PrefBlog

So it was another crummy day for equities:

Canadian bank stocks were down more than 3.5 per cent during the day, marking the biggest decline for the group since August, 2009, when stock markets were emerging fitfully from the global financial crisis.

Stocks recovered some lost ground later in the day, but over all, Canadian bank stocks have tumbled more than 7 per cent this year.

While that is relatively mild next to the double-digit declines among U.S. and European bank stocks, Tuesday’s downturn suggests investors are starting to lump the big banks together with their global peers.
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The backdrop to the day’s market turbulence certainly pointed to indiscriminate alarm among investors. European stocks fell 1.8 per cent and Japanese stocks fell 5.4 per cent. The Toronto Stock Exchange tumbled 2 per cent.

And the Canadian short-term yield curve inverted:

The Canadian yield curve was briefly inverted out to five years on Tuesday before recovering to roughly flat levels. This is bad news for domestic investors. Just how bad things will get depends on how much faith remains in central bank monetary policy and the extent to which “it’s different this time.”

Supported by Federal Reserve research studies, inverted yield curves are a widely accepted, long-standing indicator of economic recessions. In Canada, the last time the yield curve was inverted out to five years (the five-year Government of Canada bond yielded less than the three-month T-bill yield) was in January, 2015, just as the domestic technical recession began.

… and oil’s in the tank:

Crude tumbled the most in five months in London as price volatility climbed to a seven-year high and Goldman Sachs Group Inc. warned of wider swings to come.

Brent futures fell 7.8 percent as global equities neared a bear market. Volatility is set to “spike” as prices seek an equilibrium, which could drag oil below $20 a barrel, Goldman Sachs said. The CBOE Crude Oil Volatility Index, which measures expectations of price swings, rose as high as 73.52, almost the highest since 2009. The world oil surplus will be bigger in the first half of this year than previously estimated, according to the International Energy Agency.

… and overnight markets are grim:

Japanese stocks extended losses and Singaporean shares tumbled following a two-day break, as persistent concern over market volatility helped the yen solidify its ascent. Oil climbed back above $28 a barrel before an update on U.S. stockpiles.

The Topix index headed for the biggest two-day drop since the aftermath of the March 2011 earthquake in Tokyo as a gauge of Japanese equity volatility soared. The Straits Times Index in Singapore sank the most in three weeks while the yen strengthened a third day and gold resumed its advance. U.S. index futures reversed some early gains as Vermont Senator Bernie Sanders defeated Hillary Clinton in the New Hampshire Democratic Primary, while Donald Trump prevailed over a crowded Republican field.

But cheer up! The regulators are making investing safer!

New proposals from the U.S. securities watchdog aimed at reducing risks in exchange-traded funds (ETFs) may end up being the best thing that ever happened to rival exchange-traded notes (ETNs).

ETFs holding some $225 billion worth of assets are likely to violate the new rules suggested by the Securities and Exchange Commission (SEC), and could ironically spark a mass migration of investors into riskier products.
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The first rule proposal attempts to address liquidity concerns by requiring that no more than 15 percent of a fund’s holdings take longer than seven days to liquidate without moving the market. This effectively means that “every broad corporate and high-yield bond fund and every broad emerging markets fund would be in trouble,” according to Nadig, who ran the numbers using his own trading estimates of how many ETFs would be in violation.
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The other proposal attempts to address derivatives usage by limiting the leverage in 40 Act funds to 150 percent. That puts a majority of the two-times and three-times levered ETFs in violation. While the issuers may be able to find clever workarounds to get to the two- and three-times exposure while still remaining in compliance, it does put another $25 billion at risk of being in violation, leaving many investors searching to find other ways to get this exposure, such as ETNs.

Unlike ETFs, exchange-traded notes involve investors taking on significant credit risk to the ETN’s issuers.

ETNs are unsecured debt obligations regulated under the less-stringent Securities Act of 1933, and are not required to physically hold anything. As such, there is a risk that the issuer could default and investors would lose some or all of their investment. This is very different to the structure of a high-yield bond ETF or even a leveraged ETF, both of which physically hold the securities or derivatives involved. Shareholders have ownership of those assets even if the issuer goes out of business.

I continue to feel that the best option is to allow for staggered redemptions, so that ETF (and mutual fund) investors get a break on fees if they agree to a delayed redemption schedule; e.g., you have to give 20 trading day’s notice of redemption and your cash redemption value is based on the equally weighted mean average of the redemption prices on each of those days. Perhaps a third class of share would not be redeemable or exchangeable at all; at the core of an ETF would be a CEF.

But really, requiring that 85% of ETF holdings have a reasonable probability of being liquidated in seven days with ABSOLUTELY ZERO MARKET IMPACT is going way too far. But how else can the public be forced to buy government bonds at yields below the inflation rate?

It’s also going to force people into direct corporate bond holdings, as well. Just wait until Joe Lunchbucket finds that one of his five holdings has gone bust!

I really suggest that preferred share investors relax a little. Maybe watch a nice movie:

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It was a horrible day for the Canadian preferred share market, with PerpetualDiscounts off 89bp, FixedResets down 150bp and DeemedRetractibles losing 151bp. The Performance highlights table is, of course, ridiculous; all four of the FTS FixedResets are down over 150bp on the day in the wake of the company’s ambitious takeover announcement. 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 17.55 to be $1.36 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.85 cheap at its bid price of 18.15.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 16.60 to be 0.68 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 18.00 to be 0.79 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 12.57 to be $1.77 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 16.66 and appears to be $1.05 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.90, looks $0.31 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.50 and is $0.50 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.95%, with two outliers below -1.50%. There is one junk outlier below -1.50% and one above +0.50%.

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

There is speculation regarding negative US rates:

If the world’s biggest economy weakens enough that traditional policy measures don’t help, the Fed may consider pushing rates below zero, according to Bank of America Corp. and JPMorgan Chase & Co.

That step would broaden the Fed’s toolkit beyond what was available during the financial crisis, when it slashed its overnight benchmark near zero and bought bonds to stimulate the economy. In 2012, New York Fed researchers said negative rates could prompt individuals to avoid depositing money in banks, potentially weakening the financial system.

“They’re still concerned, but not as much as they once were,” said Mark Cabana, a New York-based interest-rate strategist at Bank of America. “They’ve seen how successful they were in other countries, where there haven’t been adverse impacts on market functioning.”

Traders may be getting on board with the possibility too. The implied probability of U.S. rates sinking below zero by the end of 2017 has jumped to roughly 13 percent, the highest since at least July, data compiled by Bloomberg show. The wagers are tied to the London interbank offered rate, which partly reflects expectations for Fed rates.

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And 10-Year JGBs are at zero:

The yield on Japan’s benchmark 10-year government bonds fell to zero for the first time, an unprecedented low for a Group-of-Seven economy, as global financial turmoil and the Bank of Japan’s adoption of negative interest rates drive demand for the notes.

The 10-year yield has tumbled from 0.22 percent before the BOJ surprised markets with the decision on Jan. 29 to introduce a minus 0.1 percent rate on some of the reserves financial institutions park at the central bank. It fell four basis points to zero percent as of 10:17 a.m. in Tokyo.

Japanese bonds are also climbing as sovereign securities rally worldwide. Global stocks have dropped almost 10 percent this year on concern growth is slowing in China, and as slumping oil prices undermine policy makers efforts to revive inflation. About 29 percent of the outstanding debt in the Bloomberg Global Sovereign Bond index was yielding less than zero as of 5 p.m. in New York on Monday. Swiss 3 percent notes due in 2018 were offering the lowest yield in the index, according to data compiled by Bloomberg.

Deutsche Bank might have trouble paying coupons on its CoCos:

Deutsche Bank AG may struggle to pay coupons on its riskiest bonds next year if operating results disappoint or litigation costs are higher than expected, according to analysts at CreditSights Inc.

Bonds and stock of Germany’s largest bank have plunged this year, with the shares shedding 39 percent of their value and its contingent convertible bonds — known as CoCos, or additional Tier 1 securities — turning in a similar performance. The cost of protecting the company’s subordinated debt from default for five years using credit-default swaps has more than doubled since the end of 2015, rising to 438 basis points, a four-year high, from 187.
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The question for CoCo investors and holders of trust preferred securities is whether Deutsche Bank has sufficient “available distributable items,” a measure based on audited unconsolidated accounts calculated under German accounting principles, to make the payments, according to [CreditSights analyst Simon] Adamson. Given that there are reserves available to make up any shortfall that might prevent payouts, “we would be surprised” if Deutsche Bank didn’t pay coupons on its CoCos this year, which are determined by its 2015 performance, he said.

At the end of 2014, the latest figure available, Deutsche Bank had 2.87 billion euros ($3.2 billion) of ADIs, according to a presentation. The company also has 2.93 billion euros in a general reserve that could be used to top up ADI, as well as a 5.5 billion-euro “blocked amount” that was excluded from the ADI calculation and could probably be unblocked if necessary, according to CreditSights.

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UK authorities have done much to cement perception of regulators as Keystone Kops:

The first signs of trouble for prosecutors came about three weeks into the trial. Their witness was a government investigator called to lay out details of the probe into the alleged rigging of a key interest rate by a group of brokers who faced up to 20 years in prison.

But as the investigator went through a calendar his agency had compiled listing days the rates had allegedly been manipulated, his team admitted they had some of the dates wrong. Waving the schedule as he spoke, defense lawyer Philip Hackett asked if the prosecution was “making this up as they go along.”
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The case against the brokers looked like a slam-dunk for [Serious Fraud Office chief prosecutor Mukul] Chawla. To begin with, [Tom] Hayes [now serving an 11-year sentence] had admitted conspiring with the six men to rig the rate to boost his trading profits. Reams of e-mail and instant-message evidence showed the defendants discussing the alleged crimes with Hayes. Two of the firms they worked for — ICAP and RP Martin — had already been fined $90 million by U.K. and U.S. regulators for failing to curb the brokers’ behavior.
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But as Chawla laid out his case, even some of his own witnesses seemed to undermine it. In the second week, the prosecutor called John Ewan, a former director of the British Bankers’ Association, the trade body that officially oversaw Libor until 2013, in an effort to explain how the system was supposed to work when it wasn’t being rigged.

Instead of upstanding, Ewan came off as evasive. At one point, he claimed he had no idea the rate was being manipulated, despite written evidence that traders had told him.
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The following week, Chawla called Paul Chadwick, the SFO investigator. It should have been a routine discussion on how the evidence was compiled, but descended into an argument when it emerged that the SFO had changed the dates it claimed rigging took place. The initial version had some defendants accused of manipulation on days when they’d been on vacation. Hackett, a defense counsel, would later denounce the SFO’s handling of the probe as an “utter shambles.”

However, the best line I’ve seem coming out of a courtroom in recent memory comes from one of the defendants:

Former Tullett Prebon broker Noel Cryan, for example, had exchanged dozens of instant messages with Hayes over a 10-month period in 2009 in which he pledged to help manipulate the rate.

Prosecutors argued the communications proved Cryan’s guilt. But he testified that it had all been a ruse. He’d never actually followed through on Hayes’s requests, he said, but only deceived him to allow his firm to pocket the more than 200,000 pounds commissions Hayes’s bank paid as rewards.

When Chawla asked Cryan how he justified lying to one of his best and longest-standing customers, Cryan cracked a wide smile. “It’s called broking Mr. Chawla,” he said.

Members of the jury rolled their eyes when defense counsel revealed that the SFO didn’t have any proof that Cryan had actually passed on Hayes’s requests to Tullett Prebon’s cash brokers to carry them out.

Meanwhile, Timothy Lane, Deputy Governor of the BoC, has implied he not only has a crystal ball but is much wiser than investor-scum:

Macroprudential tools can be used in two ways. One is to foster a more resilient financial system on an ongoing basis. To give just one example, regulators can establish ceilings on mortgage loan-to-value ratios on an ongoing basis, so that any correction in housing prices is less likely to create stress for the financial system. With a more resilient system, all of the financial stability concerns I have been discussing become more manageable.

Authorities could also, in principle, adjust macroprudential tools to dampen financial cycles—tightening them when leverage is building up and risk taking is increasing, and easing those requirements when that cycle turns. For example, regulators can lower loan-to-value ratios in response to indications of rising household sector vulnerabilities. Another example is the countercyclical capital buffer introduced as part of the Basel III reform of bank capital requirements.

Such countercyclical measures are designed, in part, to weaken the feedback loop between asset prices and credit growth that can lead to the kind of financial excesses that set the stage for a crisis. The track record of countercyclical measures in leaning against a financial cycle is not yet nearly sufficient to form a definite view of their practical effectiveness, however.

“Not yet nearly sufficient”? There’s complete negative evidence, more like. The Fed never saw the US housing bubble and has produced convincing evidence that there was no reason for them to see it.

Central bankers are about bright and wise enough to change policy rates when inflation changes and sometimes miss that boat completely as well. Once they are permitted to apply “macro-prudential tools” (the new euphemism for Soviet-style central planning) we’ll all be worse off.

There are some things I support that might be considered “macro-prudential”, but which fall far short of Mr. Lane’s winner-picking and crony-capitalism. I think, for instance, that given that 40% of Canadian bank assets are mortgages, compared to a 30% historical rate, it would be entirely proper to apply a surcharge to the risk weights of this asset class – as well as, potentially, other balloons. But I do not suggest this because I’m the smartest guy in the room and my uncle once dated the sister of a cabinet minister; I suggest this simply because it is a large change and it behooves us to behave with caution when things are changing. When things get significantly out of whack with historical averages, lean against them; but do not attempt to pick winners and over-ride the judgement of the guy on the ground who figures he can handle a 95% LTV mortgage; or the guy in the bank who figures he’s right. To do so is intellectual narcissism.

But on a bright note, there’s another currency-driven takeover:

Reno, Nevada-based Tahoe agreed to acquire Lake Shore on Monday in an all-stock deal valued at C$945 million ($678 million). From the perspective of Tahoe, which has mines in Latin America, the advantages are twofold, according to Barry Allan, a Toronto-based senior vice president at Mackie Research Capital Corp.

“It’s political diversification for these Tahoe shareholders,” Allan said by phone. “You’ve got stable Canada, thank you very much, an attractive currency. It’s just an insurance policy.”
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In the deal, Lake Shore investors will get 0.1467 of a Tahoe share for every share they own, the companies said Monday in a statement. The ratio implies C$1.71 per Lake Shore common share, based on Tahoe’s closing on Friday, representing a premium of about 15 percent to Lake Shore’s closing price that day, the companies said.

It was a horrible day for the Canadian preferred share market, with PerpetualDiscounts off 35bp, FixedResets losing 98bp and DeemedRetractibles down 56bp. The Performance Highlights table is lengthy. 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 +235, is bid at 17.60 to be $1.43 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.78 cheap at its bid price of 11.11.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.65 to be 0.83 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 18.20 to be 0.95 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 13.15 to be $1.52 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.11 and appears to be $1.13 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 16.03, looks $0.24 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.69 and is $0.51 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.84%, with three outliers below -1.50%. Note the x-axis has been shifted today. There are two junk outliers below -1.50% and one above +0.50%.

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

Jobs, jobs, … well, a few jobs, anyway:

Job growth settled into a more sustainable pace in January and the unemployment rate dropped to an almost eight-year low of 4.9 percent, signs of a resilient labor market that’s causing wage growth to stir.

The 151,000 advance in payrolls, while less than forecast, largely reflected payback for a seasonal hiring pickup in the final two months of 2015, Labor Department figures showed Friday. The jobless rate fell to the lowest level since February 2008. Hourly earnings rose more than estimated after climbing in the year to December by the most since July 2009.
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Friday’s data showed a much-awaited pickup in wage growth is starting to manifest itself. Average hourly earnings rose 0.5 percent from a month earlier to $25.39. The year-over-year increase of 2.5 percent followed a 2.7 percent jump in the 12 months ended in December, which was the biggest advance since mid-2009.

All in all, the report was somewhat hawkish for the Fed:

Most obviously, the jobless rate dropped in January to 4.9 percent, matching the Fed’s median forecast for the long-run sustainable level of unemployment — or “full employment” — and continuing the most impressive trend in U.S. economic data.

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Perhaps even more encouraging was the move in the labor force participation rate. The share of the working-age population that was either employed or looking for a job ticked up to 62.7 percent in January from 62.6 percent the month before. From a year earlier, some 1.31 million people have entered the labor force.

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Average hourly earnings rose by a more-than-expected 2.5 percent in January from the year before. Wages for the year through December were revised upward to 2.7 percent, the highest level since July 2009.

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Meanwhile, back in the frozen North:

Over all, Canada shed 5,700 jobs in January, pushing the jobless rate up by 0.1 percentage point and missing analyst expectations as energy-related declines offset a spurt in public sector employment.
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Ontario was the only province to see job expansion, with 20,000 new positions created last month, according to Statscan. Most of the increases were in trade, education, and accommodation and food services.

But we can hope for higher unemployment amongst stock brokers!

Banks are watching wealthy clients flirt with robo-advisers, and that’s one reason the lenders are racing to release their own versions of the automated investing technology this year, according to a consultant.

Millennials and small investors aren’t the only ones using robo-advisers, a group that includes pioneers Wealthfront Inc. and Betterment LLC and services provided by mutual-fund giants, said Kendra Thompson, an Accenture Plc managing director. At Charles Schwab Corp., about 15 percent of those in automated portfolios have at least $1 million at the company.

“It’s real money moving,” Thompson said in an interview. “You’re seeing experimentation from people with much larger portfolios, where they’re taking a portion of their money and putting them in these offerings to try them out.”

… despite the best efforts of their future colleagues:

OSC Notice 33-745 also provided some commentary on what would be expected of a registered advising representative (AR) in the context of an online advisory business:

“The online advice model that we have considered acceptable involves an interactive website used to collect KYC information, which will be reviewed by a registered AR. The AR will communicate with the client by telephone, video link, email or internet chats. The AR must ensure that sufficient KYC information has been gathered to support the PM firm’s obligation to make suitability determinations for the client.

Each of the firms that we have registered to provide online advice operates on a discretionary managed account basis, using portfolios of unleveraged exchange traded funds (ETFs) or low cost mutual funds. In most cases, these are model portfolios which are selected for a client based on a profile generated by the KYC collection process. An AR will review and approve the suitability of the portfolio for the client. The client’s account is periodically rebalanced to the parameters set for their portfolio.

This is not the so-called “robo-advice” model seen in the United States, where online advice has seen rapid growth in the last few years. The online advisers operating in Ontario are offering hybrid services that utilize an online platform for the efficiencies it offers, while ARs remain actively involved in decision making.”

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 62bp, FixedResets up 54bp and DeemedRetractibles gaining 8bp. The Performance Highlights table is lengthy. 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 +235, is bid at 17.43 to be $1.04 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.76 cheap at its bid price of 18.30.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 18.30 to be 1.21 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 18.20 to be 1.23 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 13.30 to be $1.65 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.30 and appears to be $1.05 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 16.15, looks $0.22 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.10 and is $0.24 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.92%, with two outliers above 0.00%. There are four junk outliers above 0.00%.

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

There are mutterings about increasing foreign holdings of Canada bonds:

The Canadian fixed-income market is exposed to foreign investors like never before, said Warren Lovely, head of public-sector research at National Bank. And with Canada’s once-superior economic stature having slouched under the weight of the commodity shock, the appeal of Canadian bonds to global investors could fade, he said.

“If not a full-blown systemic risk, Canada’s leverage to foreign portfolio investors is a notable vulnerability for the country’s capital markets and debt issuers,” he said.

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Morgan Stanley has prepared some interesting charts on global monetary policy:

The Bank of England voted unanimously not to raise interest rates Thursday, as the sole dissenter on the Monetary Policy Committee abandoned his recent calls to tighten policy. The European Commission also slashed its inflation forecasts, all but guaranteeing more quantitative easing when the European Central Bank next meets in March. Now, given the world’s deteriorating economic backdrop, that December rate increase from the Federal Reserve looks increasingly anachronistic.

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S&P published a review article titled Negative Interest Rates: Why Central Banks Can Defy “Time Preference”. It’s mainly about the BoJ move to negative policy rates, but concluded:

Since the Global Financial Crisis erupted in 2008 and triggered the Great Recession and ushered in a period of secular macro deleveraging, the major central banks of the world have progressively implemented all manner of “unconventional” monetary policy measures. There are now five major central banks implementing some form of negative interest rate policy. Two of those central banks are also implementing full-fledged QE. The Federal Reserve has made one interest rate hike, but it continues to have a balance sheet with a stock of QE on it to the tune of more than $3 trillion. Similarly the Bank of England, while not having raised interest rates yet, maintains a much enlarged balance sheet, thanks to its earlier five rounds of QE. Several major central banks have experimented with various forms of forward guidance too.

When future historians look back on this period, they will likely describe a world in which the major central banks all experimented with new forms of monetary policy easing and learned from one another in the process, as one central bank after another pioneered new policy innovations and others adopted and adapted them, some rapidly, others with long lags. Disentangling cause and effect in the process of cross-fertilization and adaptation will be no simple feat.

There is nothing new in this of course: The 20 years or so preceding the financial crisis were ones in which similar cross-fertilization of ideas and practice occurred, as what become known as “flexible inflation targeting” became the orthodoxy of central banking, before it was confronted by the ghost of Hyman Minsky (14).

It is my compelling sense that this process of cross-pollination of policy learning and institutional evolution is far from over. The journey into uncharted monetary waters continues.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 62bp, FixedResets up 54bp and DeemedRetractibles gaining 8bp. The Performance Highlights table is lengthy. 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 17.46 to be $1.14 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.86 cheap at its bid price of 18.21.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 18.35 to be 1.36 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 18.15 to be 1.20 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.30 to be $1.88 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.66 and appears to be $1.17 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 16.24, looks $0.23 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.15 and is $0.27 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.98%, with two outliers above 0.00%. There are two junk outliers above 0.00%.

Click for Big

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