The story so far:
The yield on the benchmark 10-year Treasury note rose to 2.88 percent late yesterday, reaching two-year highs for a third consecutive day, as investors become increasingly convinced the Fed next month will reduce how much stimulus it pumps into the economy. The yield had been as low as 1.63 percent on May 2.
Yields on U.S. corporate bonds from the riskiest to most-creditworthy borrowers have climbed to 4.23 percent from a record-low 3.35 percent on May 2, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index. They reached a one-year high of 4.3 percent on June 25.
So far this year, rising yields have been accompanied by improving confidence. The Bloomberg Consumer Comfort Index early this month reached the highest reading since January 2008. The New York-based Conference Board’s confidence gauge in June and July also had the strongest two months in more than five years. The Thomson Reuters/University of Michigan’s measure in July reached a six-year high, before falling this month.
Some spreads have narrowed:
About $50 billion of collateralized loan obligations may be refinanced in the next two years, rewarding holders of the most speculative portions of the funds at the expense of AAA investors, according to Royal Bank of Scotland Group Plc. (RBS)
BlackRock Inc. (BLK), Ares Management LLC and other firms have refinanced more than $2 billion of CLOs this year, and an additional $8 billion sold in 2011 will be able to cut interest payments by the end of 2013, according to RBS. Restrictions preventing more than $40 billion of 2012 investments from doing the same will be lifted in 2014, according to the bank.
Yield premiums on new-issue CLOs shrank to the lowest levels in at least three years as more investors piled into the debt seeking better returns than similarly-rated asset classes. Rising demand helped push CLO issuance to $60.6 billion globally this year, the most since 2007, according to JPMorgan Chase & Co.
The BoC has published a very dense paper by Selma Chaker titled Volatility and Liquidity Costs:
Observed high-frequency prices are contaminated with liquidity costs or market microstructure noise. Using such data, we derive a new asset return variance estimator inspired by the market microstructure literature to explicitly model the noise and remove it from observed returns before estimating their variance. The returns adjusted for the estimated liquidity costs are either totally or partially free from noise. If the liquidity costs are fully removed, the sum of squared high-frequency returns – which would be inconsistent for return variance when based on observed returns – becomes a consistent variance estimator when based on adjusted returns. This novel estimator achieves the maximum possible rate of convergence. However, if the liquidity costs are only partially removed, the residual noise is smaller and closer to an exogenous white noise than the original noise. Therefore, any volatility estimator that is robust to noise relies on weaker noise assumptions if it is based on adjusted returns than if it is based on observed returns.
…
There are many possible extensions to this work. For instance, it would be interesting to allow for endogenous and non i.i.d. residual noise. Potentially, a nonlinear or an index model of liquidity costs would capture more noise than a linear one. Indeed, nonlinearities are well documented in market microstructure theory. Another extension would be to add jumps in the frictionless-price dynamics. There is evidence of jumps in the data, so accounting for discontinuities should be explored.In addition to the estimation of volatility-type objects, this paper’s approach to decontaminate high-frequency prices from liquidity costs could be used to study whether the current stylized fact of the reversal of weekly returns (see Gutierrez Jr. and Kelley 2008) is still present for returns that are adjusted for liquidity costs.
There are interesting snippets of news about BAM:
Brookfield Asset Management Inc. has another $1-billion (U.S.) under management, after wrapping up fundraising for a timber fund that met hotter-than-expected demand.
Brookfield set out to raise $750-million to invest in timberland and said commitments exceeded the target. Toronto-based Brookfield also put in $250-million of its own money.
…
The fund comes not long after another Brookfield manager, Brookfield Infrastructure, got out of the timber business, which it called a “lower yielding” asset, to focus on other areas.
… and the Loblaws / Shoppers deal:
Loblaw Cos. Ltd., which is offering $61.54 a share to buy Shoppers Drug Mart Corp., initially bid much less – $45 a share – for the drugstore chain in early 2011.
Loblaw increased the bid to $48 a share a few months later, but talks fell apart in June of that year partly because of the grocer’s concerns about the effects of generic drug reforms, which have eaten into drugstores’ profits and forced them to cut costs and shift strategies.
Wonder of wonders, it was a modestly positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets up 6bp and DeemedRetractibles winning 12bp. A choppy market, with a very long (considering the overall moves) Performance Highlights table, featuring FixedResets and BAM amongst both winners and losers. Volume was extremely high.
| 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 | -0.8408 % | 2,598.2 |
| FixedFloater | 4.24 % | 3.53 % | 32,879 | 18.27 | 1 | 0.6284 % | 3,918.9 |
| Floater | 2.59 % | 2.95 % | 71,327 | 19.82 | 5 | -0.8408 % | 2,805.3 |
| OpRet | 4.69 % | 4.39 % | 72,801 | 2.81 | 3 | -0.0520 % | 2,594.0 |
| SplitShare | 4.77 % | 4.38 % | 56,393 | 4.11 | 6 | 0.7299 % | 2,926.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0520 % | 2,371.9 |
| Perpetual-Premium | 5.82 % | 5.91 % | 97,205 | 14.00 | 12 | -0.1795 % | 2,226.3 |
| Perpetual-Discount | 5.78 % | 5.93 % | 161,555 | 13.95 | 25 | 0.0539 % | 2,231.5 |
| FixedReset | 5.08 % | 4.04 % | 244,823 | 4.62 | 84 | 0.0596 % | 2,404.5 |
| Deemed-Retractible | 5.31 % | 5.40 % | 198,051 | 6.94 | 43 | 0.1234 % | 2,281.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.C | Floater | -2.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 17.59 Evaluated at bid price : 17.59 Bid-YTW : 3.01 % |
| BAM.PR.K | Floater | -1.94 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 17.65 Evaluated at bid price : 17.65 Bid-YTW : 3.00 % |
| POW.PR.D | Perpetual-Discount | -1.90 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 21.22 Evaluated at bid price : 21.22 Bid-YTW : 5.98 % |
| BAM.PR.T | FixedReset | -1.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 22.55 Evaluated at bid price : 23.31 Bid-YTW : 4.67 % |
| MFC.PR.K | FixedReset | -1.69 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.20 Bid-YTW : 4.82 % |
| ENB.PR.F | FixedReset | -1.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 22.00 Evaluated at bid price : 22.52 Bid-YTW : 4.83 % |
| MFC.PR.F | FixedReset | -1.31 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.91 Bid-YTW : 5.04 % |
| ENB.PR.B | FixedReset | -1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 22.28 Evaluated at bid price : 22.86 Bid-YTW : 4.68 % |
| PWF.PR.L | Perpetual-Discount | -1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 21.32 Evaluated at bid price : 21.32 Bid-YTW : 6.05 % |
| ENB.PR.P | FixedReset | -1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 22.02 Evaluated at bid price : 22.61 Bid-YTW : 4.78 % |
| POW.PR.B | Perpetual-Discount | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 22.35 Evaluated at bid price : 22.62 Bid-YTW : 5.98 % |
| BNS.PR.Z | FixedReset | 1.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.12 Bid-YTW : 4.57 % |
| IAG.PR.F | Deemed-Retractible | 1.13 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 6.04 % |
| GWO.PR.L | Deemed-Retractible | 1.15 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.63 Bid-YTW : 5.97 % |
| FTS.PR.F | Perpetual-Discount | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 21.57 Evaluated at bid price : 21.57 Bid-YTW : 5.71 % |
| RY.PR.C | Deemed-Retractible | 1.23 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.79 Bid-YTW : 5.34 % |
| FTS.PR.H | FixedReset | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 20.25 Evaluated at bid price : 20.25 Bid-YTW : 4.34 % |
| NA.PR.Q | FixedReset | 1.39 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-11-15 Maturity Price : 25.00 Evaluated at bid price : 24.85 Bid-YTW : 3.99 % |
| BAM.PR.N | Perpetual-Discount | 1.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 19.66 Evaluated at bid price : 19.66 Bid-YTW : 6.15 % |
| SLF.PR.B | Deemed-Retractible | 1.61 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.45 Bid-YTW : 6.72 % |
| CIU.PR.C | FixedReset | 2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 22.13 Evaluated at bid price : 22.49 Bid-YTW : 3.76 % |
| PWF.PR.S | Perpetual-Discount | 2.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 21.62 Evaluated at bid price : 21.95 Bid-YTW : 5.50 % |
| FTS.PR.J | Perpetual-Discount | 2.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 21.34 Evaluated at bid price : 21.65 Bid-YTW : 5.49 % |
| BAM.PR.X | FixedReset | 3.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 21.93 Evaluated at bid price : 22.33 Bid-YTW : 4.46 % |
| BNA.PR.E | SplitShare | 5.07 % | Just a bounce from yesterday’s stupidity. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2017-12-10 Maturity Price : 25.00 Evaluated at bid price : 24.03 Bid-YTW : 5.86 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PR.N | FixedReset | 64,694 | Scotia crossed 45,000 at 23.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 22.29 Evaluated at bid price : 23.05 Bid-YTW : 4.80 % |
| MFC.PR.D | FixedReset | 53,266 | RBC crossed 36,000 at 25.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 25.48 Bid-YTW : 3.63 % |
| ENB.PR.P | FixedReset | 53,050 | Nesbitt crossed 25,000 at 22.78. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-20 Maturity Price : 22.02 Evaluated at bid price : 22.61 Bid-YTW : 4.78 % |
| GWO.PR.H | Deemed-Retractible | 52,415 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.06 Bid-YTW : 7.00 % |
| BAM.PR.P | FixedReset | 44,998 | Scotia crossed 35,000 at 25.92. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.88 Bid-YTW : 4.67 % |
| RY.PR.I | FixedReset | 44,992 | RBC crossed 34,800 at 24.95. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 4.01 % |
| There were 78 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| GWO.PR.N | FixedReset | Quote: 21.50 – 22.49 Spot Rate : 0.9900 Average : 0.6905 YTW SCENARIO |
| BAM.PR.J | OpRet | Quote: 26.26 – 26.90 Spot Rate : 0.6400 Average : 0.3896 YTW SCENARIO |
| GWO.PR.M | Deemed-Retractible | Quote: 25.27 – 25.80 Spot Rate : 0.5300 Average : 0.3334 YTW SCENARIO |
| MFC.PR.K | FixedReset | Quote: 23.20 – 24.00 Spot Rate : 0.8000 Average : 0.6039 YTW SCENARIO |
| BNS.PR.Y | FixedReset | Quote: 22.49 – 22.96 Spot Rate : 0.4700 Average : 0.3307 YTW SCENARIO |
| PWF.PR.L | Perpetual-Discount | Quote: 21.32 – 21.74 Spot Rate : 0.4200 Average : 0.2868 YTW SCENARIO |