September 21, 2012

More regulation! It appears a Senate committee wants to ban hedging:

A U.S. Senate panel probing the multibillion-dollar trading loss by JPMorgan Chase & Co. (JPM) plans to unveil its findings at a hearing this year to press regulators to tighten the Volcker rule, according to three people briefed on the matter.

Staff members of the Permanent Subcommittee on Investigations, headed by Senator Carl Levin, have interviewed JPMorgan officials as well as examiners and supervisors at the institution’s regulator, the Office of the Comptroller of the Currency, said the people, who spoke on condition of anonymity because the inquiry isn’t public.

One focus of the queries is whether JPMorgan’s wrong-way bets on derivatives would have been permitted under regulators’ initial draft of the Volcker ban on proprietary trading, the people said. The lender lost $5.8 billion on the trades in the first six months of the year.

Levin of Michigan and Senator Jeff Merkley of Oregon, both Democrats, inserted the trading ban into the 2010 Dodd-Frank Act, leaving the details largely up to regulators. The senators have said that the JPMorgan loss highlights a loophole in the regulators’ draft that would allow banks to continue hedging their portfolio risks, and they said it should be closed.

It will be interesting to see how far that goes. If you buy a big block of 29-year Treasuries from a client, will you be allowed to sell 30-year Treasuries to hedge? How about futures on 30-year Treasuries? My continuing question is – has anybody given the slightest thought to just where we’re going on all this? What does the perfect world look like? Or are things just going to be banned willy-nilly, on the grounds that more regulation is better regulation?

Canadian inflation is at low levels:

The Bank of Canada is running out of reasons to raise interest rates anytime soon.

Consumer prices rose 1.2 per cent in August from a year earlier, Statistics Canada reported Friday, compared with 1.3 per cent in July. That’s comfortably below the central bank’s target of 2 per cent. At the same time, wholesalers are struggling. Statscan said in a separate report that wholesale trade plunged 0.6 per cent in July, to $49.5-billion. Most Bay Street analysts were expecting a small gain.

These figures imply Canada’s economy is sputtering. The wholesale numbers, combined with weak factory data last week, suggest third quarter growth will be weak. And little economic growth suggests little inflation. Krishen Rangasamy, a senior economist at National Bank Financial in Montreal, says third-quarter inflation is running well behind the pace that the Bank of Canada was expecting: 1.1 per cent for the headline number, compared with the central bank’s current estimate of 1.2 per cent; and, more importantly, core inflation, which deducts volatile food and energy prices, is tracking 1.4 per cent v. the Bank of Canada’s estimate of 1.9 per cent.

S&P has a cheerful recession scenario:

The Downside Case (20%-25%): We All Fall Down

In our double-dip scenario, a recession takes hold in the fourth quarter of this year. The U.S. enters into a recession as the ongoing political wrangling of U.S. lawmakers over fiscal policy results in the failure of the government to agree on a sound budget deficit-cutting plan before 2013. Despite central bank efforts, the eurozone continues to be broadsided by fiscal austerity and its political backlash, a deep recession, financial system turmoil, and a loss of investor and consumer confidence. And emerging Asian economies continue their slowdown, amplifying the U.S. recession as exports take a hit.
The recession lasts until the second quarter of 2013, but political uncertainty in Europe and the U.S. and government austerity keep the recovery very weak. Despite tensions in the Middle East, the global slowdown pushes oil prices lower, down to $77 per barrel in the first quarter of 2013 from $94 per barrel in second-quarter 2012.

As businesses rein in hiring, the unemployment rate rises to 8.8% in 2013 and peaks above 9% the following year. Rising unemployment will put an even tighter squeeze on consumers. Nonfarm productivity contracts by 1.0% in the fourth quarter and by 0.8% in 2013.

The slumping economy, political wrangling, weak exports, and higher costs of federal retirement and health care programs all have an impact on the budget deficit. Congress’ reluctance to compromise forces an austere fiscal policy. After widening to $1.14 trillion in 2012, the deficit narrows to $970 billion in fiscal 2013 as a result of the automatic sequestration. The damage in the first quarter causes policymakers to agree on extending the expiring measures one more year. But, deficit hawks convince policymakers to let them expire in 2014. Additional austerity further slows the recovery.

The 10-year Treasury note yield falls to averages of 1.7% and 1.3% in 2012 and 2013, respectively, as investors rush to safety. The current account deficit narrows to $353 billion in 2013, from the record $801 billion in 2006, on lower prices and weak domestic demand for most imports.

The result is another recession before the recovery is complete

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets down 7bp and DeemedRetractibles up 4bp. There was no volatility. None. Zip, zero, zilch. Volume was low.

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 0.3632 % 2,443.9
FixedFloater 4.52 % 3.88 % 35,055 17.50 1 0.2864 % 3,520.8
Floater 3.00 % 3.01 % 59,055 19.71 3 0.3632 % 2,638.8
OpRet 4.67 % 3.34 % 53,789 1.46 4 -0.1537 % 2,546.7
SplitShare 5.46 % 4.97 % 72,557 4.57 3 0.0133 % 2,811.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1537 % 2,328.7
Perpetual-Premium 5.29 % 2.92 % 96,018 1.03 28 0.0284 % 2,286.7
Perpetual-Discount 4.96 % 4.95 % 103,833 15.58 3 -0.2221 % 2,543.8
FixedReset 4.96 % 3.12 % 175,768 4.05 72 -0.0741 % 2,429.4
Deemed-Retractible 4.94 % 3.52 % 122,703 1.60 46 0.0434 % 2,370.0
Performance Highlights
Issue Index Change Notes
No individual gains or losses exceeding 1%!
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.A OpRet 88,874 National Bank crossed 85,700 at 25.58.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2015-12-18
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.34 %
ENB.PR.P FixedReset 66,390 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-21
Maturity Price : 23.08
Evaluated at bid price : 24.97
Bid-YTW : 3.85 %
RY.PR.T FixedReset 47,700 National crossed 25,000 at 26.87.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.85
Bid-YTW : 2.57 %
RY.PR.X FixedReset 44,295 RBC crossed 25,000 at 26.90.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.85
Bid-YTW : 2.57 %
CM.PR.D Perpetual-Premium 31,725 RBC crossed 25,000 at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-21
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : -30.32 %
BNS.PR.M Deemed-Retractible 28,955 TD crossed 15,500 at 26.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-27
Maturity Price : 25.25
Evaluated at bid price : 25.95
Bid-YTW : 3.69 %
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.K Floater Quote: 17.43 – 17.86
Spot Rate : 0.4300
Average : 0.2558

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-21
Maturity Price : 17.43
Evaluated at bid price : 17.43
Bid-YTW : 3.01 %

TCA.PR.Y Perpetual-Premium Quote: 51.60 – 52.09
Spot Rate : 0.4900
Average : 0.3592

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 51.60
Bid-YTW : 3.88 %

BAM.PR.N Perpetual-Discount Quote: 23.97 – 24.26
Spot Rate : 0.2900
Average : 0.1725

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-21
Maturity Price : 23.57
Evaluated at bid price : 23.97
Bid-YTW : 4.95 %

BAM.PR.G FixedFloater Quote: 21.01 – 21.33
Spot Rate : 0.3200
Average : 0.2109

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-21
Maturity Price : 21.75
Evaluated at bid price : 21.01
Bid-YTW : 3.88 %

IAG.PR.C FixedReset Quote: 25.95 – 26.20
Spot Rate : 0.2500
Average : 0.1533

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.95
Bid-YTW : 3.05 %

RY.PR.X FixedReset Quote: 26.85 – 27.09
Spot Rate : 0.2400
Average : 0.1724

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.85
Bid-YTW : 2.57 %

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