points, or 0.03 percentage point, to 2.28 percent at 3:04 p.m. in New York, according to Bloomberg Bond Trader data. The benchmark 2.125 percent security due in May 2025 fell 7/32, or $2.19 per $1,000 face amount, to 98 21/32. The yield climbed three basis points on Tuesday.
…
Traders are pricing in a 39 percent probability that the Fed raises rates at or before the September meeting, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff. That compared with a 40 percent probability before the Fed announcement.

The likelihood of a December rate increase was 71 percent, compared with 70 percent.

Meanwhile, Joe Oliver showed who’s boss at the Bank of Canada:

Last week, while addressing questions about Canada’s fragile economy, federal Finance Minister Joe Oliver was asked whether the Bank of Canada should consider using “quantitative easing” to stimulate Canada’s economy. He responded immediately, saying it’s “not on the table.” But whatever the case for the use of this approach to monetary policy, Mr. Oliver should know better than to speak about something clearly outside his purview.
…
Mr. Oliver can play his best role in this complex debate by staying out of it altogether.

The federal government is the sole shareholder of the Bank of Canada, whose governor is accountable to the finance minister and, through him or her, to Parliament.

But the Bank of Canada is also “operationally independent” from the federal government, and this independence is crucial to the bank’s long-term success in maintaining low and stable inflation.

Over many years and across many countries, evidence clearly shows that when elected governments get too involved in the operational details of monetary policy, inflation rises and becomes more volatile.

Mr. Oliver should be talking a lot about the current weakness of the Canadian economy, and also about what he is prepared to do – with fiscal policy – to make the situation better for Canadians. But when he faces questions about monetary policy, he should defer to the bank’s governor. To do anything else is to undermine the bank’s ability to make monetary policy in the best interests of the country.

Trouble is, the BoC is no longer “operationally independent”. That went out the window with Dodge, Chretien and Turner.

There’s some interesting discussion of bond liquidity today … fund managers are holding cash, which is market timing:

Western Asset Management Co., which oversees about $455 billion, has developed a system of ranking securities based on their perceived liquidity to make sure they’ve got plenty of easy-to-sell assets in a pinch. Loomis Sayles & Co. is “comfortable holding higher-than-average reserves, such as cash and high-quality developed market sovereign debt,” according to a report this month.

For funds that are loaded up with hard-to-trade bonds, “it could be a challenge under difficult market conditions to meet very large redemptions” without suffering huge losses, according to Michael Buchanan, Western Asset’s deputy chief investment officer, in a July 20 paper. “Overall the trend is that liquidity will continue to decline.”
…
The silver lining is that these measures taken by investors may end up reducing the risk of a market seizure, both because banks are safer and investors are more prepared. Both Western Asset and Loomis Sayles are planning for a dislocation in which they can be on the other side of the trade, buying bonds in the case of a forced sale.

In the July 20th interview – not a paper, as far as I can tell – Mr. Buchanan says:

Proprietary trading and hedge funds were active participants in the trading of fixed-income markets. By closing these lines of business, the regulation reduced the number of players bidding and offering securities on a daily basis, making periods of heightened volatility more violent from a mark-to-market perspective. Market regulatory modifications include a proposal by the European Commission to implement a tax of 1–10 basis points (bps) on transactions in all classes of fixed-income instruments. If finalized as proposed, it would clearly act as yet another disincentive for market-makers to commit capital to the investment community, further reducing liquidity in the market.
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Maintaining portfolio liquidity for mutual funds is of significant importance, and as such, we have been increasing the use of instruments such as cash, T-Bills, ETFs and derivatives to provide additional liquidity. Across all vehicles, we are utilizing the primary market more frequently as new issues price, more often than not, at large concessions to secondary issues, and the new issues actively trade with minimal bid/offer spreads. We are also employing derivatives via indices/tranches that provide a liquidity enhancement while maintaining exposure to the given asset class. In those cases when we consider an issue for investment, we often value the on-the-run investment opportunity more than an off-the-run opportunity on a relative value basis.
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The biggest reduction in liquidity has been experienced by off-the-run issues in the credit market and non-current coupon bonds in the MBS market. For example, an off-the-run issue on a 10-year bond for an investment-grade issuer trades at a 10–20 bps discount to that issuer’s on-the-run issue, versus a 5–10 bps discount that was available pre-crisis.

And Matt Levine contributes some information in his usual entertaining style:

One potential solution for that problem is to have investors just trade bonds with each other, cutting out the banks as middlemen. But it turns out that doesn’t work very well, in part because investors don’t know how much bonds are supposed to cost, and need banks to tell them:

Many bonds don’t trade for weeks or months, leaving gaps in pricing that historically were filled by banks that had more market information at their command than their customers.

On Bondcube, which announced its closure on July 22, investors who found each other on the company’s system often couldn’t agree on a price, according to a person familiar with the matter, who asked not to be identified because the information isn’t public. So bids and offers were too far apart.

Oops.
…
Bondcube is also a nice little lens through which to look at the felony fraud charges against the mortgage traders — Jesse Litvak, Matthew Katke and potentially others — accused of lying about this sort of price information. I find these cases very confusing, because these guys didn’t lie about any fundamental facts of the bonds they were selling. They never fudged cash-flow statements or bribed home appraisers or anything like that. Instead they (allegedly) just told customers that they’d paid 58 cents on the dollar for a bond, when really they’d paid 57, and pocketed the difference. That seems clearly irrelevant to a sophisticated investor’s view of value, and so arguably not material: If the investor thought the bond was worth 59, and paid 58.25 for it, then why does it matter that the dealer bought it for 57 instead of 58?
…
Of course you could still make a go of it. That’s sort of the point of Ken Griffin’s op-ed from the other day, arguing that “recent reforms and regulatory pressures have dramatically increased the number of participants who can make prices and provide liquidity across many fixed-income markets.” The bio on that piece says that “Mr. Griffin is the founder and CEO of Citadel LLC, a hedge-fund manager and securities dealer,” and I suspect there was a time when it would have left off the “securities dealer” part. But Citadel realized that when banks won’t make markets, somebody has to, and it might as well be Citadel.

Tragically, Mr. Levine let a shibboleth go by unchallenged:

But one of the most popular solutions for bond-market illiquidity, urged by BlackRock and others, is more electronic trading of bonds. At best, electronic venues would aggregate price and order information in a way that increases price discovery and liquidity. Or they might just lead to a bunch of investors twiddling their thumbs and wishing there were some dealers to make markets.

Sadly, electronic trading of bonds (of anything, in fact) harms liquidity. It’s been proven over and over again.

It was another poor day for the Canadian preferred shares market, with PerpetualDiscounts losing 25bp, FixedResets off 6bp and DeemedRetractibles down 10bp. The Performance Highlights table is lengthy but balanced. Volume was average.

PerpetualDiscounts now yield 5.34%, equivalent to 6.94% at the standard equivalency factor of 1.3x. Long corporates now yield about 4.0%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 295bp, somewhat wider than the 285bp reported July 22.

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.B, which resets 2020-6-30 at +128, is bid at 14.90 to be $0.62 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.99 cheap at its bid price of 15.20.

Click for Big

Another good fit today!

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.02 to be 0.30 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.75 to be $0.28 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 18.11 to be $0.94 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.83 and appears to be $1.18 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 21.48, looks $0.90 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.23 and is $0.86 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of +0.08%, with one outlier above 1.00%. There are no junk outliers.

Click for Big

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

Nothing happened today, either. BORING!

It was another rotten day for the Canadian preferred share market, with PerpetualDiscounts losing 28bp, FixedResets off 4bp and DeemedRetractibles down 19bp. The Performance Highlights table is predictably lengthy. 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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 21.67 to be $0.56 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.83 cheap at its bid price of 15.50.

Click for Big

Another good fit today!

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.01 to be $0.37 rich, while MFC.PR.M, resetting at +236bp on 2019-12-19, is bid at 22.32 to be $0.35 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 18.41 to be $0.85 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 22.10 and appears to be $1.26 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 21.55, looks $0.90 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.36 and is $0.79 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.01%, with one outlier above 1.00%. There are no junk outliers.

Click for Big

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

Nothing happened today.

It was a horrid day for the Canadian preferred share market, with PerpetualDiscounts down 56bp, FixedResets losing 71bp and DeemedRetractibles off 27bp. A very lengthy Performance Highlights table is dominated by losers. 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 21.70 to be $0.67 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.93 cheap at its bid price of 15.40.

Click for Big

Another good fit today!

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.06 to be $0.40 rich, while MFC.PR.M, resetting at +236bp on 2019-12-19, is bid at 22.12 to be $0.60 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 18.30 to be $0.86 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 22.20 and appears to be $1.42 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 21.37, looks $0.76 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.44 and is $0.68 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.11%, with one outlier below -1.00% (and even then, only with the help of a dummy bid!). There are no junk outliers.

Click for Big

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

Years of back-door largesse are having an effect on Chicago’s municipal pension plan:

A plan to ease Chicago’s $20 billion public-worker pension deficit is illegal, an Illinois judge ruled, leaving the city vulnerable to another credit downgrade.

Immediately after the ruling, Standard & Poor’s said it would probably lower the city’s rating again if a solution isn’t found. S&P already cut Chicago’s rating earlier this month to BBB+, or three levels above junk.

The Illinois Constitution bars the diminishing of public pensions, state court judge Rita Novak ruled Friday. The Illinois Supreme Court in May killed similar changes to the state’s pension funds.
…
The pension system in Chicago is $20 billion short and is only 36 percent funded, compared with 61 percent in 2005.

It’s not just equities that are getting nailed:

A plunge in commodities is pushing investors to the sidelines as they look to sell their most vulnerable holdings, while treading cautiously around new offerings. With oil prices slumping below $48, energy bonds have lost 5.3 percent this month, and debt linked to metals and mining companies have handed lenders declines of more than 8 percent.
…
Leveraged loans, which are repaid before junk bonds, haven’t been immune to the turmoil. Prices of the debt have fallen to 94.5 cents on the dollar, the lowest since December, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index.

This provides some company for the loonie:

Bank of Canada Governor Stephen Poloz has sparked a fire sale on the Canadian dollar.

The currency plunged as much as 0.5 percent to C$1.3103 against its U.S. counterpart, the lowest on an intraday basis since September 2004. It fell after a private gauge of Chinese manufacturing dropped to the lowest in 15 months, signaling decreased commodities demand.
…
The Canadian currency fell 0.2 percent to C$1.3066 versus the U.S. dollar as of 11:57 a.m. in Toronto. That’s weaker than C$1.29, the median year-end estimate of analysts and strategists surveyed by Bloomberg. The loonie is poised for a 4.6 percent decline this month.

Traders are still pricing in the chance of another interest-rate cut, though these expectations have moderated in the last week. Trading in overnight index swaps show an implied policy rate of 0.39 percent in six months, compared to the Bank of Canada’s current 0.5 percent, Bloomberg calculations show. Last week they were pricing a rate of 0.36 percent.

There will be a major new investment management firm in the States … led by Hillary Clinton! The firm’s gimmick will be an emphasis on long-term investment; I think the marketing slogan will be ‘Buy, Hold and Prosper’:

Hillary Clinton sharpened her criticism against what she sees as Wall Street excess by targeting investors who demand short-term corporate measures like share buybacks and dividends to pump up a company’s stock price.

“We need a new generation of committed, long-term investors to provide a counter-weight to the hit-and-run activists,” the Democratic presidential candidate said Friday in a speech at New York University’s Stern School of Business. She contrasted her favored approach with investors who agitate for immediate change “no matter how much it discourages and distracts management from pursuing strategies that would add the most long-term value.”
…
“Real value comes from long-term growth, not short-term profits,” said Clinton, 67. “It comes from building companies, not stripping them; from creating good jobs, not eliminating them; from seeing workers as assets to cultivate, not costs to be cut.”
…
Clinton is proposing that the top 43.4 percent tax rate on short-term capital gains be extended to apply to assets held for less than two years, compared with the current one-year threshold. Beyond that, she would implement a sliding scale of long-term capital gains rates, and taxpayers in the top bracket would have to keep holdings for at least six years to get today’s rate of 23.8 percent, which would remain the lowest available.

With a top investment manager like Clinton in charge, performance at this new firm is virtually certain to be better than that at all the firms run by dummies. Where do I send my money?

Geez, I haven’t mentioned drones since May 5; it’s a good thing there’s a Bloomberg piece on drone traffic control:

Google Inc., the company that brought order to the Internet, has set its sights on doing the same for the flocks of commercial drones expected to someday clog the skies.

The search-engine pioneer is joining some of the biggest companies in technology, communications and aviation — including Amazon.com Inc., Verizon Communications Inc. and Harris Corp. — in trying to create an air-traffic control system to prevent mid-air collisions.

But don’t expect a big federally operated network of control towers. The government hasn’t said who will run the system or how it will operate, and is asking for ideas.
…
At least 14 companies, including Google, Amazon, Verizon and Harris, have signed agreements with NASA to help devise the first air-traffic system to coordinate small, low-altitude drones, which the agency calls the Unmanned Aerial System Traffic Management. More than 100 other companies and universities have also expressed interest in the project, which will be needed before commercial drones can fly long distances to deliver goods, inspect power lines and survey crops.
…
PrecisionHawk, a Raleigh, North Carolina, drone company with about 100 employees, began developing its own drone traffic control system because the large agriculture and oil companies it flies for wanted something to keep tabs on unmanned flights. “Our clients need it,” Tyler Collins, the program’s director, said.

In a recent demonstration over a North Carolina cattle farm, Collins and his team intentionally steered a quad-copter drone toward an imagined crop duster at work on an adjacent farm, the kind of hazardous scenario PrecisionHawk employees have seen in the real world.

Within seconds an alert popped up on the operator’s smartwatch: “WARNING, nearing no-fly zone.” When the operator ignored the warning, an autopilot took over and flew the whirring machine back to safety.

PrecisionHawk’s system can automatically block its drones from flying into danger, such as around airports and other aircraft. And it makes a drone’s real-time flight track available so others can stay away.

CU Inc., proud issuer of CIU.PR.A and CIU.PR.C, has announced:

it will issue $400,000,000 of 3.964% Debentures maturing on July 27, 2045, at a price of $100.00 to yield 3.964%. This issue was sold by BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., TD Securities Inc., Scotia Capital Inc. and CIBC World Markets Inc. Proceeds from the issue will be used to finance capital expenditures, to repay existing indebtedness, and for other general corporate purposes of ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd.

CIU.PR.A is a PerpetualDiscount yielding 5.11% at today’s bid price of 22.77; the interest-equivalent is 6.64%, a spread of 268bp over these new long bonds.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets down 40bp and DeemedRetractibles off 11bp. The Performance Highlights table is its usual exaggerated length. 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

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 14.98 to be $0.62 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.74 cheap at its bid price of 15.50.

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Another good fit today!

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.05 to be $0.18 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 22.00 to be $0.19 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 18.50 to be $0.88 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 22.10 and appears to be $1.12 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.10, looks $0.51 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.45 and is $0.66 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.07%, with no outliers. There are two junk outliers, one above +1.00% and one below -1.00%.

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

There has been widening of NVCC-compliant sub-debt:

Investors who leaped into Basel-compliant bonds issued by Canadian banks to great fanfare are likely regretting their haste. A year on, the reward for taking on the risk of bailing out a bank has become much richer.

Relative yields of the bonds have widened 25 basis points this year, the worst performance among Canadian five-year corporate bonds, according to RBC Dominion Securities research. The debt is designed to convert to equity if a bank gets into financial distress, in line with new Basel rules to prevent another financial crisis. The first issue of the debt, called contingent capital bonds, in Canada was by Royal Bank of Canada in July, 2014.
…
Toronto-Dominion Bank was the most recent issuer, pricing $1.5-billion of 10-year notes on June 18 at a yield of 166 basis points more than the equivalent government benchmark. By comparison, investors demand about 108 basis points to hold senior-ranking bank debt, according to Merrill Lynch.

Google rallied a few days ago; today it was Amazon’s turn:

Amazon.com Inc. reported a surprise second-quarter profit on top of sales that beat analysts’ estimates, showing investors — as it has done before — that the Web retailer can make money when it puts the brakes on investments.

Shares in Amazon jumped as much as 19 percent after it reported Thursday that revenue rose 20 percent to $23.2 billion, helped by a fast-growing cloud-computing business and initiatives to lure more customers. Net income was $92 million, or 19 cents a share. Analysts projected, on average, a loss of 14 cents on sales of $22.4 billion.
…
Shares surged after the close of trading in New York, helping to push Amazon’s market capitalization to about $267 billion, more than Wal-Mart Stores Inc., the world’s largest retailer. The stock declined 1.3 percent to $482.18 at the close, leaving it up 55 percent this year.

And even the Canadian economy is forecast to grow:

The Canadian economy is already bouncing back from a slump in the first half of the year, but it remains vulnerable to further falls in oil prices and any renewed weakness in export demand from the United States, a Reuters poll found.

After the economy contracted in the first three months of the year, the second quarter also got off to a weak start, suggesting Canada, a major oil exporter, may have been in recession in the first half of 2015.

But economists, none of whom predicted such an outcome when polled on the outlook six months ago, forecast gross domestic product is already re-accelerating to a 1.7-per-cent rate, followed by 2.2 per cent in the fourth quarter.

A Reuters poll taken last week after the Bank of Canada shocked markets for a second time this year with an interest rate cut to dull the sting from falling oil prices found that the new rate of 0.5 per cent will likely be the floor.

It was a good, if mixed, day for the Canadian preferred share market, with PerpetualDiscounts gaining 18bp, FixedResets up 30bp and DeemedRetractibles off 1bp. The Performance Highlights table is dominated by winners. 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.B, which resets 2020-6-30 at +128, is bid at 14.95 to be $0.63 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.82 cheap at its bid price of 15.40.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 25.10 to be $0.16 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.58 to be $0.15 cheap.

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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 20.61 to be $1.00 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 17.29 and appears to be $1.15 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.50, looks $0.66 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 21.00 and is $0.37 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.09%, with no outliers. There are no junk outliers.

Click for Big

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