PrefBlog

George Athanassakos of UWO makes an interesting point about the Taylor Rule:

Since the markets have spoken, what is the Fed waiting for? Why is the Fed not raising its effective interest rate yet? According to the well-known Taylor rule, which stipulates by how much nominal interest rates should change in response to a change in inflation and economic activity, the interest rate set by the Fed should have stood by now at about 2 per cent as opposed to almost zero per cent – not because of a rise in inflation but simply because of a pickup in economic activity.

Now if economic activity also results in a pickup of inflationary expectations, then an even higher normalized nominal federal-funds interest rate should be called for. This seems to have been coming into focus recently given that the iShares Long U.S Treasury Bond prices (which were up on a year-over-year basis) are now down by over 3 per cent since May, 2015, while the iShares U.S. TIPS Bond Index is down only by about 1.5 per cent over the same period.

The loonie has problems. Wait a minute, you think the loonie has problems?

Kazakhstan’s tenge plunged a record 23 percent after the country relinquished control of its exchange rate, becoming the latest emerging market to abandon efforts to prop up its currency after China devalued the yuan.

The nation has switched to a free float and will pursue an inflation-targeting monetary policy, Prime Minister Karim Massimov told a government meeting in Astana. Supply and demand will determine the exchange rate, central bank Governor Kairat Kelimbetov said, adding that there will only be intervention if stability is threatened. The tenge sank to an all-time low of 257.21 per dollar in Almaty, data compiled by Bloomberg show.
…
Russia let the ruble float freely and switched to inflation targeting in November after spending about $90 billion last year from reserves trying to contain the depreciation.

The ruble has lost 46 percent of its value in the past 12 months, versus a 7.6 percent weakening for the tenge before today’s switch. As a result, Kazakhstan witnessed an influx of grain, metals, construction materials, oil products and coal from its northern neighbor, according to Kazakh business association Atameken.

Bloomberg has put together a list of other currencies that looks shaky. Who wants to play dominos?

There was no respite from yesterday’s moronization in the Canadian preferred share market today, with PerpetualDiscounts down 29bp, FixedResets losing 88bp and DeemedRetractibles off 25bp. Yet another extremely lengthy Performance Highlights table is yet again dominated by losing FixedResets. 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 19.08 to be $0.65 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.69 cheap at its bid price of 13.02.

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Another good fit today!

Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 24.54 to be 0.40 rich, while MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 22.24 to be 0.26 cheap.

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The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.00 to be $1.40 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 22.76 and appears to be $0.97 rich.

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FTS.PR.M, with a spread of +248bp, and bid at 22.10, looks $0.47 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.25 and is $0.70 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.29%, with one outlier above +1.00%. Note that the distribution is bimodal, with NVCC non-compliant bank issues averaging -0.40% and the unregulated issues averaging +0.21%. There are two junk outliers 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 Fed is uncertain on inflation:

Federal Reserve officials signaled concern about stubbornly low inflation even as they indicated that an improving job market is bringing them closer to the first interest-rate increase in almost a decade.

Participants in the July 28-29 Federal Open Market Committee meeting said economic conditions “were approaching that point” where the economy could sustain a slight increase in borrowing costs, according to minutes of the meeting released in Washington on Wednesday.

Preserving their flexibility on the timing of rate liftoff, they also showed more concern about how soon they would hit their 2 percent inflation target, a goal they have missed for more than three years.

… so the cowboys are getting cold feet about the Fed liftoff:

Traders gearing up for the Federal Reserve to raise interest-rates next month reversed course Wednesday after minutes from the central bank’s July meeting showed policy makers were still waffling on whether the economy is strong enough to warrant higher borrowing costs.

That’s far short of the confidence they expected to see from a central bank supposedly just weeks away from what would be the first increase in almost a decade.

The probability that futures traders assign to a rate boost next month slid to 36 percent, the lowest since July, from about 50 percent earlier in the day. The levels assume that the Fed’s target will average 0.375 percent after the first move. The chance of an increase at or before the Fed’s December meeting dropped as well, to 65 percent from 73 percent Tuesday.

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GWO, proud issuer of more preferred shares than you can shake a stick at, was confirmed at Pfd-1(high) by DBRS:

Combining somewhat higher leverage with stable profits, GWO has been able to produce an above-peer return on equity in the mid-teens for several years running. As the Company is the largest insurer in Canada, its top-line growth will be limited largely to total market growth. Growth by acquisition within Canada is also constrained, given the dominance of the big three insurers. Achieving a full turnaround with the Putnam investment subsidiary has proven elusive, but recently its funds have achieved high-ranking performance statistics, which should allow a shift toward better results.

Financial leverage at June 30, 2015, is 27.5%, which has shown considerable improvement over recent quarters.

The Canadian operations have a Minimum Continuing Capital and Surplus Requirements ratio of 229%, which is satisfactory. The Company’s U.S. subsidiaries follow and meet U.S. regulatory requirements.

The Company’s credit rating may be negatively affected by an extended decline in interest rates or equity market returns (though it is less sensitive to these declines than its peers), which would affect long-term product profitability; a sustained reduction in earnings; or by large debt-financed acquisitions. Conversely, GWO’s rating may benefit from further improvements in its leverage and coverage ratios.

Today’s market moronization means that none of the following numbers should be taken very seriously, but we’ll do what we can …

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 18bp, FixedResets getting whacked for 74bp and DeemedRetractibles gaining 10bp. The Performance Highlights table is:

• Lengthy
• Dominated by FixedReset losers, and
• Virtually meaningless

. Volume was 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.A, which resets 2019-12-31 at +192, is bid at 17.09 to be $0.69 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.82 cheap at its bid price of 13.29.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.22 to be 0.34 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 21.31 to be $0.29 cheap.

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The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.37 to be $1.16 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 22.99 and appears to be $1.07 rich.

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FTS.PR.M, with a spread of +248bp, and bid at 22.51, looks $0.52 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.56 and is $0.60 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.29%, with no outliers. Note that the distribution is bimodal, with NVCC non-compliant bank issues averaging -0.48% and the unregulated issues averaging +0.09%. There are three junk outliers 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 dong has been devalued:

The State Bank of Vietnam weakened its reference rate by 1 percent to 21,890 dong a dollar effective Wednesday, it said in a statement on its website. The authority also widened the currency’s trading band to 3 percent on either side of the fixing. The dong fell 1.4 percent to 22,408 as of 10:36 a.m. in Hanoi, according to data compiled by Bloomberg.

The devaluation comes after the central bank widened the dong’s trading band to 2 percent from 1 percent on Aug.12, a day after China’s surprise policy shift heightened the risk of a currency war. Prime Minister Nguyen Tan Dung is seeking to safeguard slowing export growth and the State Bank said it’s concerned about the prospect of higher U.S. interest rates.

“After the strong devaluation of the yuan, Vietnam’s domestic market sentiment is still very much concerned about the impact of the U.S. Federal Reserve’s rate increase,” the central bank said in its statement. The reference rate and the trading band are being adjusted “in order to proactively lead the market and preempt negative impacts of the possibility that the Fed will increase rates.”

And there’s pressure on Thailand:

Bangkok’s deadly bomb attack this week is set to hit Thailand’s last remaining growth pillar with travel warnings and canceled trips, adding pressure on authorities to restore confidence and stimulate the economy.

Weaker tourism in the next two to three quarters will probably hurt Thailand’s economic growth and the explosion could have a longer-lasting impact on visitor numbers compared with previous incidents in the past decade, Standard & Poor’s said Tuesday.
…
It also increases the probability that the Bank of Thailand will cut interest rates again this year, according to Credit Suisse, Australia & New Zealand Banking Group Ltd., Nomura Holdings Inc. and BMI.

“It reinforces our view of further monetary easing ahead,” said Weiwen Ng, a Singapore-based economist at ANZ, who estimates tourism accounts for 20 percent of the economy, including indirect effects. “Domestic demand — which is already sluggish — will be derailed. Bank of Thailand will also probably allow some baht weakness to help boost exports.”

Today’s technology news is that Uncle Sam is Yelping:

Adding customer satisfaction ratings and reviews to public services just got easier now that Yelp offers a terms of service for official government use.

Yelp, a Web and mobile-based user review platform, hosts insights from “real people giving their honest and personal opinions on everything from restaurants and spas to coffee shops.” With the addition of Public Services and Government under the Yelp umbrella, agencies can continue to find new ways to use customer insights to improve citizen services.

Agencies are now able to use Yelp to potentially:

• ◾Claim existing pages or launch new pages to listen and respond to customer comments
• ◾Use customer feedback data to drive improvements in citizen services.

It was yet another poor day for the Canadian preferred share market, with PerpetualDiscounts off 7bp, FixedResets losing 35bp and DeemedRetractibles down 13bp. The Performance Highlights table is again notable for the relatively large number of TRP and ENB issues included in the less desirable neighborhood. 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.A, which resets 2019-12-31 at +192, is bid at 17.00 to be $0.49 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.90 cheap at its bid price of 13.26.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.27 to be 0.38 rich, while MFC.PR.J, resetting at +261bp on 2018-3-19, is bid at 22.60 to be $0.41 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.43 to be $1.30 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.41 and appears to be $1.13 rich.

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Not very reliable; the calculated level of Implied Volatility dropped from 17% yesterday, largely due to a highly suspicious bid on FTS.PR.K (see the Performance Highlights table).

FTS.PR.H, with a spread of +145bp, and bid at 15.90, looks $0.79 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.36 and is $0.49 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.35%, with no outliers. Note that the distribution is bimodal, with NVCC non-compliant bank issues averaging -0.47% and the unregulated issues averaging -0.10%. There are three junk outliers below -1.00%.

Click for Big

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

Matt Levine writes a good piece on bond market ethics, whatever those are:

And Edward Jones’s behavior seems to have been even worse than that: It didn’t just put the bonds in inventory, wait until they started trading, and hope to flip them for a profit (which would be bad!); it actually sometimes sold bonds to customers at prices above the offering price while the offering was still going on.5 As far as I can tell, this worked mostly because customers didn’t know any better, and Edward Jones didn’t tell them.6 (There’s no suggestion that Edward Jones lied to the customers about the price it paid, though.)
…
The real point here is that there is a “well-established industry practice” that, if you’re an underwriter for municipal bonds, and you buy bonds from the issuer at the offer price,8 you have to re-sell them to customers at the offer price. You just can’t do what Edward Jones did.

I’d say the party injured by Edward Jones’ misconduct is not the customers – who were buying from the broker as principal and knew this – but the issuer. The underwriters are acting as agents for the issuer and are paid a commission for doing so. If the underwriters then turn around and skimming off the concession for themselves, then it seems to me they have a powerful incentive to give their client – to whom yes, they have a fiduciary obligation – some very gloomy advice about how difficult it will be to sell the issue and how big, therefore, the concession should be.

New Zealand demonstrates good news for Canadian housing markets:

Auckland home prices are up more than 20 percent in the past year. If you’re a buyer from China or the U.S., they’re not.

The slump in New Zealand’s currency has made properties in the country’s largest city a bargain for foreigners, creating a headache for central bank Governor Graeme Wheeler, who has been trying to put a lid on the country’s overheated property market.

“Five years ago I would have estimated two or three percent of Auckland properties were bought from overseas,” said Peter Thompson, managing director of Barfoot & Thompson, which says it sells one-in-three homes in the so-called City of Sails. “These days it’s 10 or 12 percent.”

Wheeler has lowered interest rates to offset faltering economic growth and weaken the currency, but the cuts are stoking Auckland’s housing prices, which are already the second highest relative to income among developed economies. Worse still, with foreign buyers tripling their participation in the city of 1.5 million people, the price surge is starting to spread to cheaper neighboring regions.
…
The main opposition Labour Party last month claimed that 40 percent of Auckland house sales between February and April were purchased by people with Chinese-sounding names, and criticized the government for soaring prices.

While the claim drew accusations of xenophobic politics, a subsequent poll of 1,000 voters showed 61 percent wanted the government to ban non-resident foreigners from buying houses.

Meanwhile, PrefBlog’s Better Living Through Technology Departments highlights a good news story from Saudi Arabia:

If she had chosen the traditional route to opening her accessories business in Jeddah, Rozana al-Daini would have had to enlist a male sponsor to represent her before government agencies and sign official documents on her behalf.

Instead, she sells jewelry, watches and wallets on Instagram, where Saudi businesswomen can avoid the gender restrictions they face in the kingdom. Her two-year-old business, Accessories_ar, has two employees, 67,000 followers and handles up to 25 orders a day. It also provides her with the ultimate empowerment: her own income.
…
Saudis spend an average of 2.65 hours per day social networking, compared to a global average of 1.69 hours, according to a survey this year by London-based market research firm GlobalWebIndex. Saudi Arabia also ranked first in the world for Twitter penetration, according to a 2013 study by Amsterdam-based PeerReach. The GlobalWebIndex survey found that nearly half of Saudi Internet users are members of Instagram, compared with a global average of 23 percent.

While entrepreneurs also use Twitter and other social networks, al-Daini said Instagram’s photo-based interface was a natural fit for her business. “The photography affects people,” she said.

Designed for smartphones, the application provides an easy way for creative Saudis to share their talent, Moustakas said.

It was yet another grim day for the Canadian preferred share market, with PerpetualDiscounts losing 42bp, FixedResets down 41bp and DeemedRetractibles off 9bp. TRP issues continue to be notable in the Performance Highlights table, mostly in a bad way. 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.A, which resets 2019-12-31 at +192, is bid at 17.15 to be $0.51 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.83 cheap at its bid price of 13.41.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.45 to be 0.46 rich, while MFC.PR.M, resetting at +236bp on 2019-12-19, is bid at 21.75 to be $0.31 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.36 to be $1.36 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.75 and appears to be $1.48 rich.

Click for Big

FTS.PR.M, with a spread of +248bp, and bid at 22.48, looks $0.43 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.50 and is $0.77 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.23%, with no outliers. Note that the distribution is bimodal, with NVCC non-compliant bank issues averaging -0.53% and the unregulated issues averaging +0.36%. There are three junk outliers below -1.00% and one 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?