November 21, 2007

Menzie Chinn of Econbrowser wrote a good piece yesterday reviewing the dollar’s decline, noting:

So while there is a tremendous amount of inertia in a currency’s reserve role, what we might be seeing now is the interaction of cyclical factors (low U.S. interest rates and dollar depreciation) and structural factors (the strains on dollar pegs and consequent erosion of demand for dollar assets) which could lead to a substantial drop in the dollar’s value.

It’s always the way. Any kind of accident – whether in the financial markets or in everyday life – generally results from a confluence of factors … the one percent chance that you don’t look when crossing the street will sometime coincide with somebody else’s one percent chance of not checking carefully when making a turn. The comments to the post are quite good, but I confess I’m not looking forward to the next year … an economics discussion on the Internet about the US during an election year? The mind boggles.

In a related essay, Richard Baldwin writes an excellent review of a paper by Martin Feldstein that provides an intellectual framework for thinking about currency values:

Feldstein makes a bold simplification that helps him to think clearly about the messy world. He takes US savings and investment as primitives and views the value of the dollar as the variable that adjusts to make things fit. As he writes it: “This line of reasoning leads us to the low level of the U.S. saving rate as the primary cause of the high level of the dollar.”

If the US saving rate rises without a dollar drop, there is no narrowing of the trade gap to offset the closing saving/investment gap. Aggregate demand falls and we get a US recession or at least growth deceleration. More to the point facing us today, Feldstein notes that since a falling dollar stimulates net exports only with a lag, avoiding a slowdown in US aggregate demand growth would have required the dollar to fall before the saving rate rises, maybe a couple of quarters earlier. Or, as he puts it: “the domestic weakness will occur unless the dollar decline precedes the rise in saving.”

There was another insight into A Day in the Life of a Bond Guy on Accrued Interest; a discussion of an investment in Washington Mutual that the author is not prepared to support any more. After all the analysis, all the securities filings, all the worry … it all comes down to trust. In the comments section, AI floats the possibility of a takeover of WM … now that’s something that looks interesting. Every morning I rush to the newspaper, looking for the news that I am convinced will come in the near future: Major Canadian Bank Makes Massive Purchase in States.

The Canadian banks have balance sheets that are very strong by world standards – never mind just by comparison to US banks – AND we’re sitting on a hot currency AND the US financial sector is getting beat up beyond the bounds of rationality. If there was ever time to do something like this, it’s now. It doesn’t have to be another bank, or a big-name company like WaMu … it could be something like ACA Capital Holdings, which is not having a very nice time.

In more news of interest, yet another “enhanced yield” product was found to be in danger of breaking the buck and is getting a cash transfusion from Federated Investors. Note that Bear Stearns Cos.’ Enhanced Income Fund and General Electric Co.’s GEAM Trust Enhanced Cash Trust both broke the buck without support from their sponsors.

Readers will remember the concept of covered bonds and some will be aware that BMO is planning an issue. However, in addition to deterorating market conditions

Abbey National Plc, the U.K. home lender owned by Banco Santander SA, became the third financial company to cancel an offering of covered bonds within a week today as investors demanded banks pay the highest interest premiums to sell bonds in the 12 years since Merrill Lynch & Co. began collecting the data.

“We are in a deteriorating situation,” Patrick Amat, chairman of the Brussels-based ECBC, said in a telephone interview. “A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.”

… there is now a recommendation from the trade association that:

“In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads, the 8-to-8 Market-Makers & Issuers Committee recommends that inter-bank marketmaking be suspended, temporarily, until Monday the 26th of November 2007. As this recommendation relates only to inter-bank trading, market-maker obligations to investors will remain unaffected.”

Fascinating. I have been advised that this recommendation only applies to extant market making agreements that commit the banks to calling a market in good size and is not a flat (unenforceable) prohibition of trades between two banks that want to trade. The Covered Bond Fact Book states:

Market Makers’ commitments define bid/offer spreads for sizes up to 15 million EUR for different maturities as follows:
> up to 4 years maturity – 5 cents;
> from 4 to 6 years – 6 cents;
> from 6 to 8 years – 8 cents;
> from 8 to 15 years – 10 cents;
> from 15 to 20 years – 15 cents; and
> from 20 years upwards – 20 cents.

I wrote about Fannie Mae and its accounting on November 16Accrued Interest has fleshed that out a little more (with the benefit of an American market background!) in a post about Freddie Mac.

Good volume for prefs today, and some of the more egregious silliness was smoothed away, but all in all performance was poor.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.81% 4.81% 137,055 15.79 2 +0.0205% 1,045.4
Fixed-Floater 4.88% 4.85% 84,801 15.74 8 -0.1054% 1,043.4
Floater 4.65% 4.69% 59,618 15.96 3 -0.8663% 1,010.9
Op. Retract 4.86% 2.68% 77,362 3.52 16 -0.1088% 1,032.2
Split-Share 5.37% 5.86% 89,871 4.09 15 -0.3494% 1,009.4
Interest Bearing 6.33% 6.68% 64,499 3.49 4 -0.5718% 1,045.7
Perpetual-Premium 5.86% 5.65% 82,876 8.25 11 -0.0784% 1,005.2
Perpetual-Discount 5.61% 5.66% 335,883 14.41 55 -0.2357% 902.0
Major Price Changes
Issue Index Change Notes
BNA.PR.B SplitShare -4.3478% This issue was the topic of some comments regarding yesterday’s post. Asset coverage of just under 4.0:1 according to the company. Now with a pre-tax bid-YTW of 6.87% based on a bid of 22.00 and a hardMaturity 2016-3-25 at 25.00. Note BNA.PR.A yields 6.04% to 2010-9-30 and BNA.PR.C yields 7.99% to 2019-1-10.
FIG.PR.A InterestBearing -2.5432% Asset coverage of 2.1+:1 according to Faircourt. Now with a pre-tax bid-YTW of 7.23% (mostly as interest) based on a bid of 9.58 and a hardMaturity 2014-12-31 at 10.00.
HSB.PR.C PerpetualDiscount -2.1314% Now with a pre-tax bid-YTW of 5.76% based on a bid of 22.50 and a limitMaturity.
ELF.PR.G PerpetualDiscount -1.9155% Now with a pre-tax bid-YTW of 6.93% based on a bid of 17.41 and a limitMaturity.
FTU.PR.A SplitShare -1.7544% Asset coverage of 1.8+:1 according to the company. Now with a pre-tax bid-YTW of 7.92% based on a bid of 8.96 and a hardMaturity 2012-12-1.
BAM.PR.B Floater -1.6253%  
ACO.PR.A OpRet -1.5849% Now with a pre-tax bid-YTW of 4.45% based on a bid of 26.08 and a call 2009-12-31 at 25.50.
GWO.PR.G PerpetualDiscount -1.5666% Now with a pre-tax bid-YTW of 5.84% based on a bid of 22.62 and a limitMaturity.
CM.PR.H PerpetualDiscount -1.2556% Now with a pre-tax bid-YTW of 5.50% based on a bid of 22.02 and a limitMaturity.
IAG.PR.A PerpetualDiscount -1.1558% Now with a pre-tax bid-YTW of 5.95% based on a bid of 19.67 and a limitMaturity.
POW.PR.D PerpetualDiscount -1.1348% Now with a pre-tax bid-YTW of 5.82% based on a bid of 21.78 and a limitMaturity.
BAM.PR.K Floater -1.0430%  
BAM.PR.M PerpetualDiscount +1.1050% Now with a pre-tax bid-YTW of 6.62% based on a bid of 18.30 and a limitMaturity. The virtually identical BAM.PR.N is quoted at 18.16-20 … yesterday’s Assiduous Reader may be hoping to get on the merry-go-round again!
PIC.PR.A SplitShare +3.3496% Making up for some (but not all!) of yesterday’s losses. Asset coverage of 1.6+:1 according to Mulvihill. Now with a pre-tax bid-YTW of 6.39% based on a bid of 14.81 and a hardMaturity 2010-11-1 at 15.00.
Volume Highlights
Issue Index Volume Notes
TD.PR.M OpRet 678,300 Scotia did two crosses, 225,000 and 419,300, both at 26.10, just before the bell. Now with a pre-tax bid-YTW of 3.93% based on a bid of 26.10 and a softMaturity 2013-10-30 at 25.00.
IQW.PR.D Scraps (would be FixFloat but there are rather pressing and urgent credit concerns) 267,150 The company had to scrap a financing.
NTL.PR.F Scraps (would be Ratchet but there are credit concerns) 257,600 Scotia crossed 250,000 at 15.50 … somebody badly wanted to sell, it looks like they took out quite a few bids before being able to trade at the day’s low. Closed at 16.00-50, 5×20. What is this, Junk Day on Bay Street?
EPP.PR.A Scraps (would be PerpetualDiscount but there are credit concerns) 244,450 TD crossed 227,100 at 17.50 and, just as with NTL.PR.F, it looks like a few bids had to be taken out on the way to that price. Now with a pre-tax bid-YTW of 6.97% based on a bid of 17.75 and a limitMaturity.
CM.PR.G PerpetualDiscount 210,440 Scotia crossed 100,000 at 24.71, and 103,700 at 24.73 about two-and-a-half hours after that. Now with a pre-tax bid-YTW of 5.51% based on a bid of 24.70 and a limitMaturity.
IQW.PR.C Scraps (would be OpRet but there are rather pressing and urgent credit concerns) 140,828 See yesterday’s comments – I’m not writing all that muck out again! Now with a pre-tax bid-YTW of 183.54% (annualized) based on a bid of 17.80 and a softMaturity 2008-2-29 at 25.00. Now, this one qualifies as a Distressed Preferred!

There were thirty-seven other index-included $25.00-equivalent issues trading over 10,000 shares today.

One Response to “November 21, 2007”

  1. […] There is also the potential for so-called liquidity guarantees to be put in place at time of underwriting. So-called? Well, the European Covered Bond market association called for suspension of the agreement on November 21 and there are current problems with liquidity on Auction Rate Municipals, as mentioned yesterday. I’ve mentioned my own problems in not being able to get a bid for less than a million of good quality corporate paper. So, while I would not put too much faith in the ability of the private sector to provide a bottomless pit of liquidity for bonds in general, liquidity could be enhanced … central banks, for instance, could enter into “liquidity provider of last resort” agreements and accept corporate and other bonds as collateral on a routine basis. […]

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