January 8, 2008

Accrued Interest presents the case in favour of (US Corporate) fixed income, on the grounds that yield spreads are recessionary; stock prices ain’t. He is severely criticized for this view in the comments, but I think there is a certain amount of truth in his argument. It’s not conclusive … but it’s a piece of evidence.

Michael Woodford of Columbia University wrote a very thoughtful piece on VoxEU, discussing the Fed’s new communications strategy. This new policy was released on November 14:

In the future, the FOMC will compile and release projections four times each year rather than twice a year. In addition, the projection horizon will be extended to three years, from two. FOMC meeting participants will now provide projections for overall personal consumption expenditures (PCE) inflation, as well as for real gross domestic product (GDP) growth, the unemployment rate, and core PCE inflation. Projections of nominal GDP growth will be discontinued. Summaries and explanations of the projections will be published along with the minutes of the FOMC meeting at which they were discussed. These descriptions will provide a fuller discussion of the projections, covering not only the outcomes that most meeting participants see as most likely, but also the risks to the economic outlook and the dispersion of views among policymakers.

Prof. Woodford poses the question:

The commitment [by many central banks] to justify policy to the public in this way increases public understanding of the policy, and so should improve the public’s ability to correctly anticipate the future conduct of policy, increasing the effectiveness of policy. It also serves the goal of making the central bank more accountable, which provides democratic legitimacy for the central bank’s grant of operational independence. And finally, it can improve policy itself, by providing a check on possible temptations to base policy purely on short-run considerations, losing sight of whether policy remains consistent with the bank’s medium-run objectives.

Does the Fed’s commitment to release additional projections, and additional discussion of those projections, serve a similar function?

He concludes:

So the Fed has not yet taken too great a step toward implementation of inflation targeting in the U.S. (This is likely to come both as a relief to some and as a disappointment to others.) Does the new policy matter at all?

I think that it will make a difference, but not primarily to the degree to which outsiders are better able to understand or predict Fed policy, in the first instance. Rather, the most important consequence of the new strategy, in the short run, will be for the Fed’s own deliberations. Requiring the members of the FOMC to consciously consider the way in which the economy is likely to evolve over the next several years, and the nature of appropriate policy not just in the short run, but also over the next several years, is likely to increase the extent to which policy decisions are considered as part of a coherent strategy rather than as a sequence of unrelated decisions. Encouraging them to discuss with one another the extent to which their forecasts differ and why will facilitate the development of a shared understanding of what a sensible strategy would be like. And pressing them to consider the reasons for the changes in their forecasts from one release to the next should ultimately favour the maintenance of consistency over time in the way that policy is approached.

Prof. Woodward’s analysis makes a lot of sense but, while he mentions the issue of central bank independence, he does not address the fact that such projections will help to defend such independence. Such a formalized methodology of explaining the central bank’s decisions will serve to pre-empt political criticism … if a politician says that rates have to come down because unemployment’s up and inflation’s not a worry, there will already be a projection on the table that he will have to address.

There has, for instance, been considerable tension between Sarkozy and the ECB:

Trichet has refused to heed Sarkozy’s call for the ECB to follow the Federal Reserve and cut its benchmark interest rate from a six-year high of 4 percent. Inflation accelerated to 2.6 percent in October, the fastest pace in two years, and the price of oil yesterday rose above $96 per barrel for the first time.

It’s best to nip such tension in the bud by giving political reporters a known source of independent projections and justifications.

Those who hate the Credit Rating Agencies will be overjoyed to learn (hat tip: Financial Webring Forum) that they are firing staff:

DBRS Ltd., the Canadian ratings company, closed its European offices and cut about a quarter of its workforce because of a slump in credit markets.

The offices in Frankfurt, Paris and London closed and 43 European employees were fired, said spokeswoman Caroline Creighton. DBRS also cut jobs in North America, reducing its overall staff to about 200 people, from 270.

DBRS joins Moody’s Corp., the second-biggest credit-ratings company, in trimming its workforce because of the decline in credit markets and reduced demand for ratings on mortgage-backed securities and other debt. New York-based Moody’s said yesterday it plans to cut about 275 jobs, or 7.5 percent of its employees.

It’s noteworthy that the number of jobs Moody’s cut is greater than the number of jobs DBRS has. Is it any wonder that DBRS is the weak sister among the major agencies?

Not the most exciting of all possible days on the preferred share market, unless you’re subject to margin calls on your BCE.PR.B position! Volume picked up a little with a few good crosses going through and perpetuals ground out another win. Yesterday’s frothy correspondent clarified the view … projecting that a P1 would have to offer at least 5.50% to get a deal done given that demand for perpetuals is still shallow and that there should be a lot of corporate bond issuance this month.

Well, as my more Assiduous Readers will have come to expect by now … I dunno! I think that, regardless of what will happen to spreads in the coming months, spreads are now attractive … and I LOVE trading in frothy market!

One of the first things you learn as an investment counsellor is to be humble. Don’t boast about your great trade, because it jinxes your monthly return. Don’t boast about the monthly return … don’t boast about the yearly return. The market has a way of making you look like an idiot. So I won’t boast, I’ll just point out that I’ve updated Malachite Aggressive Preferred Fund‘s fourth quarter annualized return.

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 5.32% 5.32% 62,955 14.94 2 +6.7691% 1,066.9
Fixed-Floater 4.92% 5.32% 73,340 15.11 9 +0.2430% 1,034.8
Floater 5.20% 5.23% 92,173 15.19 3 +0.1022% 846.8
Op. Retract 4.83% 1.69% 80,784 3.13 15 +0.0931% 1,043.1
Split-Share 5.25% 5.44% 103,681 4.34 15 -0.2172% 1,041.6
Interest Bearing 6.38% 6.38% 58,635 3.44 4 +0.3578% 1,070.0
Perpetual-Premium 5.78% 3.83% 66,080 4.98 12 +0.0957% 1,021.4
Perpetual-Discount 5.46% 5.49% 352,347 14.69 54 +0.0881% 937.9
Major Price Changes
Issue Index Change Notes
HSB.PR.D PerpetualDiscount -3.3877% Now with a pre-tax bid-YTW of 5.45% based on a bid of 23.10 and a limitMaturity.
WFS.PR.A SplitShare -1.9589% Asset coverage of just under 2.0:1 as of December 31, according to Mulvihill. Now with a pre-tax bid-YTW of 5.29% based on a bid of 10.01 and a hardMaturity 2011-06-30 at 10.00.
IAG.PR.A PerpetualDiscount -1.4149% Now with a pre-tax bid-YTW of 5.35% based on a bid of 21.60 and a limitMaturity.
FTU.PR.A SplitShare +1.0799% Asset coverage of 1.7+:1 as of December 31, according to the company. Now with a pre-tax bid-YTW of 6.88% based on a bid of 9.36 and a hardMaturity 2012-12-1 at 10.00.
SLF.PR.E PeretualDiscount +1.2322% Now with a pre-tax bid-YTW of 5.31% based on a bid of 21.36 and a limitMaturity.
PWF.PR.D OpRet +1.3432% Now with a pre-tax bid-YTW of -19.35% based on a bid of 26.46 and a call 2008-2-7 at 26.00. This issue is the major reason why the OpRet Index’s average YTW is so low … I suppose that the market is predicting that it will hang on until its softMaturity 2012-10-30 at 25.00 … but geez, that’s a lot of risk to take for a tax-equivalent of 5.33%!
W.PR.J PerpetualDiscount +1.5099% Now with a pre-tax bid-YTW of 5.97% based on a bid of 23.53 and a limitMaturity.
W.PR.H PerpetualDiscount +1.5625% Now with a pre-tax bid-YTW of 5.86% based on a bid of 23.40 and a limitMaturity.
NA.PR.L PerpetualDiscount +2.1159% Now with a pre-tax bid-YTW of 5.45% based on a bid of 22.20 and a limitMaturity.
ELF.PR.G PerpetualDiscount +2.3136% Now with a pre-tax bid-YTW of 2.31% 6.00% based on a bid of 19.90 and a limitMaturity.
BCE.PR.B Ratchet +14.7619% Reversing yesterday’s idiotic plunge. Closed at 24.10-75, 1×11, on no volume.
Volume Highlights
Issue Index Volume Notes
CM.PR.A OpRet 304,500 Nesbitt crossed 100,000 at 25.92, then 40,000 at 25.90 and finally 160,000 at 25.90. Now with a pre-tax bid-YTW of 1.25% based on a bid of 25.76 and a call 2008-2-7 at 25.75.
SLF.PR.D PerpetualDiscount 105,579 Now with a pre-tax bid-YTW of 5.31% based on a bid of 21.11 and a limitMaturity.
TD.PR.O PerpetualDiscount 78,605 Nesbitt crossed 50,000 at 23.11, then another 25,000 at the same price. Now with a pre-tax bid-YTW of 5.25% based on a bid of 23.09 and a limitMaturity.
SLF.PR.B PerpetualDiscount 30,825 Scotia crossed 20,000 at 22.70. Now with a pre-tax bid-YTW of 5.35% based on a bid of 22.56 and a limitMaturity.
CM.PR.I PerpetualDiscount 26,926 Now with a pre-tax bid-YTW of 5.65% based on a bid of 20.88 and a limitMaturity.

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

2 Responses to “January 8, 2008”

  1. prefhound says:

    might be a typo here. ELF.PR.G YTW can’t be 2.31%. 6.31% seems more likely, which is why I own it.

  2. jiHymas says:


    There I go again, typing the return when talking about the yield!

    The error has been corrected. Thanks!

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