There’s a new wrinkle in the financial repression chronicles:
JPMorgan Chase & Co. (JPM) and Bank of America Corp. are helping clients find an extra $2.6 trillion to back derivatives trades amid signs that a shortage of quality collateral will erode efforts to safeguard the financial system.
Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market.
The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” That’s raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead.
Adding to the concern is the reaction of central clearinghouses, which collect from losers on derivatives trades and pay off winners. Some have responded to the collateral shortage by lowering standards, with the Chicago Mercantile Exchange accepting bonds rated four levels above junk.
The potential reward for revenue-starved banks is an expanded securities-lending market that could generate billions of dollars in fees. JPMorgan and Bank of America, which have the biggest derivatives businesses among U.S. bank holding companies with a combined $140 trillion of the instruments, are already marketing their new collateral-transformation desks, people with knowledge of the operations said.
As discussed on August 31, directed lending to the government is a form of financial repression.
The US has to force people to buy its bonds! The outlook isn’t getting any better:
Moody’s warned Tuesday it could strip the United States of its coveted triple-A credit rating if Congress fails to produce a budget that will bring down the federal debt burden.
“Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the U.S. government’s Aaa rating and negative outlook,” the ratings firm said in a statement.
If the negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, it said.
“If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.”
Moody’s said it was unlikely it would keep the Aaa rating with a negative outlook into 2014.
“The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock – such as would occur if the so-called ‘fiscal cliff’ actually materialized – which could lead to instability,” it said.
There was very little movement in the Canadian preferred share market today, with PerpetualPremiums and FixedResets both gaining 3bp; DeemedRetractibles were off 2bp. Volatility was average. Volume improved a little, but was still below what I would call ‘average’ levels; but on a brighter note, RBC owned the board today, with no other dealer mentioned in the Volume Highlights.
| 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 | -0.5726 % | 2,406.6 |
| FixedFloater | 4.52 % | 3.87 % | 35,084 | 17.53 | 1 | 0.0952 % | 3,522.5 |
| Floater | 3.02 % | 3.07 % | 55,251 | 19.46 | 3 | -0.5726 % | 2,598.5 |
| OpRet | 4.63 % | 3.28 % | 60,557 | 1.47 | 4 | 0.3644 % | 2,548.4 |
| SplitShare | 5.48 % | 5.07 % | 75,233 | 4.60 | 3 | -0.1065 % | 2,799.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3644 % | 2,330.2 |
| Perpetual-Premium | 5.29 % | 3.60 % | 87,231 | 0.45 | 28 | 0.0271 % | 2,279.5 |
| Perpetual-Discount | 4.91 % | 4.94 % | 95,317 | 15.48 | 3 | 0.4430 % | 2,546.8 |
| FixedReset | 4.99 % | 3.07 % | 167,093 | 4.08 | 70 | 0.0266 % | 2,421.9 |
| Deemed-Retractible | 4.95 % | 3.68 % | 121,414 | 1.85 | 46 | -0.0187 % | 2,365.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.M | Perpetual-Discount | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-11 Maturity Price : 24.11 Evaluated at bid price : 24.40 Bid-YTW : 4.94 % |
| BAM.PR.Z | FixedReset | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-11 Maturity Price : 23.35 Evaluated at bid price : 25.69 Bid-YTW : 4.26 % |
| FTS.PR.E | OpRet | 1.45 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-06-01 Maturity Price : 25.75 Evaluated at bid price : 26.64 Bid-YTW : 0.16 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| MFC.PR.D | FixedReset | 104,462 | RBC crossed two blocks of 50,000 each, both at 26.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 26.63 Bid-YTW : 2.76 % |
| PWF.PR.M | FixedReset | 100,830 | RBC crossed 100,000 at 26.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.23 Bid-YTW : 2.87 % |
| TRP.PR.B | FixedReset | 96,980 | RBC crossed 70,000 at 24.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-11 Maturity Price : 23.38 Evaluated at bid price : 24.89 Bid-YTW : 2.69 % |
| SLF.PR.F | FixedReset | 54,565 | RBC crossed 50,000 at 26.40. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.39 Bid-YTW : 2.67 % |
| RY.PR.X | FixedReset | 53,635 | RBC crossed 50,000 at 26.78. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-24 Maturity Price : 25.00 Evaluated at bid price : 26.75 Bid-YTW : 2.73 % |
| FTS.PR.H | FixedReset | 49,600 | RBC crossed 48,700 at 25.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-11 Maturity Price : 23.59 Evaluated at bid price : 25.50 Bid-YTW : 2.78 % |
| There were 22 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.C | Floater | Quote: 17.15 – 17.50 Spot Rate : 0.3500 Average : 0.2483 YTW SCENARIO |
| BAM.PR.X | FixedReset | Quote: 25.02 – 25.20 Spot Rate : 0.1800 Average : 0.1164 YTW SCENARIO |
| SLF.PR.A | Deemed-Retractible | Quote: 24.10 – 24.28 Spot Rate : 0.1800 Average : 0.1199 YTW SCENARIO |
| TRP.PR.A | FixedReset | Quote: 25.41 – 25.67 Spot Rate : 0.2600 Average : 0.2074 YTW SCENARIO |
| SLF.PR.B | Deemed-Retractible | Quote: 24.26 – 24.40 Spot Rate : 0.1400 Average : 0.0899 YTW SCENARIO |
| CM.PR.L | FixedReset | Quote: 26.77 – 26.99 Spot Rate : 0.2200 Average : 0.1702 YTW SCENARIO |