August 24, 2010

The Bank of Canada has released a discussion paper by Zhongfang He titled Evaluating the Effect of the Bank of Canada’s Conditional Commitment Policy:

The author evaluates the effect of the Bank of Canada’s conditional commitment regarding the target overnight rate on longer-term market interest rates by taking into account the relationship between interest rates, inflation, and unemployment rates. By using vector autoregressive models of monthly interest rates, month-over-month inflation, and unemployment rates for Canada and the United States, the author finds that the Canadian 1-year treasury bill rates and 1-year forward 3-month rates have generally been lower than their model-implied values since April 2009, while the difference between the U.S. realized rates and their model-implied values has been much smaller. The author also studies the effect of the conditional commitment on longer-term government bond yields with maturities of 2, 5, and 10 years, and finds lower actual Canadian longer-term interest rates than their model-implied values, though their difference diminishes as the maturities become longer. The evidence appears to suggest that the Bank of Canada’s conditional commitment likely has produced a persistent effect in lowering Canadian interest rates relative to what their historical relationship with inflation and unemployment rates would imply. However, this finding is not statistically strong and is subject to caveats such as possible in-sample model instability and the dependence of the results on the choice of inflation variable.

Ontario will tinker with pension guarantees:

The fund, which provides pensioners with up to $1,000 a month if their private-sector plan fails to provide its full benefit, has been an albatross for the governing Liberals, who have repeatedly warned that it hasn’t been funded properly since its inception 30 years ago.

That looming threat came to a head last year during the global recession, when the government was faced with a fund that didn’t have enough cash to help thousands of workers at corporate giants like General Motors of Canada Ltd. and Nortel Networks Corp. that were poised to collapse into bankruptcy.

“These rules will help reduce – hopefully eliminate – the kind of moral hazard that I would associate with companies and employee groups agreeing to benefits without properly funding them.”

Mr. Duncan is also proposing some temporary relief for certain pension plans in the broader public sector by offering them more time to pay down solvency deficits, as long as they meet certain conditions, and a review of the pension system every five years.

This may be related politically to Nortel’s pension status:

On Sept. 30, 2010, the Nortel Defined Benefit Pension Plans will become orphans. The Financial Services Commission of Ontario (FSCO) will then take over as required by current law.

Unless the Ontario government takes prompt action, Nortel’s pensioners will then lose 36% of their pensions and possibly even more. A major part of their loss occurs because, under current regulations, FSCO will simply wind-up the pension funds by converting them to annuities. This forever locks-in the existing pension deficit and it adds major penalties, because the cost of annuities is presently at the worst they have even been in 25 years with no relief in sight.

In 2001 Nortel’s plan went from half a billion surplus to one billion deficit; to $1.8-billion in 2002 …

Manulife common (MFC-TO) got hammered today:

Manulife Financial Corp., North America’s third-largest insurer, decreased 5.4 percent to a 17-month low of $11.71. Bank of America Corp. analyst Steve Theriault yesterday increased his third-quarter loss estimate for the company to 94 cents a share from 37 cents a share, excluding certain items. Sun Life Financial Inc., Canada’s third-biggest insurance company, dropped 4.3 percent to C$24.17.

Fitch affirmed MFC:

Fitch Ratings has assigned an ‘A-‘ rating to Manulife Financial Corporations (MFC’s) recently issued C$900 million 4.079% medium-term notes due Aug. 20, 2015. At the same time Fitch affirmed all of MFC’s existing ratings. (A full list of rating actions follows at the end of this release.) The Rating Outlook is Stable.

Within Fitch’s rating rationale are multiple considerations. If MFC were to materially deviate from any of these items, especially for an extended period, the ratings could be impacted. Included within these key rating rationale factors are the following:

–The annual 3Q’10 actuarial experience and methods adjustments of at least C$1 billion;
–MFC adjusted earnings of C$3 billion a year;
–Operating company Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio above 190%;
–Holding company financial leverage not exceeding 20% on Fitch’s equity adjusted leverage basis;
–Current sensitivity to equity markets;
–Current volatility in earnings

–C$$350 million 4.1% class A, series 1, preferred stock at ‘BBB’;
–C$350 million 4.65% class A, series 2, preferred stock at ‘BBB’;
–C$300 million 4.5% class A, series 3, preferred stock at ‘BBB’;
–C$450 million 6.6% non-cumulative, preferred class A, series 4 stock at ‘BBB’;
–C$350 million 5.60% non-cumulative rate reset, preferred class 1, series 1 stock at ‘BBB’.

S&P says Ireland needs a little more green:

Ireland’s long-term sovereign credit rating was cut one step to AA- from AA by Standard & Poor’s, which cited the projected cost of supporting the nation’s financial sector.

“The negative outlook reflects our view that a further downgrade is possible if the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government’s ability to meet its medium- term fiscal objectives,” S&P said today in a statement.

S&P said its new projections suggest that Ireland’s net general government debt will rise toward 113 percent of gross domestic product in 2012. That’s more than 1.5 times the median for the average of euro zone sovereign nations, and “well above” the debt burdens the New York-based firm said it projects for similarly rated countries in the region such as Belgium at 98 percent and Spain at 65 percent.

The Canadian preferred share market edged a little higher today, with PerpetualDiscounts up 6bp and FixedResets gaining 10bp. Volume was above average. MFC’s preferreds were not immune to the woes of the common, with two issues figuring in the performance highlights – which were all losses today.

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

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.3305 % 2,048.7
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.3305 % 3,103.6
Floater 2.55 % 2.17 % 36,162 21.92 4 -0.3305 % 2,212.1
OpRet 4.91 % 4.11 % 97,880 0.90 9 -0.3526 % 2,343.2
SplitShare 6.05 % -32.87 % 67,451 0.09 2 0.1044 % 2,328.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.3526 % 2,142.7
Perpetual-Premium 5.76 % 5.22 % 101,904 1.75 7 0.0450 % 1,963.0
Perpetual-Discount 5.72 % 5.77 % 186,794 14.11 71 0.0585 % 1,896.7
FixedReset 5.28 % 3.24 % 274,303 3.37 47 0.0975 % 2,245.9
Performance Highlights
Issue Index Change Notes
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 4.11 %
BAM.PR.K Floater -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-24
Maturity Price : 14.89
Evaluated at bid price : 14.89
Bid-YTW : 3.26 %
MFC.PR.D FixedReset -1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 26.76
Bid-YTW : 4.52 %
Maturity Type : Call
Maturity Date : 2011-07-30
Maturity Price : 25.25
Evaluated at bid price : 25.63
Bid-YTW : 4.72 %
MFC.PR.B Perpetual-Discount -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-08-24
Maturity Price : 18.76
Evaluated at bid price : 18.76
Bid-YTW : 6.21 %
Volume Highlights
Issue Index Shares
MFC.PR.B Perpetual-Discount 169,174 Nesbitt crossed 75,000 at 19.00; RBC crossed 45,000 at the same price.
Maturity Type : Limit Maturity
Maturity Date : 2040-08-24
Maturity Price : 18.76
Evaluated at bid price : 18.76
Bid-YTW : 6.21 %
CM.PR.D Perpetual-Discount 166,030 TD crossed blocks of 29,900 and 30,000, both at 25.20. Nesbitt crossed 100,000 at 25.21.
Maturity Type : Call
Maturity Date : 2012-05-30
Maturity Price : 25.00
Evaluated at bid price : 25.17
Bid-YTW : 5.60 %
BNS.PR.J Perpetual-Discount 91,861 RBC crossed 84,100 at 24.07.
Maturity Type : Limit Maturity
Maturity Date : 2040-08-24
Maturity Price : 22.96
Evaluated at bid price : 24.05
Bid-YTW : 5.46 %
MFC.PR.E FixedReset 85,029 Nesbitt crossed 10,000 at 25.85; RBC crossed 50,000 at 25.82.
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 25.91
Bid-YTW : 4.54 %
BMO.PR.P FixedReset 83,911 RBC crossed blocks of 37,700 and 40,000, both at 27.25.
Maturity Type : Call
Maturity Date : 2015-03-27
Maturity Price : 25.00
Evaluated at bid price : 27.26
Bid-YTW : 3.23 %
SLF.PR.E Perpetual-Discount 74,040 RBC crossed 69,100 at 19.00.
Maturity Type : Limit Maturity
Maturity Date : 2040-08-24
Maturity Price : 18.93
Evaluated at bid price : 18.93
Bid-YTW : 5.94 %
There were 45 other index-included issues trading in excess of 10,000 shares.

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