March 24, 2010

Covered bonds are recovering:

Europe’s banks are selling covered bonds at the fastest pace in four years in a sign that debt investors are betting Europe’s economy is strong enough to weather the budget crisis in Greece.

Caja Ahorros Barcelona, Spain’s largest savings bank, and Westdeutsche Immobilienbank AG, a unit of Germany’s third- biggest state-owned lender, are among the mainly European financial companies that issued 87.5 billion euros ($118 billion) of the notes this year, according to data compiled by Bloomberg. That’s the most since 95.4 billion euros of the bonds were sold in the same period of 2006.

Covered bond spreads have tightened at a slower pace than those on other senior corporate debt. Typically carrying top ratings, they also widened less at the onset of the deepest financial crisis since the Great Depression.

The extra yield on the mortgage- and public sector-backed securities is still more than double the 36 basis-point average for the past 12 years, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Investment-grade corporate bond spreads narrowed to 148 basis points as of March 22, compared with an average 92 basis points since 1997, index data show.

Covered bond sales fell as the credit market seized up, when investors shunned hard-to-value securities such as those backed by real estate. Issuance tumbled to 228.4 billion euros in 2008, from a record-high 347.8 billion euros in 2007, according to data compiled by Bloomberg.

It’s hard to interpret shifts in covered bonds in isolation, or with highly aggregated data such as the above. If it means more investor interest – good! If it means the banks are locked out of the unsecured market – bad!

It is possible to have your CFA Charter pulled for pornography.

Volume continued heavy in the Canadian preferred share market today as the ACO.PR.A redemption took effect. PerpetualDiscounts lost 1bp and FixedResets gained 9bp – which did not affect the median weighted average yield, which remains at 3.40%. That’s the trouble with using medians – sometimes things simply don’t move in-line!

PerpetualDiscounts now yield 6.01%, equivalent to 8.41% interest at the standard 1.4x equivalency factor. Long Corporates now yield about 5.7% (showing a total return of 0.35% on the month-to-date, +4.46% YTD), so the pre-tax interest-equivalent spread (also called the seniority spread) is now about 270bp, a slight widening from the 265bp reported March 17 and edging closer to their one year high in the low 290s.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 2.66 % 2.73 % 61,221 20.67 1 0.0472 % 2,074.3
FixedFloater 5.05 % 3.17 % 49,126 19.96 1 0.7491 % 3,128.6
Floater 1.93 % 1.72 % 45,900 23.26 4 0.2580 % 2,390.8
OpRet 4.82 % 1.85 % 108,644 0.18 12 0.1092 % 2,315.3
SplitShare 6.37 % 6.26 % 136,379 3.67 2 -0.0659 % 2,141.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1092 % 2,117.2
Perpetual-Premium 5.94 % 6.01 % 118,718 13.67 7 -0.1715 % 1,872.7
Perpetual-Discount 5.97 % 6.01 % 181,218 13.83 71 -0.0095 % 1,770.9
FixedReset 5.33 % 3.40 % 344,628 3.67 43 0.0881 % 2,211.1
Performance Highlights
Issue Index Change Notes
IAG.PR.E Perpetual-Premium -2.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-24
Maturity Price : 24.11
Evaluated at bid price : 24.31
Bid-YTW : 6.20 %
BAM.PR.J OpRet -1.53 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 4.99 %
CIU.PR.A Perpetual-Discount -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-24
Maturity Price : 19.54
Evaluated at bid price : 19.54
Bid-YTW : 5.95 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.A OpRet 225,530 Nesbitt crossed 23,100 at 25.83; Desjardins bought 10,000 from anonymous at the same price. National crossed 40,000 at 25.80 and two blocks, 50,000 and 60,000 at 25.84. Desardins crossed 25,000 at 25.83.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-04-23
Maturity Price : 25.25
Evaluated at bid price : 25.81
Bid-YTW : -11.91 %
CM.PR.L FixedReset 184,250 National crossed 40,000 at 28.50 and 50,000 at 28.57. Nesbitt crossed 50,000 at 28.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 28.45
Bid-YTW : 3.25 %
BAM.PR.O OpRet 124,100 Nesbitt crossed 120,000 at 25.85.
YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.90
Bid-YTW : 3.81 %
SLF.PR.A Perpetual-Discount 120,690 RBC crossed 50,000 at 19.33 and 10,000 at 19.30, followed by another 50,000 at 19.33.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-24
Maturity Price : 19.28
Evaluated at bid price : 19.28
Bid-YTW : 6.20 %
TD.PR.K FixedReset 100,919 National crossed 19,400 at 28.36 and 60,000 at 28.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 28.35
Bid-YTW : 3.26 %
TRP.PR.B FixedReset 95,524 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-24
Maturity Price : 24.95
Evaluated at bid price : 25.00
Bid-YTW : 3.94 %
There were 59 other index-included issues trading in excess of 10,000 shares.

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