Let’s all reach for yield!
Rates on U.S. high-yield corporate bonds fell below 7 percent for the first time last week, according to Bank of America Merrill Lynch index data.
Average borrowing costs for speculative-grade companies from Sprint Nextel Corp. (S) to HCA Holdings Inc. (HCA) dropped to an unprecedented 6.965 percent Sept. 14 from 7.07 percent the day earlier, Bank of America Merrill Lynch’s U.S. High Yield Master II index data shows. The gauge was at 8.54 percent at year-end and 8.79 percent a year ago, the index data show.
There’s a good editorial on Bloomberg about licensing:
The average cosmetologist in the U.S. trains for 372 days before earning a license. The average emergency medical technician spends 33 days in training. From this, one might conclude that Americans are obsessed with primping but tragically unprepared for emergencies.
Actually, the disparity merely confirms what a muddle the process of occupational licensing is. In 1952, fewer than 5 percent of U.S. workers required a state license. By 2006, according to a survey that year by the Gallup Organization, 29 percent of workers said they needed a government-issued license to do their job.
It’s a serious concern for civil liberties: governments should be in the business of prohibitions – with the growth in licensing, they are in the business of permissions.
Bloomberg’s editors have been on a hot streak lately, bringing to my attention a reckless change in US pension law:
So Congress changed the discounting rules, allowing companies to choose discount rates based on a 25-year average of corporate bond yields instead of using an average of just two years.
…
Meanwhile, companies that go bankrupt will tend to have accrued larger unfunded liabilities. The bulk of those liabilities are covered by the Pension Benefit Guaranty Corp., a federal agency backstopped by taxpayers.The pension legislation also raised the premiums that companies pay into the agency, which, in theory, should offset costs to taxpayers. But Congress counted the increased premiums as funds available to pay for highway construction, essentially double-counting the money.
This relief of pension funding obligations will undermine the solvency of pension funds in part to address a problem that doesn’t exist. Companies protest that they can’t afford to adjust to sharply falling discount rates. The costs they face, however, are a mix of costs they should have been able to control and costs they do control.
In the first category is any increase in unfunded pension liabilities due to lower discount rates. It’s true: Given the crashing bond yields of recent years, without relief, pension funds would be told to start holding many more assets. But the flip side of falling yields is that bond prices have risen significantly.
If a pension plan invested in bonds with maturities matching its obligations — that is, enough 10-year bonds to cover the payments due in 10 years, and so forth — the value of its holdings should have risen enough to cover its added asset needs. Only companies that chose not to properly match their maturities are left closing a gap.
But immunizing liabilities is BORING!
Spanish banks are slowly but surely bleeding deposits:
Spanish banks, already hooked on cheap European Central Bank loans, are hemorrhaging deposits as the government debates whether to seek a bailout.
Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain.
…
There is “a clear underlying trend of accelerating deposit decline,” Nomura’s Quinn wrote in a Sept. 4 report. Term deposits by households fell 6.9 percent in July from a year earlier, while those of companies fell 24 percent, which “points to continued deposit declines in the future,” he said.
It was a mixed day for the Canadian preferred shares market, with PerpetualPremiums gaining 4bp, FixedResets up 3bp and DeemedRetractibles down 6bp. Volatility was muted. Volume returned to “lousy”.
| 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 | 0.0192 % | 2,420.2 |
| FixedFloater | 4.57 % | 3.93 % | 34,960 | 17.43 | 1 | 0.0481 % | 3,487.3 |
| Floater | 3.03 % | 3.04 % | 56,791 | 19.64 | 3 | 0.0192 % | 2,613.2 |
| OpRet | 4.67 % | 3.42 % | 59,418 | 1.47 | 4 | -0.2016 % | 2,546.5 |
| SplitShare | 5.47 % | 5.00 % | 74,641 | 4.58 | 3 | -0.1196 % | 2,804.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2016 % | 2,328.5 |
| Perpetual-Premium | 5.28 % | 3.17 % | 86,355 | 0.43 | 28 | 0.0354 % | 2,281.7 |
| Perpetual-Discount | 4.95 % | 4.94 % | 96,310 | 15.63 | 3 | -0.0833 % | 2,548.0 |
| FixedReset | 4.97 % | 3.13 % | 176,462 | 4.06 | 72 | 0.0312 % | 2,426.5 |
| Deemed-Retractible | 4.95 % | 3.55 % | 120,420 | 1.24 | 46 | -0.0561 % | 2,366.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FTS.PR.E | OpRet | -1.23 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-06-01 Maturity Price : 25.75 Evaluated at bid price : 26.46 Bid-YTW : 1.15 % |
| RY.PR.D | Deemed-Retractible | -1.01 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-02-24 Maturity Price : 25.00 Evaluated at bid price : 25.58 Bid-YTW : 3.89 % |
| RY.PR.W | Perpetual-Premium | 1.19 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-02-24 Maturity Price : 25.25 Evaluated at bid price : 25.60 Bid-YTW : 2.38 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PR.P | FixedReset | 229,010 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-17 Maturity Price : 23.07 Evaluated at bid price : 24.92 Bid-YTW : 3.86 % |
| TRP.PR.B | FixedReset | 80,669 | Scotia bought 10,400 from RBC at 24.88. TD crossed 29,900 at 24.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-17 Maturity Price : 23.37 Evaluated at bid price : 24.86 Bid-YTW : 2.77 % |
| HSE.PR.A | FixedReset | 51,619 | Desjardins crossed 46,500 at 26.15. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-17 Maturity Price : 23.56 Evaluated at bid price : 25.85 Bid-YTW : 3.11 % |
| RY.PR.N | FixedReset | 36,825 | TD crossed 30,500 at 26.40. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.40 Bid-YTW : 2.56 % |
| TD.PR.A | FixedReset | 30,616 | National crossed 25,000 at 25.94. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.91 Bid-YTW : 2.77 % |
| ENB.PR.F | FixedReset | 30,129 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-17 Maturity Price : 23.18 Evaluated at bid price : 25.19 Bid-YTW : 3.82 % |
| There were 15 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| RY.PR.N | FixedReset | Quote: 26.40 – 26.80 Spot Rate : 0.4000 Average : 0.2507 YTW SCENARIO |
| IGM.PR.B | Perpetual-Premium | Quote: 26.95 – 27.30 Spot Rate : 0.3500 Average : 0.2103 YTW SCENARIO |
| GWO.PR.Q | Deemed-Retractible | Quote: 25.45 – 25.79 Spot Rate : 0.3400 Average : 0.2241 YTW SCENARIO |
| HSE.PR.A | FixedReset | Quote: 25.85 – 26.15 Spot Rate : 0.3000 Average : 0.2000 YTW SCENARIO |
| PWF.PR.M | FixedReset | Quote: 26.10 – 26.37 Spot Rate : 0.2700 Average : 0.1708 YTW SCENARIO |
| SLF.PR.F | FixedReset | Quote: 26.40 – 26.67 Spot Rate : 0.2700 Average : 0.1907 YTW SCENARIO |