August 21, 2013

Goldman Sachs had an options whoopsy yesterday:

For all the efforts to shore up electronic markets in the aftermath of one of America’s biggest trading catastrophes, yesterday’s options malfunction by Goldman Sachs (GS) Group Inc. shows the dangers haven’t gone away.

A programming error caused the firm to send unintentional stock options orders in the first minutes of trading, pushing prices on dozens of contracts to a dollar each, according to a person briefed on the matter yesterday and data compiled by Bloomberg. Any losses for Goldman Sachs, the fifth-largest U.S. bank by assets, won’t be known until exchanges determine which contracts should be canceled, said the person, who requested anonymity because the information is private.

An internal system that Goldman Sachs uses to help prepare to meet market demand for equity options inadvertently produced orders with inaccurate price limits and sent them to exchanges yesterday, according to the person familiar with the situation. Some of the transactions have already been voided, data compiled by Bloomberg show.

A “large number” of trades from the session’s first 17 minutes for tickers beginning with the letters H through L are being examined and most of the transactions may be canceled, according to a statement yesterday from NYSE Euronext (NYX)’s U.S. options business. NYSE and Nasdaq OMX Group Inc. said today that they have completed the trade reviews, according to e-mailed statements from the exchanges.

Cancelling trades is a good policy: it gives the regulators more power and therefore larger paycheques, while the big firms find it more important to hire ex-regulators to lobby their buddies. After all, the purpose of capital markets is to provide good jobs for regulators, right?

Here’s one good way to reflate the economy:

Chancellor of the Exchequer George Osborne’s plan to boost the U.K. housing market is winning his Conservative Party votes at the risk of creating a property bubble, economists say.

Help to Buy is designed to let cash-strapped buyers purchase a home with a deposit of as little as 5 percent of the value of the property. The first phase — interest-free loans for buyers of newly built homes — began in April and has already stoked the strongest housing market since the financial crisis. Guarantees meant to spur 130 billion pounds ($204 billion) of mortgage lending will be available for all homes starting in January.

A home-value gauge compiled by the Royal Institution of Chartered Surveyors rose to the highest in almost seven years in July. Halifax, the mortgage unit of Lloyds Banking Group Plc, estimates values rose for a sixth month to an average 169,624 pounds. Mortgage lending rose 29 percent from a year earlier to the highest level since the collapse of Lehman Brothers Holdings Inc. in 2008, the Council of Mortgage Lenders said yesterday.

Since Help to Buy began, 10,000 reservations for new homes have been made, according to figures published on the Department for Communities and Local Government website this month.

Rob Wood, an economist at Berenberg Bank and a former Bank of England official, forecasts house prices will rise 15 percent by the end of 2014.

The program, announced in the March budget, is designed to help people who lack enough cash for a deposit, with the government lending 20 percent of the value of a newly built home up to 600,000 pounds, interest-free for five years. The lender provides 75 percent, meaning the purchaser has to raise a down payment of 5 percent compared with about 20 percent previously.

The second phase, set to run for three years, will provide 12 billion pounds of government guarantee to encourage lenders to offer mortgages with loan-to-value ratios of up to 95 percent. The program applies to new and existing homes and excludes buyers of second properties.

The initiative, which follows the Funding for Lending Scheme run by the Bank of England, has drawn a warning from the International Monetary Fund for its potential to stoke home prices and been described as “moronic” by Societe Generale SA analyst Albert Edwards for encouraging Britons to add to already high debt levels. U.K. households owed about 1.3 trillion pounds on their mortgages in June, according to the Bank of England.

There are more liquidity problems in US Corporates:

The lowest volumes for U.S. corporate-bond trading since 2008 are underscoring the potential for market disruptions as regulations prompt dealers to retreat.

August trading volumes have plummeted to a daily average of $14.1 billion, down 9 percent from the corresponding period last year, even as the amount of company debt outstanding has soared by 12 percent. Bonds have lost 5 percent since the end of April on the Bank of America Merrill Lynch U.S. Corporate Index, the worst stretch since the credit crisis as the Federal Reserve considers curtailing its record stimulus.

Exiting from fixed-income securities is getting tougher as the world’s biggest bond dealers respond to new capital standards, reducing inventories of the debt by 76 percent since the peak in 2007. Even as lenders from Goldman Sachs Group Inc. to UBS AG create electronic-trading platforms, investors are failing to find relief from waning liquidity, according to a July report by the Treasury Borrowing Advisory Committee.

“You’ve got to be very wary of getting into a crowded position,” Stephen Antczak, the head of U.S. credit strategy at Citigroup Inc. in New York, said in a telephone interview. “If everybody has the same mandate, who’s going to take the other side of the trade? If far more guys are mark-to-market sensitive than they used to be and you overlay the lack of liquidity, that kind of exacerbates the problem.”

The unprecedented growth of funds that publish market prices of their assets daily has changed the dynamic of credit markets, with investors more inclined to redeem funds as sentiment deteriorates, Antczak said. The funds now account for more than 40 percent of the debt’s owners from about 25 percent in 2007, Citigroup data show.

So you’ve got TRACE, you’ve got capital constraints … electronic trading platforms aren’t going to help any, they’re going to hurt: it’s well known that transparency creates smaller spreads, but a thinner, more brittle market … at some point, regulators are going to have to sit down and ask themselves what bond markets are for. Are they to allow borrowers to access lenders? Or are they to be ‘fair’, whatever that means? Because right now, the public corporate bond market is being destroyed.

Yield increases are spreading through the economy:

Mortgage rates are again on the rise in Canada, increasing the likelihood of a slowdown in the national housing market.

On Wednesday, Royal Bank of Canada hiked its five-year, fixed-rate mortgage by 20 basis points to 3.89 per cent, one day after the Bank of Montreal raised its benchmark rate to 3.79 per cent.

It was a very good day for the Canadian preferred share market, with PerpetualDiscounts winning 43bp, FixedResets gaining 26bp and DeemedRetractibles up 31bp. The Performance Highlights table is suitably lengthy, with FixedResets being notable at both ends of the spectrum. Volume was high.

So, everybody’s wondering – is this a dead cat bounce or the start of a major rally? I’m preparing a three month forecast … readers will understand that due to the complexity of the problem, I won’t have it ready for about 90 days.

PerpetualDiscounts now yield 5.91%, equivalent to 7.68% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.9%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 280bp, another significant increase from the 270bp reported August 14.

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 0.4437 % 2,609.7
FixedFloater 4.25 % 3.55 % 33,637 18.25 1 -0.3122 % 3,906.6
Floater 2.58 % 2.93 % 70,751 19.87 5 0.4437 % 2,817.8
OpRet 4.67 % 4.35 % 71,820 2.81 3 0.2473 % 2,600.4
SplitShare 4.76 % 4.40 % 56,010 3.86 6 0.3642 % 2,937.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2473 % 2,377.8
Perpetual-Premium 5.83 % 5.84 % 104,946 13.95 12 -0.1425 % 2,223.1
Perpetual-Discount 5.76 % 5.91 % 160,912 13.99 25 0.4386 % 2,241.3
FixedReset 5.07 % 4.02 % 243,245 4.17 84 0.2638 % 2,410.8
Deemed-Retractible 5.29 % 5.38 % 195,921 6.94 43 0.3146 % 2,288.4
Performance Highlights
Issue Index Change Notes
BAM.PR.T FixedReset -1.93 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.29
Evaluated at bid price : 22.86
Bid-YTW : 4.77 %
CIU.PR.C FixedReset -1.91 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 21.81
Evaluated at bid price : 22.06
Bid-YTW : 3.85 %
TD.PR.S FixedReset -1.89 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.90
Bid-YTW : 4.12 %
ENB.PR.D FixedReset -1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 21.76
Evaluated at bid price : 22.15
Bid-YTW : 4.81 %
FTS.PR.J Perpetual-Discount -1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 21.38
Evaluated at bid price : 21.38
Bid-YTW : 5.58 %
HSB.PR.D Deemed-Retractible -1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.46
Bid-YTW : 5.46 %
ENB.PR.A Perpetual-Premium -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 23.85
Evaluated at bid price : 24.10
Bid-YTW : 5.72 %
BAM.PR.N Perpetual-Discount 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 19.86
Evaluated at bid price : 19.86
Bid-YTW : 6.09 %
BAM.PR.X FixedReset 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.08
Evaluated at bid price : 22.56
Bid-YTW : 4.40 %
TRP.PR.D FixedReset 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.76
Evaluated at bid price : 24.05
Bid-YTW : 4.37 %
PWF.PR.E Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 23.15
Evaluated at bid price : 23.45
Bid-YTW : 5.91 %
PWF.PR.L Perpetual-Discount 1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 21.57
Evaluated at bid price : 21.57
Bid-YTW : 5.98 %
GWO.PR.I Deemed-Retractible 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.70
Bid-YTW : 6.81 %
BMO.PR.Q FixedReset 1.34 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.22
Bid-YTW : 3.87 %
CU.PR.D Perpetual-Discount 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 21.50
Evaluated at bid price : 21.79
Bid-YTW : 5.63 %
TRP.PR.B FixedReset 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 20.85
Evaluated at bid price : 20.85
Bid-YTW : 4.05 %
GWO.PR.N FixedReset 1.58 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.84
Bid-YTW : 4.91 %
PWF.PR.P FixedReset 1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.69
Evaluated at bid price : 23.30
Bid-YTW : 3.93 %
BNS.PR.Y FixedReset 1.82 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.90
Bid-YTW : 4.42 %
CU.PR.E Perpetual-Discount 1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 21.58
Evaluated at bid price : 21.90
Bid-YTW : 5.60 %
PWF.PR.F Perpetual-Discount 1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.31
Evaluated at bid price : 22.58
Bid-YTW : 5.86 %
GWO.PR.H Deemed-Retractible 1.99 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.48
Bid-YTW : 6.76 %
GWO.PR.Q Deemed-Retractible 2.16 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.65
Bid-YTW : 5.93 %
ENB.PR.F FixedReset 2.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.34
Evaluated at bid price : 23.10
Bid-YTW : 4.69 %
TRP.PR.A FixedReset 2.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 23.84
Evaluated at bid price : 24.25
Bid-YTW : 4.11 %
SLF.PR.G FixedReset 2.97 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.20
Bid-YTW : 4.95 %
MFC.PR.K FixedReset 2.97 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.89
Bid-YTW : 4.49 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.Y FixedReset 79,086 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 21.95
Evaluated at bid price : 22.51
Bid-YTW : 4.70 %
GWO.PR.H Deemed-Retractible 71,189 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.48
Bid-YTW : 6.76 %
CU.PR.G Perpetual-Discount 51,870 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 20.30
Evaluated at bid price : 20.30
Bid-YTW : 5.57 %
GWO.PR.R Deemed-Retractible 46,300 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.30
Bid-YTW : 6.26 %
CM.PR.K FixedReset 36,543 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 3.98 %
ENB.PR.B FixedReset 33,611 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.38
Evaluated at bid price : 23.04
Bid-YTW : 4.64 %
There were 54 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: 17.80 – 18.59
Spot Rate : 0.7900
Average : 0.4461

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 17.80
Evaluated at bid price : 17.80
Bid-YTW : 2.97 %

TD.PR.S FixedReset Quote: 23.90 – 24.71
Spot Rate : 0.8100
Average : 0.4729

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.90
Bid-YTW : 4.12 %

TRI.PR.B Floater Quote: 23.50 – 24.49
Spot Rate : 0.9900
Average : 0.7246

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.22 %

ENB.PR.D FixedReset Quote: 22.15 – 22.80
Spot Rate : 0.6500
Average : 0.4413

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 21.76
Evaluated at bid price : 22.15
Bid-YTW : 4.81 %

POW.PR.B Perpetual-Discount Quote: 22.58 – 23.00
Spot Rate : 0.4200
Average : 0.2791

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.31
Evaluated at bid price : 22.58
Bid-YTW : 6.00 %

ENB.PR.N FixedReset Quote: 23.10 – 23.55
Spot Rate : 0.4500
Average : 0.3133

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-21
Maturity Price : 22.32
Evaluated at bid price : 23.10
Bid-YTW : 4.79 %

8 Responses to “August 21, 2013”

  1. nervousone says:

    Good morning,

    Of course, the story of the day yesterday was the all-important, totally vital FOMC minutes release. It’s interesting to see the general market reaction from 2pm on after the economy-shattering document was made public. Dow dropped 100 pts in the first 5 minutes, then swung 130 pts to a small gain, then closed out down close to 100. In other words, nothing of meaning was contained in the minutes, and the market had no way of interpreting this nothingness and convert it into direction. The general concensus now stands at, “no tapering in September, more data needs to be analyzed”. Wow man.

    Today, the broader markets are strong once again, but there is a concerning item for pref investors . . . the long bond yield rose 4 pts after the announcement, and is up another pt today . . . not much of a move, but the problem is the direction . . . still rising, not falling.

    Also, there was trading on 2 prefs yesterday that really concerned me –> CCS.PR.C and CIU.PR.A both down about a buck, and closing with very, very wide spreads. These two never trade big volume, but the lack of absolutely any buying interest could be seen as a very troubling storm cloud for the category in general.

    All in all, the lack of any meaningful FOMC substance probably puts the bond and pref markets in rangebound drifting for the next 3 or 4 weeks . . . the one thing that could change all of that is the upcoming job number out of the US. If it sucks, prefs fly . . . if it’s abnormally strong, say over 200K, without any meaningful trailing revisions, then tapering is a foregone conclusion, and, well, adrian owes me $100.

  2. adrian2 says:

    well, adrian owes me $100

    On the contrary, you owe me a million 😉
    You’ve claimed that because of an increase in the long bond rates prefs will drop by such and such. I’ve said you’re wrong. Long bond rates are increasing and prefs are bouncing back, q.e.d.

    Adrian

  3. Nestor says:

    the preferred share market has over reacted to the the back up in yields. no questions about it.

  4. nervousone says:

    Nestor and adrian . . . congratulations on both your optimism, and your willingness to engage in Vegas-style investing! Really? buying prefs right now, Nestor? guts of steel; I’ll give you that.

    Here’s the reality of the upcoming jobs number for you both to really, really, really understand:

    If the number comes in at or below 175K, the market will be happy that QE cannot be cut for at least another month. The pref “rally”, if you call two days of blood flow reduction a rally, will likely continue. Congratulations if that number comes in!

    If, on the other hand, the more likely and expected number comes in at or above 200K, the market will immediately see this as confirmation that the “good times” are back, and that QE tapering will commence right away. The bigger the number over 200K, the faster and larger tapering will be.

    And bond yields will spike, pref spreads will be wider than the grin that’s already forming on your face, and you will miss the most amazing pref buying opportunity since the depths of the credit crunch (and those prefs you just bought will be buyable at least a couple of dollars cheaper).

    Have a good night’s sleep before that number is released!

  5. adrian2 says:

    you will miss the most amazing pref buying opportunity since the depths of the credit crunch (and those prefs you just bought will be buyable at least a couple of dollars cheaper).

    Please do ring a bell for us plebes to know when the bottom is reached 😉

    Lots of dry powder in my TDW margin accounts.

  6. nervousone says:

    adrian,

    If I’m wrong with this logic, I will be the first one step up and say so. Of course, if things turn out the way I expect, I’m sure you will do a really good job doing what you do best.

    Enjoy the jobs number in a few days.

  7. […] PerpetualDiscounts now yield 5.81%, equivalent to 7.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.8% (maybe a little under), so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, a slight (and perhaps spurious) decline from the 280bp reported August 21. […]

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