October 20, 2010

The offshore yuan market seems to be a success:

Banks are paying about 30 percent less interest on yuan-denominated debt sold in Hong Kong than they pay in Shanghai as faster currency appreciation fuels overseas demand for the securities.

The average yield in the city is 1.77 percent, according to data from the Treasury Markets Association, which tracks 19 outstanding issues that have maturities of no more than four years. That includes bonds sold by state-controlled lenders including China Development Bank and Bank of China Ltd. The average rate in China for one- to three-year bonds issued by government-linked companies is 2.60 percent, according to Bank of America Merrill Lynch’s China Quasi-Government Index.

China is encouraging domestic lenders to sell debt in Hong Kong to broaden the appeal of holding its currency overseas as it seeks to reduce reliance on the dollar for international trade and finance. Yuan deposits in the city more than doubled to a record 130 billion yuan ($20 billion) in the first eight months of 2010.

In the same way that yuan bonds command a premium in Hong Kong, so too does the currency. The spot rate in the city’s offshore market was 6.4745 yesterday, 2.6 percent more than the onshore rate. That’s the biggest gap since Bloomberg began tracking the rate two months ago. Overseas entities can only buy yuan on the mainland if they have investment proposals or trade transactions approved by Chinese regulators.

There’s a draconian budget in the UK:

“Today’s the day when Britain steps back from the brink,” Osborne told lawmakers in the House of Commons in London today as he outlined plans to virtually eliminate a 156 billion-pound ($245 billion) budget deficit with average cuts in government departments of 19 percent.

Total spending would fall by 0.7 percent a year after inflation, according to a June outline. Under Margaret Thatcher, 85, who was known as the Iron Lady during her 11 years as premier that ended in 1990, spending rose by an annual 1.2 percent.

Legislation to impose a permanent levy on banks will be published tomorrow, Osborne said.

“We neither want to let banks off making their fair contribution, nor do we want to drive them abroad,” he said. “Our aim will be to extract the maximum sustainable tax revenues from financial services. We will assess what those maximum revenues could be — not just in one year, but over a period of years.”

Now that simplified prospectuses have been bloated to the point where they are no longer read, and the summary of terms at the beginning of the simplified prospectus has become so detailed that it’s no longer read either, the Canadian Securities Administrators have taken the next logical step and released the 145 page Notice of Amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, Form 81-101F1 and 81-101F2 and Companion Policy 81-101CP Mutual Fund Prospectus Disclosure and Related Amendments:

We have not carried forward the requirement that the Fund Facts be written at a grade level of 6.0 or less on the Flesch-Kincaid grade level scale because we were told there is no French language equivalent to the scale. However, the Fund Facts is still required to be prepared using plain language and in a format that assists in readability and comprehension.

We have added guidance in the Companion Policy that the CSA will generally consider a grade level of 6.0 or less on the Flesch-Kincaid grade level scale to demonstrate that the Fund Facts is written in plain language.

Should I ever start a public bond index-plus fund, I may require some help explaining convexity-matching at the grade 6 level in under four pages. Note, however, that the document specifies only the number of double-sided pages; it does not specify font size, so I may use a 1-point font. One way or another, if you consider yourself gifted at technical writing and are looking for work, watch this space! I’m considering making book on how long it will be until it becomes a requirement to prepare and distribute the “Simplified Fund Facts” … do you think this works better if I allow betting by individual year in a parimutual system, or an over/under setup? Maybe both?

Those of an academic bent might be interested to learn that this post so far, when analyzed by MS-Office 2003 from the beginning to “Maybe both?” in the paragraph above, with HTML formatting removed, has a Flesch Reading Ease of 36.3 and a Flesch-Kincaid Grade Level of 15.0. This will be gratifying news for any hard-core indexers out there … when you reach the point in your sermon at which you claim that “People who buy mutual funds are retarded!”, you may now also note that the Canadian Securities Administrators agree with you.

The Canadian preferred share market bounced back today on continued heavy volume with PerpetualDiscounts gaining 25bp and FixedResets winning 9bp. The market was very well-behaved, with only one entry in the performance highlights.

PerpetualDiscounts now yield 5.45%, equivalent to 7.63% interest at the standard equivalency factor of 1.4x. Long corporates now yield 5.2% – maybe a hair over – so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now at about 240bp, about the same as reported October 13.

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 0.1459 % 2,179.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1459 % 3,302.1
Floater 2.87 % 3.19 % 83,372 19.26 3 0.1459 % 2,353.6
OpRet 4.92 % 3.85 % 83,666 0.11 9 0.2208 % 2,367.5
SplitShare 5.88 % -20.72 % 69,706 0.09 2 -0.2832 % 2,392.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2208 % 2,164.8
Perpetual-Premium 5.71 % 5.10 % 145,024 5.35 19 0.0165 % 2,008.4
Perpetual-Discount 5.43 % 5.45 % 240,824 14.69 58 0.2495 % 2,009.0
FixedReset 5.26 % 3.07 % 345,038 3.26 47 0.0869 % 2,273.3
Performance Highlights
Issue Index Change Notes
RY.PR.A Perpetual-Discount 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-20
Maturity Price : 22.16
Evaluated at bid price : 22.30
Bid-YTW : 5.06 %
Volume Highlights
Issue Index Shares
RY.PR.L FixedReset 228,920 Dundee sold four blocks to anonymous, three of 25,000 shares each and one of 12,400 shares, all at 27.31. Dejsardins crossed 61,000 at 27.30. RBC crossed three blocks, of 10,000 shares, 15,000 and 70,000, all at 27.20.
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.28
Bid-YTW : 2.99 %
CM.PR.A OpRet 199,340 Called for redemption. Desjardins bought three blocks from Nesbitt, one of 90,600 and two of 50,000 each, all at 24.98.
Maturity Type : Call
Maturity Date : 2010-11-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.63 %
CM.PR.I Perpetual-Discount 185,784 RBC crossed blocks of 45,000 and 107,800, both at 22.25.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-20
Maturity Price : 22.18
Evaluated at bid price : 22.32
Bid-YTW : 5.28 %
RY.PR.E Perpetual-Discount 75,745 Scotia sold 28,900 to anonymous at 22.10.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-20
Maturity Price : 21.96
Evaluated at bid price : 22.08
Bid-YTW : 5.17 %
BNS.PR.T FixedReset 66,095 RBC crossed 58,000 at 27.92.
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.90
Bid-YTW : 2.80 %
TD.PR.K FixedReset 49,570 Nesbitt crossed 20,000 at 27.87; Desjardins crossed 11,300 at the same price.
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.88
Bid-YTW : 3.03 %
There were 55 other index-included issues trading in excess of 10,000 shares.

One Response to “October 20, 2010”

  1. […] PerpetualDiscounts now yield 5.41%, equivalent to 7.57% interest at the standard 1.4x equivalency factor. Long Corporates jerked up to about 5.3% (maybe a little under) so the pre-tax interest-equivalent spread is now about 230bp, a significant decline from the 240bp reported on October 20. […]

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