June 27, 2008

A nasty piece on VoxEU today – How to prick local housing bubbles in a monetary union: regulation and countercyclical taxes. A very prescriptive, central-planning approach … for example:

Whenever ECB interest rates become inappropriately low for a member state, for example, aggressive reductions in tax breaks on housing should aim to reduce the stimulus coming from ECB policy. For example, mortgage interest relief could be conditional on the real rather than the nominal interest rate. At the same time, tax incentives that favour fixed- over flexible-rate mortgages might be called for, as well as changes to the property tax and capital gains tax regime so that they act automatically as countercyclical stabilisers. In some cases, additional temporary tax measures to contain an emerging bubble will be required.

All told, the three Divisions have examined the references to credit ratings in 44 of our rules and forms. The staff is recommending changes to 38 of them. Specifically, they are recommending the complete elimination of any reference to credit ratings in 11 rules and forms. They are recommending the substitution of a standard based on a more clearly stated regulatory purpose or other concept in 27 rules and forms. And they are recommending leaving the reference unchanged in 6 rules and forms.

Trouble is, bubbles are only apparent after the fact. And there is no evidence to suggest that, ultimately and in aggregate, the Wise Men have any better an idea of how to accomplish market-timing than anybody else. Canada, for example, can be thought of as resembling the EU to some extent, in that our different regions have very different economies – we periodically hear massive complaints about monetary policy, for instance, tightening when a particular region is already in the doldrums. Can you imagine the reaction to special taxes and mortgage regulation in response to, say, Calgary’s oil-fueled housing boom?

Christopher Cox of the SEC introduced some SEC rule changes regarding credit ratings on Wednesday:

The third part of this rulemaking, which we take up today, is focused on the way the Commission’s own rules refer to and rely upon credit ratings. For some time before the recent subprime crisis, we had been re-evaluating the basis for the SEC’s use of ratings as a surrogate for compliance with various regulatory conditions and requirements. The recent market turmoil, and the role that credit ratings played in it, has only further motivated our consideration of reform in this area.

To begin with, the SEC’s own rules don’t distinguish between ratings for corporate bonds and ratings for structured finance products. As a result, our own regulatory regime might be vulnerable to criticism on the same grounds as the ratings agencies’ use of common symbology: namely, that it doesn’t properly reflect the different risk characteristics of structured products, and the different kinds of information and ratings methodologies that go into ratings for structured products.

Second, several of our regulations implicitly assume that securities with high credit ratings are liquid and have lower price volatility.But since structured finance products can be very different from other rated instruments in these respects, there is good reason for us to examine the precise way that credit ratings are used in our rules as a surrogate for measurements of liquidity and volatility.

Third, several observers, including the Financial Stability Forum, have leveled the criticism that the official recognition of credit ratings for a variety of securities regulatory purposes may have played a role in encouraging investors’ over-reliance on ratings.

Eminently sensible stuff. It’s the Portfolio Manager’s job to evaluate risk.

In other encouraging news, the Fed has quorum:

Elizabeth Duke, a Virginia banker, was confirmed today by the Senate to a seat on the Federal Reserve Board of Governors, breaking a yearlong impasse between the Bush administration and Congress.

Duke, who has been a banker for more than 30 years, was the first woman to chair the American Bankers Association, the industry’s Washington trade group, since its founding in 1875. She served as chairman from 2004 to 2005 and was on its board of directors from 1999 to 2006.

Duke served on the Richmond Fed bank’s board from 1998 to 2000. “She made great contributions then, and I know she’ll make tremendous contributions to the system now,” said Jeffrey Lacker, the bank’s president, who was research director at the time.

Duke held at least $8.2 million in assets, including more than $5 million of stock in Wachovia, according to a financial- disclosure filing last year. Fed officials are required to divest themselves of bank shares.

Well … her shares in Wachovia are probably worth less now! Every little bit helps!

The Fed will report the value of its “Bear Stearns Portfolio” regularly, commencing July 3.

Fortis Bank is cutting its dividend to zero and raising funds with prefs:

The Belgian-Dutch financial services group was forced to take what it called “exceptional measures” by tough market conditions as well as its purchase of parts of its former Dutch rival ABN AMRO, sealed just as the credit crisis hit last year.

It said it would sell about 6 per cent more shares to institutions to raise €1.5-billion, plus up to €2-billion of non-dilutive preference shares. It will save €1.3-billion by not paying an interim 2008 dividend, sell €2-billion of non-core assets and sell and lease back real estate, and pay its full-year dividend in shares.

In the comments to June 26, Assiduous Reader prefhound professed himself insufficiently impressed by the +31bp spread between CM.PR.E & CM.PR.J to take a position.

So I’ll try again … the RY issues aren’t as good a sample, since most of them come with very, very similar coupons. But how about if we just look at the two yield extremes:…

Two RY Perpetuals
Issue Dividend Quote Pre-Tax
RY.PR.F 1.1125 18.74-98 6.02%
RY.PR.W 1.225 22.23-33 5.58%

Ha! +44bp when it should be negative! How about them apples, prefhound?

Another way to look at is that the difference in dividend is $0.1125 and the difference in bid price is $3.49 … payback time just over 31 years. Don’t show such investments to your accountant.

Now, whenever anybody wants to make an argument about, say, PWF being a significantly better/worse credit than SLF … go for it! Maybe I’ll learn something! And we can certainly discuss at length just how much yield premium is required to hold a preferred with a limited upside (aka negative convexity). Hey, make a case that it should be zero! I’ll listen! But if anybody were to tell me that the yield premium really should be significantly negative, as it was with the CM issues today and as it is with these two RYs … it will probably be a short conversation! The only things I can think of – given that the issuer is the same – are:

  • A big difference in term to call
  • A big difference in liquidity
  • A big difference in other terms of the issue (e.g., voting rights, restrictive covenants, etc.)

None of these differences are applicable with the CM & RY issues I’ve highlighted. This is a very, very strange market.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.24% 2.89% 49,180 0.08 1 +0.0787% 1,119.3
Fixed-Floater 4.82% 4.56% 62,074 16.18 7 -0.2844% 1,043.1
Floater 4.21% 4.21% 71,591 16.99 2 -2.7508% 910.6
Op. Retract 4.88% 2.55% 209,872 2.85 16 +0.2272% 1,054.2
Split-Share 5.39% 6.07% 66,395 4.13 15 -0.7824% 1,037.4
Interest Bearing 6.12% 3.78% 46,436 2.02 3 +0.3042% 1,124.6
Perpetual-Premium 5.93% 4.63% 327,440 11.11 13 -0.0566% 1,013.1
Perpetual-Discount 6.00% 6.04% 221,146 13.86 59 -0.1233% 880.5
Major Price Changes
Issue Index Change Notes
HPF.PR.A SplitShare (for now!) -5.2021% Strange issue often discussed.
BAM.PR.K Floater -3.5114%  
BNA.PR.C SplitShare -2.7124% Asset coverage of just under 3.6:1 as of May 30 according to the company. Now with a pre-tax bid-YTW of 7.80% based on a bid of 19.01 and a hardMaturity 2019-1-10 at 25.00.
POW.PR.D PerpetualDiscount -2.5145% Now with a pre-tax bid-YTW of 6.23% based on a bid of 20.16 and a limitMaturity.
CU.PR.B PerpetualPremium (for now!) -2.3320% Now with a pre-tax bid-YTW of 6.13% based on a bid of 24.71 and a limitMaturity.
BCE.PR.G FixFloat -2.0888%  
BAM.PR.B Floater -2.0088%  
BMO.PR.H PerpetualDiscount -1.7818% Now with a pre-tax bid-YTW of 5.91% based on a bid of 22.60 and a limitMaturity.
HSB.PR.D PerpetualDiscount -1.6867% Now with a pre-tax bid-YTW of 6.17% based on a bid of 20.40 and a limitMaturity.
SBC.PR.A SplitShare -1.6782% Now with a pre-tax bid-YTW of 5.31% based on a bid of 9.96 and a hardMaturity 2012-11-30 at 10.00.
PWF.PR.E PerpetualDiscount -1.5551% Now with a pre-tax bid-YTW of 6.12% based on a bid of 22.79 and a limitMaturity.
BAM.PR.M PerpetualDiscount -1.4218% Now with a pre-tax bid-YTW of 7.19% based on a bid of 16.64 and a limitMaturity.
HSB.PR.C PerpetualDiscount -1.2172% Now with a pre-tax bid-YTW of 6.08% based on a bid of 21.10 and a limitMaturity.
PWF.PR.K PerpetualDiscount -1.2136% Now with a pre-tax bid-YTW of 6.20% based on a bid of 20.35 and a limitMaturity.
CIU.PR.A PerpetualDiscount +1.2658% Now with a pre-tax bid-YTW of 5.82% based on a bid of 20.00 and a limitMaturity.
MFC.PR.C PerpetualDiscount +1.4418% Now with a pre-tax bid-YTW of 5.76% based on a bid of 19.70 and a limitMaturity.
IAG.PR.A PerpetualDiscount +1.5504% Now with a pre-tax bid-YTW of 5.89% based on a bid of 19.65 and a limitMaturity.
ELF.PR.G PerpetualDiscount +1.7039% Now with a pre-tax bid-YTW of 6.62% based on a bid of 18.02 and a limitMaturity.
BAM.PR.J OpRet +1.8402% Now with a pre-tax bid-YTW of 5.78% based on a bid of 24.35 and a softMaturity 2018-3-30 at 25.00.
Volume Highlights
Issue Index Volume Notes
MFC.PR.B PerpetualDiscount 182,245 RBC crossed 175,000 in three tranches at 20.25. Now with a pre-tax bid-YTW of 5.83% based on a bid of 20.12 and a limitMaturity.
MFC.PR.C PerpetualDiscount 132,381 RBC crossed 50,000 at 19.75, then 75,000 at 19.65. Now with a pre-tax bid-YTW of 5.76% based on a bid of 19.70 and a limitMaturity.
TD.PR.P PerpetualDiscount 80,027 Anonymous bought 43,900 from Nesbitt at 23.02, then (another?) anonymous bought 10,000 at 23.05 from Nesbitt. Now with a pre-tax bid-YTW of 5.80% based on a bid of 21.30 and a limitMaturity.
PWF.PR.K PerpetualDiscount 62,800 RBC crossed 50,000 at 20.70. Now with a pre-tax bid-YTW of 6.20% based on a bid of 20.35 and a limitMaturity.
TD.PR.O PerpetualDiscount 45,700 CIBC crossed 40,000 at 21.30. Now with a pre-tax bid-YTW of 5.80% based on a bid of 21.30 and a limitMaturity.
CL.PR.B PerpetualPremium 40,428 CIBC crossed 38,000 at 25.45. Now with a pre-tax bid-YTW of 5.52% based on a bid of 25.45 and a call 2011-1-30 at 25.00.
TD.PR.R PerpetualPremium 27,500 Scotia crossed 20,000 at 25.00. Now with a pre-tax bid-YTW of 5.74% based on a bid of 25.00 and a limitMaturity.

There were twelve other index-included $25-pv-equivalent issues trading over 10,000 shares today.

One Response to “June 27, 2008”

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