Are the bond vigilantes hanging up their spurs?
U.S. fixed-income mutual funds attracted investor deposits last week, rebounding from redemptions spurred by speculation that the Federal Reserve would scale back its unprecedented stimulus, while bond exchange-traded funds had withdrawals.
Investors put $219 million into U.S. taxable-bond mutual funds while pulling $456 million from bond ETFs in the week ended July 10, Denver-based research firm Lipper said yesterday in an e-mailed statement. They deposited more than $3 billion in bond mutual funds and ETFs combined during the week ended July 3, the first week of net deposits in five weeks. U.S. bond funds had withdrawals of $23.7 billion in the four weeks ended June 26, the most since October 2008, Lipper said.
“Taxable-bond fund investors were of two minds,” Lipper said in the statement. “Neither amount reflected a strong opinion on bonds.”
It’s always nice to see big banks hurt by negative convexity:
JPMorgan Chase & Co (JPM). Chief Executive Officer Jamie Dimon warned investors that higher interest rates could lead to a “dramatic reduction” in the bank’s profits by eroding demand for mortgage refinancing.
The surge in 30-year home-loan rates to 4.46 percent at the end of June from 3.51 percent in mid-May caused second-quarter mortgage-fee revenue to decline 20 percent, the New York-based bank reported today. Refinancing volume could fall as much as 40 percent in the second half if rates remain elevated, Chief Financial Officer Marianne Lake told analysts on a call today.
…
Refinancings, which accounted for 76 percent of the industry’s $1.75 trillion in loan originations last year, slumped after 30-year rates surged in May and June, data compiled by Freddie Mac show. Applications to refinance loans fell 42 percent across the industry from May 17 to July 5, according to Joel Kan, an economist at the Mortgage Bankers Association, a Washington-based trade group.
Fortunately for Canadian banks, there is no real competition in Canada so we don’t have thirty-year open mortgages.
Electrical Engineering Professor Reza Iravani of the University of Toronto has come up with a a revolutionary idea for electricity delivery in Toronto:
“The delivery system has to be reinforced so even if you lose a station, the rest of the system can maintain operation without a major blackout,” he said.
Amazing. A system with some redundancy to make it more robust to single-point failure. Give the man a Nobel Prize – and, while you’re at it, a consulting contract to help the Bank of Canada with their Centralized Counterparty idea.
Investors in US Municipals have another thing to worry about:
Detroit bondholders may have a new worry after a judge ruled that Jefferson County, Alabama, could have paid legal bills for its bankruptcy from cash that was going to pay warrant holders owed $3 billion.
The ruling should concern bond investors whose revenue was previously protected from use by municipalities, said R. Dale Ginter, a bankruptcy lawyer at Downey Brand LLP in Sacramento, California. It may force those bondholders to reconsider waging an extensive legal fight to protect their interests, said Ginter, who represented retirees in the bankruptcy of Vallejo, California.
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The ruling could apply to any municipal bankruptcy with debt being paid by pledged revenues such as parking fees, airport lease payments or water and sewer charges, Ginter said. Detroit is in talks to get bondholders and current and former city workers to accept $2 billion in exchange for wiping out the $11.5 billion they may be owed. Kevyn Orr, Detroit’s emergency financial manager, said he may put the city into bankruptcy if they can’t strike a deal.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 20bp, FixedResets off 2bp and DeemedRetractibles flat. Volatility was lower than normal – especially when compared with recent times – but what there was was all positive. Volume was a little below average.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| 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 | 0.2336 % | 2,580.6 |
| FixedFloater | 4.20 % | 3.49 % | 41,381 | 18.43 | 1 | 0.4889 % | 3,952.1 |
| Floater | 2.72 % | 2.91 % | 86,966 | 19.96 | 4 | 0.2336 % | 2,786.4 |
| OpRet | 4.60 % | 2.27 % | 73,962 | 0.70 | 3 | -0.0895 % | 2,620.1 |
| SplitShare | 4.66 % | 4.47 % | 66,412 | 3.93 | 6 | 0.0217 % | 2,971.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0895 % | 2,395.8 |
| Perpetual-Premium | 5.60 % | 4.11 % | 99,741 | 0.78 | 12 | 0.0726 % | 2,292.0 |
| Perpetual-Discount | 5.33 % | 5.34 % | 138,163 | 14.81 | 26 | 0.2034 % | 2,414.4 |
| FixedReset | 4.95 % | 3.41 % | 232,126 | 3.56 | 83 | -0.0233 % | 2,485.4 |
| Deemed-Retractible | 5.04 % | 4.49 % | 187,830 | 7.00 | 43 | -0.0009 % | 2,393.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.N | Perpetual-Discount | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-15 Maturity Price : 21.65 Evaluated at bid price : 21.65 Bid-YTW : 5.54 % |
| ELF.PR.G | Perpetual-Discount | 1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-15 Maturity Price : 22.23 Evaluated at bid price : 22.55 Bid-YTW : 5.28 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.O | Deemed-Retractible | 105,100 | RBC crossed 103,000 at 26.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-08-14 Maturity Price : 26.00 Evaluated at bid price : 26.00 Bid-YTW : 2.53 % |
| CU.PR.F | Perpetual-Discount | 65,010 | Scotia crossed 56,000 at 22.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-15 Maturity Price : 22.44 Evaluated at bid price : 22.75 Bid-YTW : 4.99 % |
| ENB.PR.Y | FixedReset | 61,028 | National bought 34,500 from Scotia at 25.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-07-15 Maturity Price : 23.09 Evaluated at bid price : 24.96 Bid-YTW : 3.99 % |
| CM.PR.K | FixedReset | 45,804 | Nesbitt crossed 25,000 at 25.73. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 2.42 % |
| MFC.PR.K | FixedReset | 44,285 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-09-19 Maturity Price : 25.00 Evaluated at bid price : 25.22 Bid-YTW : 3.68 % |
| CM.PR.G | Perpetual-Premium | 35,542 | Scotia crossed 24,800 at 25.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-01 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 4.11 % |
| There were 27 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| IAG.PR.G | FixedReset | Quote: 25.70 – 26.23 Spot Rate : 0.5300 Average : 0.3718 YTW SCENARIO |
| CU.PR.F | Perpetual-Discount | Quote: 22.75 – 23.20 Spot Rate : 0.4500 Average : 0.2929 YTW SCENARIO |
| BAM.PR.G | FixedFloater | Quote: 22.61 – 23.23 Spot Rate : 0.6200 Average : 0.4981 YTW SCENARIO |
| GWO.PR.M | Deemed-Retractible | Quote: 26.15 – 26.45 Spot Rate : 0.3000 Average : 0.2191 YTW SCENARIO |
| PWF.PR.R | Perpetual-Discount | Quote: 25.25 – 25.48 Spot Rate : 0.2300 Average : 0.1695 YTW SCENARIO |
| TD.PR.K | FixedReset | Quote: 25.90 – 26.04 Spot Rate : 0.1400 Average : 0.0809 YTW SCENARIO |