PrefBlog

Today’s big new was the FOMC Release:

Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
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Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

The press conference added a little colour:

“You have seen a shift this time, in most participants assessments of the appropriate path for policy,” Fed Chair Janet Yellen said at a press conference in Washington. “That largely reflects a somewhat slower projected path for global growth, for growth in the global economy outside the United States, and for some tightening in credit conditions in the form of an increase in spreads.”

Yields on Treasury securities fell following the Fed’s actions, with the rate on the 10-year note dropping to 1.91 percent at 4:25 p.m. in New York from 1.99 percent just before the announcement.
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“The tone of the FOMC statement and accompanying economic projections was dovish,” Neil Dutta, head of U.S. economist at Renaissance Macro Research LLC in New York, said in a research note. The reference to global risks “pushes the Fed in the role of the world’s central bank. In this role, the Fed needs to let inflation in the U.S. surge to offset disinflation in the rest of the world.”
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The median of Fed officials’ projections, known as the “dot plot,” saw the federal funds rate at 1.875 percent at the end of 2017, compared with 2.375 percent forecast in December. The end-2018 level fell to 3 percent, from 3.25 percent, with the longer-run projection at 3.25 percent, down from 3.5 percent.

And Brian Milner writes in the Globe:

The Fed expects the job market to continue strengthening, with unemployment sliding to 4.7 per cent by the end of this year and falling further in subsequent years. Yet, it has slightly lowered its outlook for both economic growth and inflation – expecting the latter to remain below the 2 per cent target through next year – and reduced its long-term rate forecast to 3.3 per cent from 3.5 per cent, which implies that we won’t be seeing an economic boom any time soon south of the border.

The Fed’s policy doves, led by Ms. Yellen, seem likely to hold sway, particularly now that inflation is expected to reach only 1.2 per cent this year, down from the Fed’s earlier forecast of 1.6. Gauged by Fed funds futures trading, the market is expecting the next modest hike in June and one more before the end of the year. But that is by no means a sure bet.

“Reduced uncertainty about global economic and financial developments or further meaningful gains in the labour market and core inflation, or some combination of all of these, would appear to be the necessary condition for the next normalization step,” Michael Gregory, deputy chief economist with BMO, said in a note.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 7bp, FixedResets up 10bp and DeemedRetractibles off 9bp. The Performance Highlights table shows churn. 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 17.23 to be $1.09 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.71 cheap at its bid price of 18.18.

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Most expensive is MFC.PR.O, resetting at +497bp on 2021-6-19, bid at 25.39 to be 0.84 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.56 to be 1.44 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 14.25 to be $0.85 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.40 and appears to be $1.05 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.42 looks $0.61 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 11.12 and is $0.52 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 below -2.00% and one 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?

Bloomberg reminds us that forecasting is hard:

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First National Financial Corporation, proud issuer of FN.PR.A, has been confirmed at Pfd-3 by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating of First National Financial LP (FNFLP) at BBB, and the ratings for the Senior Unsecured Debt and Class A Preference Shares of First National Financial Corporation (FNFC; DBRS refers to FNFLP and FNFC together as First National or the Company) at BBB (low) and Pfd-3, respectively. The trend on these ratings is Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.
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DBRS considers First National’s low risk balance sheet as a key factor supporting the ratings. DBRS notes that the Company’s direct credit exposure is limited to a $246 million mortgage investment portfolio (0.9% of total assets as of YE15) it holds on its balance sheet, mostly in commercial bridge lending. Historically, mortgages originated by First National have outperformed the industry with very low delinquency rates. DBRS sees sustaining this performance as critical to the Company’s business model and franchise. While low energy prices continue to be a headwind for the Canadian economy, the impact on the Canadian housing market has largely been regional to date, with some weakening of credit metrics in the western provinces.

DBRS considers First National’s liquidity and funding to be appropriately managed and aligned with its assets. First National funds most of its MUA either through sales to institutional investors (63%) or by securitization (26%), with the remaining MUA mostly warehoused temporarily, awaiting sale or securitization. However, FNF does have some concentration risk, with 13.7% of placement fees and mortgage income being originated from one Canadian financial institution in 2015.
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DBRS considers First National’s capital levels to be acceptable given the relatively low level of credit risk. At December 31, 2015, the Company’s tangible partner equity-to-tangible assets (excluding securitized mortgages) was 8.8%. However, given the high dividend payout ratio, organic capital generation has been constrained. DBRS would view improved capital retention favourably.

It was a modestly positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets up 11bp and DeemedRetractibles winning 18bp. The Performance Highlights table shows a fair amount of underlying churn. While overall volume was average, there was a lot of volume in the top issues.

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 17.50 to be $1.47 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.84 cheap at its bid price of 18.00.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.28 to be 0.78 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.61 to be 1.38 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 14.08 to be $1.00 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.40 and appears to be $1.04 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.30 looks $0.48 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 11.15 and is $0.53 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.93%, with two outliers below -2.00% and one above 0.00%. There is one junk outlier 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?

Nothing happened today.

Wait, I’m wrong. China is drafting a Tobin Tax:

China’s central bank has drafted rules for a tax on foreign-exchange transactions that would help curb currency speculation, according to people with knowledge of the matter.

The initial rate of the so-called Tobin tax may be kept at zero to allow authorities time to refine the rules, said the people, who asked not to be identified as the discussions are private. The tax is not designed to disrupt hedging and other foreign-exchange transactions undertaken by companies, they said.

Imposing a levy on foreign-exchange trading would be the most extreme step yet by policy makers to prevent speculative bets against the Chinese currency, after state-run banks repeatedly intervened to support the yuan and the government intensified a crackdown on capital outflows. A Tobin tax would complicate plans by China to create an international reserve currency and could undermine the leadership’s pledge to increase the role of market forces in the world’s second-largest economy.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 11bp, FixedResets gaining 10bp and DeemedRetractibles off 7bp. The Performance Highlights table shows highlights of performance. 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 17.55 to be $1.38 rich, while TRP.PR.C, resetting 2021-1-30 at +296, is $0.88 cheap at its bid price of 11.22.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 16.75 to be 0.82 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.73 to be 1.25 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 14.90 to be $1.72 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.40 and appears to be $1.12 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.45 looks $0.64 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 11.20 and is $0.49 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.89%, with one outlier below -2.00%. There are three junk outliers above 0.00% and one below -2.00%.

Click for Big

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

There’s a horrible jobs market in Canada:

Canada’s jobless rate unexpectedly rose to 7.3 per cent in February, the highest level in nearly three years as the hard-hit resources sector shed another round of jobs.

Over all, the country missed analyst forecasts and shed 2,300 positions. This marked the third month the unemployment rate increased, according to Statistics Canada monthly labour report.
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Nearly 9,000 people lost work in the natural resources sector last month, adding to the tens of thousands of positions that have vanished since oil started plunging mid-2014. Husky Energy Inc. and Cenovus Energy Inc. were among those in the energy sector slashing jobs.
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Alberta’s jobless rate jumped to 7.9 per cent from 7.4 per cent in January, as more Albertans hunted for work.

But it wasn’t just the oil rich province that bore the brunt of the pain. Saskatchewan lost 7,800 jobs, the most of any of the resource dependent provinces. Ontario also shed 11,000 positions.

British Columbia, which along with Ontario is expected to grow more than the national average, was the only region to significantly add new jobs. Employment in the western province grew by 14,000 due to an increase in trade.
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Full-time employment fell by 52,000 positions while part time rose by 49,500 spots. Employment in the services-producing sector fell by 44,500 positions, with losses in accommodation and food services.

And this is happening while the chances of a Fed hike are rising:

The bond market is boosting its bets on a Federal Reserve interest-rate increase in June as stocks and oil rally.

As Treasuries head toward a third straight weekly decline, traders now see the probability of a June rate hike as slightly better than a coin flip, according to futures data compiled by Bloomberg. That’s up from a 45 percent chance assigned Thursday and odds below 10 percent seen a month ago. Since 1994, the Fed hasn’t raised rates unless the futures market had priced in at least 60 percent of the move the day before, Bank of America interest-rate strategist Mark Cabana wrote in a March 11 note.
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There’s almost no market expectation for the Fed to raise rates at its next policy-setting meeting March 15-16, with the futures market implying a 4 percent chance, assuming the fed funds effective rate averages 0.625 percent after the next hike. For the central bank’s June meeting, though, the market-implied probability rose to 51 percent Friday as gains in stocks and crude prices dented demand for Treasuries and other havens.

George Weston Limited has been confirmed at Pfd-3 by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Notes & Debentures rating of George Weston Limited (GWL or the Company) at BBB as well as its Short-Term Issuer Rating at R-2 (high) and its Preferred Shares rating at Pfd-3. All trends are Stable. DBRS notes that, on March xx, 2016, DBRS confirmed the ratings of Loblaw Companies Limited (Loblaw) and changed the trend to Positive from Stable (see separate press release).
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GWL’s financial profile should remain stable based on its relatively stable balance-sheet debt, sizable cash balance and cash-generating capacity. Capital expenditures (capex) at Weston Foods are expected to remain elevated in the $300 million range in 2016 and to moderate somewhat going forward as the Company continues to invest new capacity, primarily in the United States, as well as replacement of end-of-life assets with more efficient alternatives. As a result, Weston Foods is likely to generate free cash flow deficits in the next one to two years. GWL is no longer committed to maintaining at least $1.0 billion of cash on hand as Loblaw completed its debt repayment plans in F2015. Over the near to medium term, DBRS expects that the Company will use any free cash flow (including dividends and distributions received) as well as cash on hand to continue to invest in growth (organic through Weston Foods capex or through acquisition) as well as to further increase returns to shareholders. DBRS notes that any rating upgrade on Loblaw to BBB (high) will not likely result in a corresponding rating action on the ratings of GWL.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts up 54bp, FixedResets winning 85bp and DeemedRetractibles gaining 45bp. 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 17.31 to be $1.36 rich, while TRP.PR.C, resetting 2021-1-30 at +296, is $0.88 cheap at its bid price of 11.10.

Click for Big

Most expensive is MFC.PR.O, resetting at +497bp on 2021-6-19, bid at 25.33 to be 0.78 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.80 to be 1.16 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.90 to be $1.30 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.45 and appears to be $1.03 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.27 looks $0.49 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 11.13 and is $0.54 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.79%, with two outliers below -2.00% and one above 0.00%. Note that the range of the y-axis has changed today. 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?