PrefBlog

So evidence is accumulating that the deterioration of the Treasury market is having an effect on corporate new issues (although some might say it’s the other way ’round):

News of a debt offering from Intel Corp. took Treasuries on a rollercoaster ride.

The swings Wednesday are the latest sign that corporate-bond offerings are driving bigger moves in U.S. government debt prices this year, as a historic wave of issuance competes with Treasuries for space in investors’ portfolios, according to strategists at Bank of America Corp. The trend has picked up as post-financial crisis regulations prompt dealers to step back from Treasury trading, which means smaller trades can move prices.

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When a corporate comes out, the underwriters will short sovereigns to hedge their interest-rate risk. Some of the initial buyers might do this as well to lock in the new issue concession prior to flipping the issue in the next little while. This was discussed on May 26; there may also be a little pop in price due to index-inclusion subsequent to the initial trading period, although attribution of pops due to these different effects might prove to be a little difficult!

At any rate, what this means is that hedging a sizable purchase of new issues corporates is going to be (a) more expensive and (b) less certain. Therefore the concessions will have to be higher than otherwise; therefore the issuer will have to eat extra costs when issuing bonds; therefore the market has become less efficient in transmitting capital from lenders to borrowers. But who cares? The important thing about markets is that Granny’s investment of $5,000 is priced fairly. If industry is crippled due to the necessity of accommodating Granny, it’s a small price to pay.

Speaking of borrowing, there is speculation that Canada’s books won’t be balanced this year:

The federal government is headed for a deficit this year, Parliament’s budget watchdog warns in a fresh assessment of finances that sows doubt about the Conservatives’ centrepiece pledge to balance the books in 2015 as well as about their credentials as economic managers.

The Parliamentary Budget Officer says calculations using the Bank of Canada’s latest economic forecast show that Ottawa is on track to dip into the red by about $1-billion in the 2015-16 fiscal year.

This bleaker prediction was immediately rejected by Prime Minister Stephen Harper’s government, which insists that Ottawa will avoid a deficit this year even after it doled out $3-billion in enriched child-care benefits this week

And speaking of operating losses:

Bombardier Inc.’s shares and bonds tumbled on concern that demand is weakening for business jets, a pillar of profit at a company struggling to develop its first commercial airliner.

The sell-off probably was triggered by comments Wednesday from an aviation-parts supplier, B/E Aerospace Inc. about softening buyer interest in large-cabin executive aircraft, said Benoit Poirier, a Desjardins Securities Inc. analyst.
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Bombardier’s widely traded Class B shares sank 3.9 percent to C$1.72 at the close in Toronto, paring an earlier plunge of as much as 18 percent. The 6 percent bonds due October 2022 fell 4.8 percent to 79 cents on the dollar. They had traded above par value in January.

According to the Globe:

Amin Khoury, the executive chairman of B/E Aerospace Inc. of Florida, had told analysts on a conference call that “energy-producing companies and governments have put a damper on capital spending, which has negatively impacted business-jet sales. On a regional basis, new large-cabin business-jet demand has come under pressure as international markets that represented a significant source of demand have now become sellers, putting their used aircraft on the market, including China, Russia and Latin America.”

And the loonie got smacked:

The Canadian dollar ended the day at its lowest closing level in more than a decade as falling oil prices, which may have plunged the economy into recession in the first half of the year, resumed their descent.

The currency has been falling since last week when the Bank of Canada cut its benchmark interest rate and forecast two straight quarters of economic contraction, saying the hit from crude oil’s collapse was proving to be more severe than expected. Oil prices fell again Wednesday, with the North American benchmark trading below $50 per barrel.
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The loonie, as the currency is known for the image of the aquatic bird on the C$1 coin, ended trading Wednesday at C$1.3033 per U.S. dollar, or 76.73 U.S cents, the lowest closing level for the currency since September 2004.

Which is good news for the tourist industry! I remember the glory days of the early 2000’s … in the evening, busses with US plates would be parked all over the theatre district … it was great!

And backtracking a bit and speaking of simple-minded trading strategies:

Buy when the stock market opens. Sell at the close. Repeat.

As far as trading strategies go, that’s about as simple as it gets. Turns out it’s also been a great way to make money in China, thanks to what analysts say is a pattern of afternoon equity purchases by state-backed funds.

When applied to the Shanghai Composite Index, the trading rule generated a 23 percent return since July 8, compared with 8 percent for a buy-and-hold approach. Use it on PetroChina Co., an obvious target of state support given the stock’s heavy weighting in benchmark indexes, and the difference is even starker: 43 percent versus 0.5 percent.

Late-day rallies are the latest quirk to emerge from an equity market where government intervention — from price ceilings on initial public offerings to bans on stake sales by major shareholders — has increased to unprecedented levels after a $4 trillion selloff.

Hat tip to Assiduous Reader JP for sending me this!

I see that New York is implementing a higher minimum wage – for fast food chains only:

A panel appointed by Gov. Andrew M. Cuomo recommended on Wednesday that the minimum wage be raised for employees of fast-food chain restaurants throughout the state to $15 an hour over the next few years. Wages would be raised faster in New York City than in the rest of the state to account for the higher cost of living there.

I can’t think of any sensible rationale for carving out fast-food chains from the rest of the economy.

I support a higher (across the board) minimum wage for precisely the reason that jobs will be lost – although if I were king, implementation would be delayed until the economy started looking a little better.

Low wages encourage low-skill industries; increasing the minimum wage will encourage automation as discussed October 15, 2013.

It is not redistribution that makes us rich; productivity makes us rich.

Westcoast Energy Inc., proud issuer of W.PR.H and W.PR.J, has been confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of Westcoast Energy Inc. (Westcoast or the Company) at A (low) as well as its Commercial Paper rating at R-1 (low) and First Preferred Shares rating at Pfd-2 (low). All trends are Stable. The rating confirmations reflect Westcoast’s strong business risk profile supported by low-risk regulated or fee-for-service operations accounting for nearly 95% of the Company’s earnings and provide downside protection from the current low commodity price environment. The Company’s financial profile remained reasonable for the current rating category.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 13bp, FixedResets down 16bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is its usual lively self. Volume was average.

PerpetualDiscounts now yield 5.29%, equivalent to 6.88% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.02%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 285bp, a slight (and perhaps spurious) narrowing from the 290bp reported July 15.

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.B, which resets 2020-6-30 at +128, is bid at 14.97 to be $0.60 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.77 cheap at its bid price of 15.50.

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Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 25.03 to be $0.17 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 22.00 to be $0.25 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-06-30, bid at 18.38 to be $1.05 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 17.20 and appears to be $1.04 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.55, looks $0.65 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 21.10 and is $0.34 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.09%, with two outliers above 1.00%. There are no junk outliers.

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

Commodities got smacked yesterday. Today it was technology’s turn:

The biggest technology rally since October was knocked cold, as disappointing earnings reports punished Microsoft Corp. and left Apple Inc. in danger of its worst-ever loss of market value.

Five days after Google Inc.’s earnings sparked the largest one-day increase in market capitalization, computer and software shares are tumbling. Apple, Microsoft and Yahoo! Inc. retreated on disappointing results. Apple, the world’s most valuable company, dropped 6.7 percent, a slump that would wipe more than $50 billion from its value.

Hopes were high for the industry as earnings season began, with shares in the sector leading a rebound in U.S. equities after overseas tensions eased. The Nasdaq Composite Index rallied to an all-time high on July 17 after Google surged 16 percent, adding $65 billion to its market cap.
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Cracks in the facade appeared before Tuesday. Intel Corp., kicking off earnings by the largest U.S. technology companies last week, said it expects the personal-computer market to fall further than expected, spotlighting the challenges for chipmakers. International Business Machines Corp. dropped 5.9 percent during regular trading Tuesday after sales fell for a 13th quarter.
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Microsoft slid 3.1 percent following its largest-ever quarterly net loss, hurt by a $7.5 billion writedown after the purchase of Nokia’s handset unit failed to rescue the company’s mobile business.

According to Big Taxi funding recipient de Blasio, New York may have too many taxis:

The New York City Council may vote as soon as this week on Mayor Bill de Blasio’s plan to limit the growth of ride-hailing service Uber Technologies Inc.

No decision has been made on whether the measure will come up at the council’s next scheduled meeting Thursday, said Eric Koch, a spokesman for Speaker Melissa Mark-Viverito. The bill would first have to clear the transportation committee, where it has the support of Chairman Ydanis Rodriguez, an outspoken Uber critic backed by the yellow-taxi industry. De Blasio said Monday that he wanted the council to vote “as quickly as possible.”

The measure would restrict the growth of fleets with 500 or more cars to 1 percent while city officials conduct a study on traffic congestion, which would be due April 30. While the limit would affect all for-hire ride services, including traditional black-car companies like Carmel and Dial 7, the biggest loser would be San Francisco-based Uber, which has grown to include 19,000 vehicles and is expanding about 3 percent a month.
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The legislation is the latest battle in a fight between the traditional taxi and limousine industry, which gave de Blasio’s 2013 mayoral campaign more than $500,000, and digital ride-sharing companies like Uber and Lyft Inc. The taxi industry also donated more than $150,000 to council members, including more than $27,000 this year to [City Council Speaker] Mark-Viverito. [Transportation committee Chairman Ydanis] Rodriguez received $8,500 in 2013.

It was a mixed, but mostly negative, day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets down 30bp and DeemedRetractibles off 21bp. The Performance Highlights table continues to illustrate a high level of volatility in the marketplace. 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 +128, is bid at 22.30 to be $0.78 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.88 cheap at its bid price of 15.30.

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Another good fit today!

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.31 to be $0.33 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 22.00 to be $0.22 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-06-30, bid at 18.68 to be $0.83 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 17.20 and appears to be $0.95 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.63, looks $0.79 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 23.00 and is $0.30 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.05%, with one outliers above 1.00%. There is also one junk pair 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?

Commodities got smacked today:

The Bloomberg Commodities Index is holding losses after dropping Monday to a 13-year low, weaker than after the banking meltdown of 2008 and the euro-zone crisis of 2012. From oil to copper to sugar, little has escaped the rout in the year’s worst-performing asset class.
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Gold, the most heavily-weighted commodity in the index, is the latest to get hit hard, socked by a stronger dollar and concern about a slowdown in China. During a stretch of about 15 minutes in Asian trading hours Monday, gold prices plunged by the most in two years.
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Investors pulled about $530 million from exchange-traded funds tracking commodities last week, or almost 1 percent of the funds’ market value. Citigroup Inc. analyst Aakash Doshi estimates that $2.3 billion was pulled from investments linked to commodity indexes in the week ended July 14, bringing total withdrawals since June 30 to $2.8 billion.

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So guess what happened:

The Standard & Poor’s/TSX Composite Index fell 217.29 points, or 1.5 per cent, to 14,425.55 in Toronto. The benchmark equity gauge has declined 2.1 per cent in two days, after rallying 3.2 per cent in the previous five sessions.

Gold miners bore the brunt of selling Monday, as the metal sank to as low as $1,080 an ounce, the lowest since 2010. Barrick sank 16 per cent to close at a 25-year low, while Goldcorp tumbled 12 per cent to its worst close since 2005.

An index of gold miners retreated 12 per cent to end at the lowest since April 2001, with Yamana Gold Inc. sliding 12 percent and Kinross Gold Corp. plunging 13 per cent.

Raw-materials producers retreated 6.3 per cent for a fourth day of losses that now total 10 percent.

Aston Hill, which was reported on PrefBlog as being for sale on April 16 and losing a portfolio manager on July 3, has now lost its CFO and CEO:

Aston Hill Financial Inc. has been hit by a new wave of executive departures that will see both its CEO and CFO leave.

Eric Tremblay, who co-founded the asset management firm in 2007, is stepping down as chief executive officer effective Aug. 31 to “pursue personal endeavours” the firm said in a release. He is also resigning as chairman of the board but will remain with the firm as a director.

On Aug. 1 Peter Anderson takes over as interim CEO. Mr. Anderson, who earlier in his career worked at CI Financial Corp. for 15 years as chief investment officer and head of institutional sales until 2012, joined Aston Hill as a board member in November, 2014.

Chief financial officer Larry Titley is leaving the firm effective July 31. He had been with Aston Hill for the past 8 years. Derek Slemko, senior VP of finance will take over as CFO in an interim basis.

Aston Hill is also closing down its Calgary office.

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 a reasonably good day for the Canadian preferred share market, with PerpetualDiscounts up 50bp, FixedResets gaining 4bp and DeemedRetractibles off 3bp. The Performance Highlights table is lengthy, with BAM issues doing well. Volume was well 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 +128, is bid at 22.66 to be $0.88 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.82 cheap at its bid price of 15.40.

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Another good fit today!

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.40 to be $0.42 rich, while MFC.PR.J, resetting at +261bp on 2018-3-19, is bid at 23.69 to be $0.34 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-06-30, bid at 18.47 to be $0.97 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.90 and appears to be $0.84 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.53, looks $0.77 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 23.00 and is $0.30 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.12%, with two outliers slightly above 1.00%. There are also two junk pairs 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?

The loonie got smacked today:

Canada’s currency weakened past C$1.30 per U.S. dollar for the first time since 2009 amid speculation the nation’s central bank will cut interest rates again to fight the economic damage from lower oil prices.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell to as weak as C$1.3008. It traded at C$1.2965 at 9:26 a.m. in Toronto, and is poised to decline for a fourth week.
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Monetary easing in Canada contrasts with the U.S. Federal Reserve, which is contemplating its first interest-rate increase in almost a decade.

“For the Canadian dollar, the policy-divergence theme got a strong boost with the Bank of Canada cutting rates, while leaving the door open to more,” Matt Derr, a foreign-exchange strategist at Credit Suisse Group AG in New York, said by e-mail. Declining crude prices may put further pressure on the currency, he said.

Canada’s dollar has fallen 3.3 percent in the last three months, making it the second-worst performer among 10 developed-nation peers, according to data compiled by Bloomberg.

Canadian headline inflation is not an impediment to loose money:

Canada’s annual inflation rate quickened to 1 percent in June as food and shelter costs increased and energy provided less of a drag, providing no impetus for the central bank to change course on loose monetary policy.

Consumer prices accelerated from a 0.9 percent pace in May, Statistics Canada said Friday in Ottawa, as meat, dairy and bakery products and fresh fruit grew dearer.

Bank of Canada policy makers cut interest rates this week, saying a weak economy threatened to keep inflation from returning to its 2 percent target. The currency depreciated to the lowest since 2009 on speculation price gains aren’t enough to eliminate the chance of another central-bank rate cut.
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The core rate, which excludes eight volatile products such as energy, accelerated to 2.3 percent, close to the March reading of 2.4 percent that was the fastest since 2008.

Canada’s dollar dropped to C$1.3008 per U.S. dollar today. Two-year bond yields rose 1 basis point to 0.43 percent and 30-year securities fell to 2.25 percent from 2.27 percent.

The plunge in crude oil prices has driven down inflation and also triggered four straight monthly declines in output. At the same time, core prices have remained elevated on higher costs for meat and telecommunications products.

Economists surveyed by Bloomberg forecast Friday’s report would show overall inflation at 1 percent and the core rate remaining at 2.2 percent.

Energy costs fell 9 percent in June from 12 months earlier, less than May’s 11.8 percent rate of decline. Excluding energy the inflation rate slowed to 2.1 percent from 2.2 percent.

While the reported core inflation rate is above 2.0%, the July Monetary Policy Report states:

In contrast, core inflation as measured by CPIX has been slightly above 2 per cent, boosted by the pass-through effects of the past depreciation of the Canadian dollar and some sector-specific factors, which have offset the disinflationary force from slack in the economy (Chart 15). Although the impact of pass-through is difficult to gauge precisely, the Bank estimates that it is currently raising CPIX inflation by about 0.4 to 0.6 percentage points (Box 1).2 The underlying trend in inflation is assessed to be 1.5 to 1.7 per cent, a bit lower than in the April Report, consistent with material and increased slack in the Canadian economy.

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In an interesting twist, Freddie Mac is selling structured notes:

Freddie Mac is expanding its risk-sharing efforts meant to protect taxpayers and potentially prepare the $9.4 trillion U.S. home-loan market for its future.

In a planned $300 million offering of mortgage-backed securities being managed by Credit Suisse Group AG, the government-backed company will sell $22.5 million of junior-ranking bonds without its guarantees, a person with knowledge of the deal said.
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The bonds reflect directions that Freddie Mac and rival Fannie Mae have received from their overseer, the Federal Housing Finance Agency, to experiment with different ways of pushing their losses from homeowner defaults to bond buyers and insurers. The FHFA has also pushed them to increase the amount of the risk-sharing.

It will be interesting to see what the ultimate effect of all this is … how much will investors be willing to pay for the company guarantee when they’ve already got the first-loss protection afforded by the Junior Notes?

BCIMC has posted some good returns:

A tactical decision to shift investments into global stock markets paid off last year for British Columbia Investment Management Corp., which earned a 14.2-per-cent return for the year and boosted its total assets to $124-billion.

BCIMC reported it moved more assets into global equities during the fiscal year ended March 31, 2015, while reducing its weighting in fixed income holdings and mortgages, responding to volatility in Canadian stock markets as oil prices declined.

The fund ended the fiscal year with 49.5 per cent of its assets invested in public stock markets, up from 47.6 per cent a year earlier. BCIMC had 21.5 per cent of its holdings in fixed-income securities such as bonds, down slightly from 22 per cent last year, while 14.6 per cent of the portfolio is in real estate, a decline from 17.4 per cent at the end of fiscal 2014.

The fund said its Canadian public equity holdings earned a 7.5-per-cent return last year, while global public equities earned a far higher 23 per cent and emerging markets equities posted 21.4-per-cent gains, illustrating the value of shifting out of Canada’s volatile stock market.
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BCIMC said investing in passive benchmarks last year would have earned a 12.6-per-cent return, so its active investment strategy added $1.4-billion in additional returns. Over the past 10 years, BCIMC earned an average 8.1-per-cent annualized return, exceeding its benchmark of 7.3 per cent.

But, we all ask, what are the cool kids doing now?:

Options on indexes made up of credit default swaps (CDS) have been a sleeper hit over the past few years.

While trading indexes comprising CDS tied to a basket of corporate names can give investors a cheap and easy way to trade corporate credit at a time when the cash market is said to be illiquid, options written on those same indexes can do one better. The options give investors the right to buy or sell CDS indexes, such as Markit’s CDX or iTraxx series.
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In 2005, Citigroup estimated that about $2 billion worth of credit index options were trading per month, or roughly $24 billion over the course of the year. Last December, the same Citi analysts figured that about $1.4 trillion of the instruments had exchanged hands in all of 2014, compared with $573 billion worth in 2013. If correct, that would be more than a 5,000 percent jump in activity over the course of a decade.
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The risk is that the popularity of options on CDS indexes, combined with a big move in one of the indexes, could spark a flurry of hedging activity by the big dealer-banks as they struggle to get their positions back to neutral. That in turn could end up amplifying the move in the underlying index.

Here’s Barclays:

The relative growth of option volumes will likely make it increasingly more common to have option hedging (by dealers) exerting a meaningful influence on index dynamics—ie, we can expect to see the “option tail wagging the index dog” … This is particularly relevant because anecdotal evidence suggests that the majority of trades executed by investors are without delta as pure directional positions, and if anything, this proportion has been increasing over time. As such, in response to spread moves, the majority of delta-hedging will take place on the dealer side, with limited “natural” offset by investors delta-hedging in the opposite direction. Should the trend of rising relative option volumes continue, we are likely to see more cases of “pin risk” (delta-hedging of options bought by dealers making it more likely that spreads will stay around the strike) or “negative gamma” (delta-hedging of options sold by dealers, leading to amplifications of spread moves wider and tighter).

PDV.PR.A was confirmed at Pfd-3(high) by DBRS:

On July 18, 2014, DBRS upgraded the rating of the Preferred Shares to Pfd-3 (high) mainly based on a significant increase in downside protection to holders of the Preferred Shares. Over the last few months, the NAV of the Company has been declining as a result of high levels of uncertainty in the markets, resulting in a reduction in downside protection to 43% average compared with 45% a year ago. The dividend coverage ratio stands at approximately 0.7 times. Current performance metrics are still commensurate with the rating assigned, and as a result, the rating of the Preferred Shares has been confirmed at Pfd-3 (high).

After all the horror of the past six weeks-odd (not to mention the past six damn months!) the preferred share market has found a better place.

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If this keeps up for the rest of the month, we might even break-even year-to-date!

It was a superb day for the Canadian preferred share market, with PerpetualDiscounts up 51bp, FixedResets winning an incredible 138bp and DeemedRetractibles gaining 45bp. The Performance Highlights table is … well, the Performance Highlights table is much as you’d expect, OK? Volume was very high.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +128, is bid at 22.00 to be $0.37 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.59 cheap at its bid price of 15.70.

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An extremely good fit today!

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.30 to be $0.31 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 22.48 to be $0.24 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 20.76 to be $0.68 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 16.79 and appears to be $0.68 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.60, looks $0.80 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.87 and is $0.32 cheap.

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There is only one outlier; one of the junk pairs is below -1.00%.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.05% (which seems a little extreme!).

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

The treasury curve flattened today:

Enough distractions! Treasury investors are turning their attention back to the business of when U.S. interest rates go up.

The yield curve has flattened the most in four months in a week when Greece signed a deal to secure more bailout aid and a bear-market rout in Chinese stocks stabilized, allaying concern that turmoil abroad would delay the Federal Reserve’s first rate increase since 2006. Fed Chair Janet Yellen made it plain over two days of testimony before Congress this week that she believes the central bank can raise interest rates in 2015.
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The difference between yields on two- and 30-year government debt has narrowed 9.4 percentage points this week to 246 basis points. It reached 244 basis points Thursday, the least since July 9.

Yellen’s testimony preached restraint:

Speaking Thursday before the Senate Banking Committee, Yellen said that raising rates prematurely could derail the recovery. Waiting too long, on the other hand, might force the Fed to tighten at a faster pace to keep the economy from overheating.

“My own preference would be to be able proceed to tighten in a prudent and gradual manner,” she said.

Yellen’s comments this week were consistent with her often-stated advice to investors: the date of liftoff matters less than the subsequent pace of increases. And she has assured them that those increases would be measured.

The concern that tightening prematurely could throw the recovery off track is one reason why the federal funds rate has been kept near zero as long it has, Yellen said.

“We also want to be careful not to tighten too late because, if we do that, arguably we could overshoot both of our goals and be faced with this situation where we would then need to tighten monetary policy in a very sharp way that could be disruptive,” she told lawmakers.
…
Yellen offered other reasons for an upbeat assessment of the economy in her testimony Thursday. She said the job market is returning to a “more normal state,” even though the 5.3 percent unemployment rate understates the degree of slack. And she expects to see further gains in wages.

Fed officials say they will let the latest data on employment and inflation guide their decision on when to raise rates. To drive the point home, the San Francisco Fed has printed T-shirts with the message: “Monetary Policy — It’s Data Dependent.”

Only in America would the central bank print t-shirts!

By way of context, here’s the historical 2-year and 30-year Treasury yields from FRED:

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and the spread between the two:

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Note that there’s a gap in the 30-year series during the period in which they didn’t exist. That was the peace dividend.

And there’s more squabbling over the ORPP:

Ottawa is putting Queen’s Park on notice that it will not help set up a provincial pension plan.

Finance Minister Joe Oliver wrote to his provincial counterpart on Thursday afternoon saying that Ottawa would not help collect contributions or make the legislative changes the province would likely require.

“The Ontario Government’s proposed [plan] would take money from workers and their families, kill jobs, and damage the economy,” Mr. Oliver wrote in the letter, which was obtained by The Globe and Mail.

“Furthermore, it would impose a one-size-fits-all scheme on Ontarians and their families, without consideration for their age, family situation or financial circumstance.”
…
According to Mr. Oliver’s letter, Ontario officials have approached federal civil servants in recent months to discuss the possibility of having the federal government involved in the administration of the new provincial plan.

“We will not assist the Ontario government in the implementation of the ORPP,” Mr. Oliver wrote to Ontario Finance Minister Charles Sousa.

“This includes any legislative changes to allow the ORPP to be treated like the Canada Pension Plan for tax purposes, or to integrate the ORPP within the [registered retirement savings plan] contribution limits. Administration of the ORPP will be the sole responsibility of the Ontario Government, including the collection of contributions and any required information. We will be pleased to discuss with the Ontario Government the potential for voluntary contributions to the CPP, which we believe would better serve the interests of Ontarians and all Canadians.”

DBRS kept the ratings of the Big-6 banks’ senior debt on Trend-Negative today, confirming their conclusion reported in May:

• BMO
• BNS
• CM
• NA
• RY
• TD

Preferred share ratings and trends are unaffected.

It was a different sort of day for preferreds than it has been lately. In fact…

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It was a superb day for the Canadian preferred share market, with PerpetualDiscounts gaining 43bp, FixedResets up 86bp and DeemedRetractibles off 7bp. The Performance Highlights table was fairly lengthy, but shorter than I expected given the overall index numbers. Volume was very high.

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

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

Here’s TRP:

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TRP.PR.B, which resets 2020-6-30 at +128, is bid at 14.65 to be $0.55 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.77 cheap at its bid price of 15.20.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 17.10 to be $0.82 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 21.43 to be $0.57 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 20.15 to be $0.77 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.20 and appears to be $0.79 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.14, looks $0.44 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.85 and is $0.25 cheap.

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There is only one outlier; one of the junk pairs is below -1.00%.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.01% (which seems a little extreme!).

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