BMO will be exiting the annuity business:
Ottawa is wading into a high-stakes battle between banks and life insurers, ordering the banks to stop selling products that resemble annuities.
The decision is a win for the country’s life insurers and a blow to Bank of Montreal … which kicked off this battle in January when it began selling a product called BMO Lifetime Cash Flow, which provided buyers 55 and older with guaranteed payments for life.
…
Finance Minister Jim Flaherty said Friday that the Conservative government will introduce legislation to prevent banks from offering financial products that function like life annuities.
Some of the best investment advice I’ve ever recieved was given to me before I was ten years old. My Dad always said: When the little guys get in …:
Royal Canadian Mint’s retail gold fund is an unheralded success.
Since the books opened three weeks ago, the initial public offering has raised $600-million. That technically makes it the largest IPO of the year.
While bullion’s slide of as much as 9 percent this week took its drop from the record $1,923.70 an ounce reached in September to almost 20 percent, the common definition of a bear market, investors are still holding the most metal ever in exchange-traded products, a wager now valued at $119.2 billion.
We’re starting to get a little clarity on the MF Global situation. It seems that after six weeks of very costly forensic analysis, the CME looked at its notes from an October 31 meeting:
CME Group detailed its dealings with MF Global in documents released yesterday by the oversight panel of the House Financial Services Committee. Christine Serwinski, chief financial officer for North America at MF Global, and Edith O’Brien, a treasurer, told Mike Procajlo, an exchange auditor, at around 1 a.m. on Oct. 31 in Serwinski’s Chicago office that the customer money was transferred on Oct. 27 and Oct. 28 and possibly Oct. 26, according to a CME Group timeline.
…
MF Global had its credit rating cut to junk on Oct. 27 by Moody’s Investors Service and Fitch Ratings as its shares plunged and bonds began trading at distressed levels amid a crisis of investor confidence over the Europe trades.The downgrades “sparked an increase in margin calls” that were “threatening overall liquidity,” Bradley Abelow, MF Global’s president and chief operating officer, said in the company’s bankruptcy filing.
Customer funds were also used to make a $175 million loan to MF Global’s U.K. subsidiary, Duffy said yesterday.
…
A revised MF Global customer segregation report was sent to CME Group on Oct. 31 that showed $891.5 million in missing customer money as of Oct. 28, the CME Group chronology shows.
This has not been previously disclosed because muttering darkly about “missing” funds is a better regulatory career move. Assiduous Readers will doubtless remember that on November 2 I wrote:
Experience suggests to me that the actual players know very well what the answer to the segregated account mystery is, but are posturing for political purposes.
The euro declined against the dollar after Fitch Ratings said it may downgrade Belgium, Spain, Slovenia, Italy, Ireland and Cyprus, adding to concern the region’s debt crisis hasn’t been contained.
…
The euro fell 0.1 percent to $1.3004 per euro at 12:53 p.m. in New York. It dropped 0.2 percent to 101.17 yen.Fitch said a “comprehensive solution” to the euro-zone crisis is “technically and politically beyond reach.”
After years of government waffling, the Belgians have been cut:
Belgium’s credit rating was cut two levels to Aa3 by Moody’s Investors Service, which said rising borrowing costs, slowing growth and liabilities arising from Dexia SA’s breakup threaten to inflate the euro area’s fifth- highest debt load.
Moody’s lowered Belgium’s debt rating to the fourth-highest investment grade, from Aa1, with a negative outlook, the ratings company said today in a statement. The action follows Standard & Poor’s one-step downgrade of Belgium to AA on Nov. 25. Fitch Ratings put Belgium’s AA+ on review for a downgrade today.
…
Belgian borrowing costs touched the highest level in 11 years in November, with the yield on the benchmark 10-year bond closing at 5.86 percent before S&P’s downgrade on Nov. 25. They started surging almost two months earlier as the caretaker government bought Dexia SA (DEXB)’s Belgian banking unit for 4 billion euros ($5.2 billion) and agreed to guarantee as much as 54.5 billion euros of the crisis-hit lender’s liabilities for as long as 10 years.The yield on the 4.25 percent securities due September 2021 was little changed today at 4.26 percent. That’s 240 basis points, or 2.4 percentage points, more than German Bunds of similar maturity.
And Dealbreaker has a very interesting piece on the difficulties of making money on a bet against Greece: It’s Not So Easy To Get Away From This Voluntary Greek Bond Swap. Which will be fine for the politicians – the last thing they want is honest price discovery!
Rob Carrick has a good piece in the Globe: Bond ETFs confuse you? Here’s a simple guide. [Update: Assidiuous Reader prefhound points out in the comments that the article does not mention the horrific effects of taxation on returns when bond ETFs are held in taxable accounts]
But there was some good news today:
The 100-watt incandescent light bulb has been spared from a U.S. phaseout in a spending deal reached by Republican and Democratic leaders in Congress.
Legislation debated today will prohibit the Energy Department from enforcing elimination of the traditional, pear- shaped bulb. Tea Party activists and their Republican allies campaigned against the energy efficiency requirement as an example of government overreach.
The federal standards limited the “freedom of average Americans” to buy whatever type of bulb they wanted, Representative Michael Burgess, a Texas Republican, said today in an interview. The House passed the bill today 296-121.
Never mind petty details like the mercury in fluorescent bulbs … if you want people to use less electricity, just raise the price. What’s so hard about that?
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 9bp, FixedResets gaining 6bp and DeemedRetractibles winning 13bp. There was continued good volatility skewed to the downside, with the SLF FixedResets being prominent on the loser list. Volume was average.
| 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 | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.5245 % | 2,004.9 |
| FixedFloater | 4.92 % | 4.67 % | 36,443 | 17.01 | 1 | -0.4126 % | 3,132.4 |
| Floater | 3.32 % | 3.70 % | 69,817 | 18.09 | 3 | -0.5245 % | 2,164.8 |
| OpRet | 4.92 % | 1.37 % | 61,301 | 1.41 | 6 | 0.1094 % | 2,482.5 |
| SplitShare | 5.51 % | 3.13 % | 63,248 | 0.97 | 4 | 0.1250 % | 2,537.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1094 % | 2,270.0 |
| Perpetual-Premium | 5.49 % | 2.06 % | 88,335 | 0.09 | 18 | 0.1516 % | 2,172.5 |
| Perpetual-Discount | 5.22 % | 5.18 % | 107,769 | 15.09 | 12 | -0.0928 % | 2,321.6 |
| FixedReset | 5.11 % | 3.02 % | 215,365 | 2.48 | 64 | 0.0620 % | 2,339.5 |
| Deemed-Retractible | 5.04 % | 3.97 % | 186,746 | 3.10 | 46 | 0.1318 % | 2,225.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.K | Floater | -2.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-12-16 Maturity Price : 13.97 Evaluated at bid price : 13.97 Bid-YTW : 3.75 % |
| SLF.PR.G | FixedReset | -2.22 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.00 Bid-YTW : 4.85 % |
| SLF.PR.H | FixedReset | -1.38 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.15 Bid-YTW : 5.15 % |
| IAG.PR.F | Deemed-Retractible | -1.32 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-03-31 Maturity Price : 25.00 Evaluated at bid price : 25.36 Bid-YTW : 5.65 % |
| BAM.PR.B | Floater | -1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-12-16 Maturity Price : 14.18 Evaluated at bid price : 14.18 Bid-YTW : 3.70 % |
| SLF.PR.I | FixedReset | -1.20 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-12-31 Maturity Price : 25.00 Evaluated at bid price : 23.07 Bid-YTW : 5.14 % |
| NA.PR.O | FixedReset | 1.08 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-15 Maturity Price : 25.00 Evaluated at bid price : 27.21 Bid-YTW : 2.66 % |
| PWF.PR.O | Perpetual-Premium | 1.11 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-10-31 Maturity Price : 25.00 Evaluated at bid price : 26.30 Bid-YTW : 5.06 % |
| PWF.PR.A | Floater | 1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-12-16 Maturity Price : 19.26 Evaluated at bid price : 19.26 Bid-YTW : 2.74 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| IFC.PR.A | FixedReset | 108,384 | TD crossed 99,800 at 24.85. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.86 Bid-YTW : 3.82 % |
| RY.PR.Y | FixedReset | 69,859 | Scotia crossed blocks of 50,000 and 18,000, both at 27.40. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-11-24 Maturity Price : 25.00 Evaluated at bid price : 27.33 Bid-YTW : 2.92 % |
| MFC.PR.G | FixedReset | 49,925 | Recent underwriters’ clearance. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.74 Bid-YTW : 4.98 % |
| BAM.PR.N | Perpetual-Discount | 33,459 | RBC crossed 30,000 at 23.44. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-12-16 Maturity Price : 22.91 Evaluated at bid price : 23.34 Bid-YTW : 5.08 % |
| TD.PR.G | FixedReset | 32,695 | TD crossed 25,000 at 27.10. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 27.15 Bid-YTW : 2.83 % |
| SLF.PR.I | FixedReset | 31,550 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-12-31 Maturity Price : 25.00 Evaluated at bid price : 23.07 Bid-YTW : 5.14 % |
| There were 31 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| SLF.PR.I | FixedReset | Quote: 23.07 – 23.60 Spot Rate : 0.5300 Average : 0.3150 YTW SCENARIO |
| IAG.PR.F | Deemed-Retractible | Quote: 25.36 – 25.83 Spot Rate : 0.4700 Average : 0.3349 YTW SCENARIO |
| BNA.PR.E | SplitShare | Quote: 22.77 – 23.73 Spot Rate : 0.9600 Average : 0.8385 YTW SCENARIO |
| HSB.PR.D | Deemed-Retractible | Quote: 25.26 – 25.61 Spot Rate : 0.3500 Average : 0.2382 YTW SCENARIO |
| NA.PR.P | FixedReset | Quote: 27.05 – 27.45 Spot Rate : 0.4000 Average : 0.2930 YTW SCENARIO |
| BAM.PR.K | Floater | Quote: 13.97 – 14.33 Spot Rate : 0.3600 Average : 0.2531 YTW SCENARIO |
Unfortunately, Carrick’s article in the Globe & Mail omits the #1 problem with bond ETFs — taxation. Since they are stuffed with premium bonds and income is taxed at full rates but capital losses credited at half rates, the effective tax rate on these instruments can be in the 50-100% range (even higher if the investor is also subject to OAS clawback).
There are darn few discount or par bonds available in the market. For example, of 41 Canada bonds listed on http://www.pfin.ca, 100% are premium bonds (price >$100) and approximately 20% have a NEGATIVE after-tax return. ETFs will own some of these — perhaps in proportion to the market.
Consider the XLB long term bond ETF with an average coupon of 5.66% and average Yield to Maturity of 3.34% (from i-Shares.ca) an average term of 22.82 years. This corresponds to an average bond price of $136.84. With a MER of 0.38% and trading costs equivalent to 0.13% (my assumption, but not critical) the pre-tax yield is 2.83%. An investor can get this on a 5-year GIC with less risk. For an investor in the 45% marginal tax bracket able to use the capital loss, the after tax yield is 1.28%, so the effective tax rate is 55% (i.e. 1 – 1.28%/2.83%). If the investor is unable to use a capital loss (i.e. has no offsetting gains in prior 3 years), the after tax yield is 1.19% for an effective tax rate of 58%.
Conclusion: Taxable investors should avoid XLB.
My favorite example of this effect iis the short term bond ETF XSB with an average term of 2.8 years, coupon of 3.53% and YTM of 1.42%. This equates to an average bond price of $105.76. After 0.27% MER and 0.1% trading costs the gross Yield to maturity for the ETF investor is 1.05%; after marginal taxes at a nominal 45% tax rate and the ability to use capital losses, the yield is a barely positive 0.13% — for an effective tax rate of 87%. For the unlucky investor not able to use capital losses, the after tax return is -0.03% for an effective tax rate of 102%.
Conclusion: Short term taxable bond investors should use deposit accounts or GICs.
While it is true that non-taxable investors (RRSPs/RRIFs) don’t get penalized by these huge effective tax rates, the combined effect of MER and trading costs don’t make for compelling bond ETF investments. It is hard to find the figures for how many bonds are owned in taxable vs non-taxable accounts, but I would guess more than half are in taxable accounts.
Sadly, the press and 99% of advisors who read that press don’t get this!
Premium prefs don’t have these disadvantages because the tax rate on dividends is similar to (or lower than) the tax rate on capital gains, so effective tax rates are not as sensitive as bonds to the size of the premium (ie eventual capital loss).
You are quite right, of course. While taxation was mentioned briefly, it would have been well worth an additional paragraph to point out the effects on returns – and possibly a column in the table that calculated the effective tax rate given a few explicit assumptions.
It is hard to find the figures for how many bonds are owned in taxable vs non-taxable accounts, but I would guess more than half are in taxable accounts.
I would guess the opposite. In fact, I would go so far as to guess that 75% are held in non-taxable accounts … in fact, I’ll bet you the price of dinner that my guess is better, to be settled if we ever find some authoritative data! But we’re both just guessing!
I assume that by “bonds” in your statement you mean “bond ETFs held by retail investors”. However, if you mean “all bonds issued in Canada” then I will up my bet to two dinners – pension funds are huge.
We need an excuse for dinner, and I don’t mind paying, but my intention was to EXCLUDE pension funds, bank holdings and corporate holdings. My ratio was intended to be:
Bonds or Bond ETFs owned by private Canadian citizens in taxable accounts divided by all bonds or bond ETFs owned by private Canadian citizens in taxable and tax deferred accounts (RRSPs and RRIFs). “bonds” excludes GICs but could include CSBs. The ETF numbers are really the most relevant to Carrick’s article, but might be hard to find. Therefore, the bond numbers (a proxy after all for the ETF holdings), might be known by Statscan or Bank of Canada. The GIC or CSB taxable/total ratio might also be known and give guidance if none of the other ratios are available.
The reason this is important is to decide if Carrick’s omission was “material” or “minor”. If less than, say, 1/3 of reader bond holdings are in taxable accounts, “minor” is reasonable; if not “material” applies. However, we may still wager dinner on the 50% level 😉