Accrued Interest leads off with an interesting post on the US Municipal market:
What’s the result? Friday it was possible to buy 5-year pre-refunded municipals (which are backed by Treasury bonds held in escrow) at yields in the 3.50’s. In other words, around 80bps higher than Treasury rates. That is literally Treasury credit at a 80bps spread to Treasuries tax-exempt. Dozens of large new issue municipal deals came at significant spreads to Treasury rates.
There’s an interesting aside to this escrow issue which may be unfamiliar to Canadians – when the municipalities buy Treasuries to defease their issues, they don’t really care (too much) about the price. They have their list of things to buy which, while not carved in stone, is pretty inflexible: too much mismatch with their bond liabilities and the assets won’t pass muster. So they’ll go on the Street and sweep up whichever Treasuries they need.
Very often, they’ll buy more than is available, with the dealers shorting the issues to them. The end result is often that firstly the issue trades well off the yield curve AND goes special in the repo market (when you borrow bonds, you collateralize with cash. The bond lender pays interest on this cash at the “GC”, “General Collateral” rate. If the particular bond issue is scarce on the repo market, the bond lender can get away with paying less than the GC rate, which is referred to as going special).
This state of affairs affects off-the-run Treasuries in the under-three-year term. And the moral of the story is … don’t invent bond strategies that assume all short treasuries can be borrowed at the GC rate, because very often they can’t!
Related to the US Municipals story is MBIA – in the news again today with one investor placing a big bet:
Third Avenue Management LLC’s flagship mutual fund purchased 10.6 million of MBIA’s common shares at $12.15 each in February, Whitman said in a letter to shareholders released this week. New York-based Third Avenue, which Whitman founded in 1986, also bought $197 million of MBIA surplus notes.
This follows disclosure of long-term restructuring plans:
A plan to split MBIA’s structured-finance business from its municipal insurance operation in the next five years will make the Armonk, New York-based company more transparent, Chief Executive Officer Jay Brown said in an interview today on Bloomberg Television.
It’s an interesting story to watch!
Getting back to municipals for a moment, there is at least one indication that the market is – slowly – normalizing:
California, the largest borrower in the U.S. municipal market, sold $1.75 billion of bonds after attracting record demand from individuals amid the highest tax- exempt yields in more than three years.
The state got orders from more than 4,000 investors equal to over 72 percent of the bonds available, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer. Officials, who were to complete the sale tomorrow, were able to wrap it up a day early after selling the rest of the debt to institutions.
… which just goes to show ya … ignore the headlines … behave sensibly … you’ll do fine.
On the other hand, though, there’s one market that’s getting sillier. Naked Capitalism brings to my attention the fact that real yields on 5-Year TIPS are negative:
Yields on five-year Treasury Inflation-Protected Securities fell below zero for a third day on investor speculation that inflation will quicken as the U.S. economy slows.
Yields on the securities, known as TIPS, dropped to minus 0.036 percent on Feb. 29, according to Barclays Capital Inc., the biggest dealer of the securities. It was the first foray below zero since five-year TIPS were first sold in 1997, according to the firm, one of the 20 primary dealers that trade directly with the Federal Reserve.
It brings to mind one of my favourite factoids …. at times during the Great Depression, T-Bills traded above par. This doesn’t make a lot of sense until you consider the alternatives … put your cash in the bank and the bank fails … keep your cash under your mattress and get robbed. I can’t find hard proof of this factoid, however … anybody who can help me will deserve my most earnest thanks.
Speaking of interest rates, how about that Bank of Canada, eh? Scotia has announced prime of 5.25% effective 3/5; so has TD and National and CIBC and BMO. I don’t see anything for RBC yet, but it’s a pretty good bet! Oddly, each of the three Prime-Rate-Dependent HIMIPref™ indices was up on the day. Well, I find it odd, anyway! Were traders of these shares pricing in a bigger cut? Are they now looking forward to faster hikes sooner? Is it just random chaos? Somebody tell me, because I don’t know.
TD announced today that the new issue greenshoe was fully exercised, indicating that the underwriting did very well, even as the preferred market went down (which might indicate indigestion). Will other issuers find the situation encouraging or not? The Shadow knows!
The market was weak, but the volume was up … maybe the Technical Analysis guys will short whatever they can get on this news. That’s fine … I’ll sell em some liquidity!
| 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 | 5.54% | 5.56% | 35,932 | 14.6 | 2 | +0.1446% | 1,082.1 |
| Fixed-Floater | 4.79% | 5.61% | 66,598 | 14.75 | 8 | +0.4160% | 1,037.4 |
| Floater | 5.18% | 5.26% | 90,360 | 14.96 | 2 | +0.1324% | 866.4 |
| Op. Retract | 4.81% | 2.36% | 76,678 | 2.39 | 15 | +0.2425% | 1,049.4 |
| Split-Share | 5.25% | 5.16% | 98,745 | 4.03 | 14 | -0.1808% | 1,047.4 |
| Interest Bearing | 6.20% | 6.58% | 66,424 | 4.24 | 3 | -0.6022% | 1,081.2 |
| Perpetual-Premium | 5.74% | 5.42% | 308,730 | 5.54 | 17 | -0.1939% | 1,026.3 |
| Perpetual-Discount | 5.40% | 5.44% | 275,695 | 14.74 | 51 | -0.4112% | 953.4 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| POW.PR.D | PerpetualDiscount | -2.7813% | Now with a pre-tax bid-YTW of 5.58% based on a bid of 22.72 and a limitMaturity. |
| BSD.PR.A | InterestBearing | -1.6789% | Now with a pre-tax bid-YTW of 7.18% based on a bid of 9.37 and a hardMaturity 2015-3-31 at 10.00. |
| BMO.PR.H | PerpetualDiscount | -1.6762% | Now with a pre-tax bid-YTW of 5.49% based on a bid of 24.05 and a limitMaturity. |
| IAG.PR.A | PerpetualDiscount | -1.5909% | Now with a pre-tax bid-YTW of 5.30% based on a bid of 21.65 and a limitMaturity. |
| BNA.PR.B | SplitShare | -1.5690% | Asset coverage of 3.3+:1 as of January 31, according to the company. Now with a pre-tax bid-YTW of 7.44% based on a bid of 21.33 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (2.18% to call 2008-4-3 at 25.50) and BNA.PR.C (6.81% to hardMaturity 2019-1-10). |
| NA.PR.L | PerpetualDiscount | -1.4453% | Now with a pre-tax bid-YTW of 5.59% based on a bid of 21.82 and a limitMaturity. |
| SLF.PR.D | PerpetualDiscount | -1.4214% | Now with a pre-tax bid-YTW of 5.18% based on a bid of 21.50 and a limitMaturity. |
| SLF.PR.E | PerpetualDiscount | -1.3272% | Now with a pre-tax bid-YTW of 5.21% based on a bid of 21.56 and a limitMaturity. |
| SLF.PR.A | PerpetualDiscount | -1.1299% | Now with a pre-tax bid-YTW of 5.22% based on a bid of 22.75 and a limitMaturity. |
| GWO.PR.I | PerpetualDiscount | -1.0979% | Now with a pre-tax bid-YTW of 5.19% based on a bid of 21.61 and a limitMaturity. |
| RY.PR.C | PerpetualDiscount | -1.0909% | Now with a pre-tax bid-YTW of 5.33% based on a bid of 21.76 and a limitMaturity. |
| SLF.PR.C | PerpetualDiscount | -1.0124% | Now with a pre-tax bid-YTW of 5.18% based on a bid of 21.51 and a limitMaturity. |
| FFN.PR.A | SplitShare | +1.0795% | Asset coverage of 2.0+:1 as of February 15, according to the company. Now with a pre-tax bid-YTW of 4.76% based on a bid of 10.30 and a hardMaturity 2014-12-1 at 10.00. |
| BCE.PR.R | FixFloat | +1.2552% | |
| ELF.PR.G | PerpetualDiscount | +2.0000% | Now with a pre-tax bid-YTW of 5.92% based on a bid of 20.40 and a limitMaturity. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| PWF.PR.K | PerpetualDiscount | 154,700 | RBC crossed 100,000 at 23.20, then Nesbitt crossed 50,000 at the same price. Now with a pre-tax bid-YTW of 5.41% based on a bid of 23.11 and a limitMaturity. |
| ELF.PR.G | PerpetualDiscount | 66,700 | Nesbitt crossed 48,400 at 20.50. Now with a pre-tax bid-YTW of 5.92% based on a bid of 20.40 and a limitMaturity. |
| BAM.PR.N | PerpetualDiscount | 58,400 | RBC crossed 15,000 at 19.07, then 15,000 at 19.00. Now with a pre-tax bid-YTW of 6.38% based on a bid of 19.00 and a limitMaturity. Note that this issue closed at 19.00-14, 2×5, while the virtually identical (Weak Pair) BAM.PR.M closed at 19.70-79, 3×10. I love this market! |
| POW.PR.D | PerpetualDiscount | 45,900 | Scotia crossed 33,000 at 22.75. Now with a pre-tax bid-YTW of 5.58% based on a bid of 22.72 and a limitMaturity. |
| CM.PR.G | PerpetualDiscount | 37,896 | Now with a pre-tax bid-YTW 5.72% based on a bid of 23.87 and a limitMaturity. |
There were thirty-five other index-included $25-pv-equivalent issues trading over 10,000 shares today.
I enjoy your blog but I still have a lot to learn. What do you mean by “crossed” in the Notes section of the volume highlights when you write “RBC crossed 15,000 at 19.07” or “RBC crossed 100,000 at 23.20, then Nesbitt crossed 50,000 at the same price”? I assume you mean they bought the stock at that price but I am just not sure. Thks
I don’t know if you will consider this to be a hard proof of T-Bills having traded above par during the Great Depression, but from a 6-page document published by Callan Associates in November 2003, I found the following:
The following is an excerpt from Ibbotson’s annual Stocks, Bonds, Bills and Inflation 2000 yearbook:
“Monthly Treasury bill returns were negative in February 1933, and in 12 months during the 1938–1941 period. Also, the annual Treasury bill return was negative for 1938. Since negative Treasury bill returns contradict logic, an explanation is in order.”
“Negative yields observed in the data do not imply that investors purchased Treasury bills with a guaranteed negative return. Rather, Treasury bills of that era were exempt from personal property taxes in some states, while cash was not. Further for a bank to hold US government deposits, Treasury securities were required as collateral. These circumstances created excessive demand for the security, and thus bills sold at a premium. Given the low interest rate during the period, owners of the bills experienced negative returns.”
Link to the Callan Associates document:
http://www.callan.com/research/institute/download/?file=papers/free/61.pdf
Louis –
Thanks for stopping by! A dealer “crosses” a trade when he acts for both the buyer and the seller. In institutional trading, it is very common for large trades not to be posted publicly – showing too much size might scare away counterparties, and lead to other traders playing traders’ games.
There are other, better reasons: say, for instance that you are the investment manager for 100 clients holding varying numbers of shares. If you were to put it up publicly and only get a partial fill – say, 57,600 shares – you’ve got headaches splitting it up fairly and headaches having all those clients with tiny, virtually untradeable positions.
The best reason for doing this is if the order is contingent: maybe you want to sell PWF.PR.K to buy POW.PR.D and take out $0.45 on the switch. In that case, the dealer’s got two orders to fill. Maybe he can sell the PWF.PR.K, but can’t find any POW.PR.D for you (or he finds some, but he can’t put the deal together in such a way that you take out your $0.45). In that case, nothing will happen – and the next day, maybe you’ll call another dealer.
Whatever your reason, if you want to sell 100,000 shares of PWF.PR.K, you will not get your dealer to put this on the board for you. What you will do is ask him to find a buyer. He then checks his rolodex for people who have shown interest in PWF.PR.K in the past – or managers he’s talked to recently who have expressed a longing to purchase a high quality perpetual discount issue of any nature – and start dealing. Once he’s found a buyer who is willing to pay what you’re willing to sell for, he’s happy.
The exchange requires that this trade be recorded on their books. As long as the price is equal to or higher than the posted bid, and equal to or lower than the posted offer, then everything is OK and the trade gets filled as a cross.
A more specialized type of cross is when the dealer is acting for both the buyer and the seller – and so is the investment manager! This is an internal cross. The investment manager might have two funds: Acme Dividend Fund and Acme Preferred Share Fund. These two funds have differing cash flows, such that Dividend Fund needs to raise $2.5-million, and Preferred Fund needs to invest the same amount. In many cases – not all cases, but many cases – it makes sense according to the mandates of both funds that one sells to other. The investment manager gets the dealer to do it for him, the dealer ensures the price is fair, marks the trade as an “internal cross”, and Bob’s your uncle.
There are other specialized cross types as well.
cowboylutrell –
Thank you! That’s wonderful! The story’s a bit more complicated than I thought, but at least now I can show I haven’t just been making up this story for all these years.
The property tax angle is interesting. A bit like the old “Flower Bonds“, eh?
How I love the inefficient: CCS C is ex-div to day and is trading at +.165 with a strong bid. Now while it’s true that in the last 15 of trading anything can happen, it’s still rather fascinating trying to figure out the reason for the inefficiency. Off the top of my head, I would imagine that people look at a 400 basis point spread and say “what the hell, ex-div or not, I gotta get me sone of this. This is why I love the pref. market. It’s so much more interesting than plain old equities.
whoa…wait a minute…my pricing is wonky. it’s trading -.165….this is what happens when mr. bloomberg ignores his clients and listens to the siren songs of politics.
According to HIMIPref™ CCS.PR.C closed at 19.40-79 yesterday and is currently (4pm-ish) quoted at 19.01-25, 22×1. I see that today’s low was 18.55!
Still, not a bad return since you started watching!
Ex-dividend dates are always amusing – there’s always somebody who gets filled at the cum-dividend price. To Cooperator’s credit, they have started being more responsible about dates: this dividend was announced, in a welcome change from last year’s practice.
[…] The following has been copied from the comments to March 4, 2008. The rule of thumb is: if one person asks, twenty want to know! The question was: I enjoy your blog but I still have a lot to learn. What do you mean by “crossed” in the Notes section of the volume highlights when you write “RBC crossed 15,000 at 19.07″ or “RBC crossed 100,000 at 23.20, then Nesbitt crossed 50,000 at the same price”? I assume you mean they bought the stock at that price but I am just not sure. Thks […]