There’s an interesting comment in the BoC’s 2014–15 Debt Management Strategy Consultations:
Non-residents now hold about 28 per cent of Government of Canada marketable debt securities, approximately double the average for the five years preceding the financial crisis. Increased demand for Government of Canada securities by non-residents helps to diversify the investor base. At the same time, some market participants suggest that the growing share of securities held by foreign institutional investors, in particular, central banks and sovereign wealth funds, may be affecting the liquidity of certain sectors of the Government of Canada securities market, since some of these investors may not actively lend their securities in the repo market. Anecdotal evidence gathered by the Bank of Canada suggests that large increases in foreign official Canadian-dollar holdings have coincided with the more frequent “specials” in the Canadian debt markets. [Footnote] More research is necessary, however, to determine to what extent this relationship is causal and not explained by other factors.
Footnote reads: A security that is “on special” is an asset that is subject to elevated demand in the repo market. This causes securities borrowers in the repo market to compete for the asset by offering to lend cash below prevailing interest rates.
Specials are a wonderful opportunity for alert active portfolio managers to outperform, since the price of ‘special’ securities will rise as the shorts frantically try to square their positions. Regrettably, this may be exploited only from a ‘long-only’ perspective: shorting the temporarily expensive security carries a very high probability that all your profits from price movements will be eaten up by the cost of borrowing the security.
There is also an acknowledgment of the regulatory aspect of financial repression:
Demand for Government of Canada securities is being affected by several other important factors. Regulatory initiatives are increasing the need for high-quality collateral, which in Canada is reflected in greater demand for treasury bills and short-term bonds. In addition, the federal government and a number of provincial governments, as well as some corporations have put in place new prudential liquidity and contingency measures that have large, stable allocations to Government of Canada securities, especially treasury bills and short-term bonds. Structural changes, such as Canada’s new central counterparty for the fixed-income market and, in particular, the introduction of central clearing for blind repo trades for interdealer brokers, may also be influencing dynamics in the repo market.
One of the questions is of great interest:
In the Debt Management Strategy for 2013–14, the government announced the continuation of the temporary increase in the issuance of 10- and 30-year bonds and signalled that it would be assessing the potential benefits of issuing bonds with a maturity of 40 years or longer.
How would you characterize the demand for long-term bonds since yields began rising in May 2013 and how do you see it evolving?
All together, folks! WE WANT FORTIES! WE WANT FORTIES!
Many readers will find the following section fascinating:
Fixed-income products in Canada are typically traded over the counter (OTC), whereas equities are traded on public exchanges. Many financial institutions, institutional investors and wealth managers participate in electronic marketplaces to facilitate the trading of fixed-income securities. However, for retail investors, acquiring a position in fixed-income securities often involves buying money market and bond mutual funds or exchange-traded funds (ETFs). Wealth managers offer another avenue for retail investors to acquire fixed-income securities by leveraging institutional buying of fixed-income securities. Retail investors that prefer not to pay the asset-management fees associated with mutual funds, ETFs
and wealth managers can buy and sell fixed-income securities through an online or discount brokerage account. However, the relative opaqueness of the OTC market has led to criticism of broker compensation, transaction fees and the cost of trading from one’s own broker account. Changes implemented by the Canadian Securities Administrators to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations seek to enhance registrants’ relationships with their clients (retail investors) through an expansion of cost and registrant compensation disclosure, as well as the introduction of performance reporting.16. Of those retail investors with an online or discount brokerage account, what proportion use their account to buy fixed-income securities in general and Government of Canada securities specifically?
17. What are your views on the impact of the additional fee, commission and cost transparency required under National Instrument 31-103 for dealer and broker activities? Will these changes help to promote greater price transparency for retail investors?
18. What measures could the Government of Canada take to facilitate easier retail investor access to its debt securities?
I would be very pleased to see a Canadian programme run along the lines of Treasury Direct. On the other hand, retail is grossly over-invested in Canadas – they’re paying an enormous liquidity premium that they will never, ever need, and a smaller, but still large, regulatory premium that is simply not applicable.
Market-Timers are busily retiming the timing of their timing:
Incredibly, retail investors are now moving back into bonds. September U.S. mutual fund flow data is now out, and last month three of the four highest net inflows went into bond and credit funds, according to Morningstar. Non-traditional bonds led the way, then high yield bonds, then short-term bonds. Institutional clients don’t seem so scared either, considered how they plowed money into the Verizon Communication’s record debt offering.
Given all this data, there’s a growing counter-theory, one that hails the ‘not-so-great rotation.’ Last year Bank of America Merrill Lynch put out a report that called “The Bond Era Ends.” Morgan Stanley’s pushing back with its own report, titled “Great Rotation? Probably not.”
On the other hand, market timers are also winning the Nobel Prize, so take your pick:
Fama helped revolutionize the practice of investing by showing it was difficult to predict individual stock prices in the short run. That led to the emergence of index funds as a common investment.
Shiller showed that there’s more predictability in stock and bond markets in the long run. That encouraged the creation of institutional investors, such as hedge funds, that take bets on market trends.
In the late 1990s, Shiller said the stock market was overvalued “and lo and behold he was proven right” when the dot-com bubble burst in 2000, said Nobel committee secretary Peter Englund.
“He also predicted for a long time that the housing market was overvalued and again he was proven right,” Englund said. The U.S. property market suffered a crash in 2007 that helped fuel the global financial crisis.
Englund said he believes the three laureates agree on the findings for which they were awarded. However, Fama and Shiller have different “interpretations of the real world,” he added.
“It’s no secret that for Eugene Fama the sort of null hypothesis is that markets work well and he is willing to believe that until he is proven otherwise whereas for Robert Shiller, I think his null hypothesis is that there are periods of excessive optimism and pessimism,” Englund said.
Swiss Re may join the exodus from US life insurance:
Swiss Re Ltd. (SREN) is considering selling Aurora National Life Assurance Co. as it retreats from the U.S. life and health insurance market, people familiar with the matter said.
The world’s second-largest reinsurer is working with Barclays Plc to find buyers for Aurora National and some other U.S. assets, two people said, asking not to be identified because the matter isn’t public. The sale could fetch more than $400 million, one person said.
The deal would include about $5 billion in insurance assets, including corporate-owned and other life-insurance policies and annuities, said one person.
Corporate bond trading is entering a new era and nobody knows (or cares) where it will end:
A record share of U.S. corporate-bond trading has moved to computers as buyers who traditionally transacted over the phone seek faster ways to buy and sell in a market where Wall Street’s human traders are retreating.
Investment-grade volumes on MarketAxess Holdings Inc.’s electronic system are on pace to exceed $400 billion in 2013 after surging 45 percent to $44 billion in September from a year earlier, according to data from the company, which estimates it captures about 90 percent of electronic trades among the dollar-denominated notes. That’s equal to 14.3 percent of all market activity, including business done over the phone, up from 12.2 percent a year earlier.
…
While the dollar-denominated investment-grade bond market has increased 71 percent since 2008 to about $4.3 trillion, the size of each transaction declined to about $565,000 in the three months ended June 30, compared with about $970,000 in the first three months of 2007, according to Trace, Finra’s bond-price reporting system, which tracks both electronic transactions and those negotiated over the phone. The average investment-grade trade on MarketAxess’ system was $600,000, according to Rick McVey, the company’s chief executive officer.“Dealers do not have the balance-sheet capacity to warehouse large block trades from investors the way they used to, so investors are breaking trades down into smaller sizes,” he said in a telephone interview.
…
The biggest U.S. banks’ fixed-income trading revenue probably fell 20 percent in the third quarter from a year earlier on lower volumes, Richard Staite, an analyst at Atlantic Equities LLP, said in a Sept. 23 report.“It’s a reasonable-size business in terms of revenues for them, but they don’t have the balance sheet capacity to be the backstop for the market,” said Roger Rudisuli, a partner in McKinsey’s corporate and investment banking practice, speaking about dealers generally. “They cannot play this role anymore.”
Fitch placed the US on Watch-Negative:
The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This “faith” is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.
…
The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the U.S. economy.
…
In the event of a deal to raise the debt ceiling and to resolve the government shutdown, which Fitch expects, the outcome of a subsequent review of the ratings would take into account the manner and duration of the agreement and the perceived risk of a similar episode occurring in the future. It would also reflect Fitch’s assessment of the following main factors:– The impact of the debt ceiling brinkmanship and government shutdown on our assessment of the effectiveness of government and political institutions, the coherence and credibility of economic policy, the potential long-term impact on the U.S. sovereign’s cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth.
– Our assessment of the prospects for further deficit-reduction measures in future years necessary to contain government deficits in the face of long-term spending pressures and place public debt on a downward path over the medium to long term.
There’s some interesting data on fast-food wage scales:
Data from the U.S. Census Bureau and public benefit programs show 52 per cent of fast-food cooks, cashiers and other “front-line” staff had relied on at least one form of public assistance, such as Medicaid, food stamps and the Earned Income Tax Credit program, between 2007 and 2011, researchers at the University of California-Berkeley and the University of Illinois said.
In a concurrent report, the pro-labor National Employment Law Project found that the 10 largest fast-food companies in the United States cost taxpayers more than $3.8 billion each year in public assistance because the workers do not make enough to pay for basic necessities themselves.
…
The Employment Policies Institute, which has opposed calls for higher fast-food wages in the past, said in a statement that the reports “ignore economic evidence that dramatic wage hikes would make fast food workers worse off” when employers “replace employees with less-costly automated alternatives.”
Replace order-takers? That’s what’s happening in Europe:
McDonalds recently went on a hiring binge in the U.S., adding 62,000 employees to its roster. The hiring picture doesn’t look quite so rosy for Europe, where the fast food chain is drafting 7,000 touch-screen kiosks to handle cashiering duties.
The move is designed to boost efficiency and make ordering more convenient for customers. In an interview with the Financial Times, McDonald’s Europe President Steve Easterbrook notes that the new system will also open up a goldmine of data. McDonald’s could potentially track every Big Mac, McNugget, and large shake you order. A calorie account tally at the end of the year could be a real shocker.
The touch screens will only accept debit or credit cards, adding to the slow death knell of cash and coins.
So we have the slightly unusual situation of Europe being ahead in automation because of low US labour costs. I suggest that this, rather than any bleeding-heartedness, is a good reason to raise the minimum wage. The burger flippers will then, perforce, find something more useful to do.
Everybody’s preparing for a US default:
A default may not disrupt markets as long as the U.S. alerted traders the night before a payment was due that it was probably going to default, giving the Federal Reserve’s Fedwire, an electronic service that transfers securities and payments, enough time to adjust its programs and allow the defaulted debt to be “transferable,” according to JPMorgan Chase & Co. That would allow them to continue to be used as collateral in repo markets.
…
The Securities Industry and Financial Markets Association, or Sifma, in a statement this month said if the Treasury were to delay payments on debt it would extend the payment date of the securities one day at a time. The Treasury Market Practice Group, an industry organization sponsored by the Federal Reserve Bank of New York that advises on transactions in U.S. securities, said last month contingency planning developed since the 2011 debt-limit crisis would mitigate yet not eliminate the operational risk posed by government-debt payment delays.Some clearing firms are preparing for a default, with Citigroup Inc. and State Street Corp. discussing ways to limit the use of short-term Treasury bills as collateral in coming weeks, the Wall Street Journal reported on its website yesterday, citing people familiar with the matter. Citigroup told some clients it would prefer not to take U.S. government debt maturing Oct. 24 or Oct. 31 as security for transactions, the newspaper reported.
Norway has a very good Sovereign Wealth Fund policy – but even they have a problem involving politicians on one hand and a large pot of money on the other:
The Labor government, which resigned yesterday, presented what it called a “cautious” budget, saying it would use 135 billion kroner ($22 billion) of Norway’s oil wealth to plug deficits next year, equal to 5.5 percent of mainland gross domestic product. That leaves Solberg’s administration with 54 billion kroner to spend before it breaches the nation’s fiscal policy rule.
…
Solberg and her coalition partner, the Progress Party, have until early November to adjust the spending plan put forward by the outgoing administration. While she has promised to stick to the fiscal rule, which caps expenditure of Norway’s oil income at 4 percent of its wealth fund, the two parties have signaled they want to spend more on infrastructure, education and health care. Those measures will come on top of planned tax cuts.
DBRS has published its Quarterly Split Share Market Report:
DBRS has today published its quarterly surveillance report covering the Canadian split share market for Q3 2013. The report provides insight into recent market activity and summarizes the performance of split share funds rated by DBRS. Three main areas are covered in the report: equity performance, existing fund activity and new fund market activity. The appendix provides details on all of the preferred shares and securities rated by DBRS, including current ratings and recent downside protection levels.
A copy of this commentary is available by contacting us at info@dbrs.com.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets off 2bp and DeemedRetractibles gaining 1bp. The Performance Highlights table is longer than one might expect given these quiet figures, but Floaters continued to plunge. 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 | -1.0948 % | 2,442.9 |
| FixedFloater | 4.32 % | 3.58 % | 29,284 | 18.26 | 1 | -0.6321 % | 3,888.9 |
| Floater | 2.77 % | 2.99 % | 64,564 | 19.76 | 5 | -1.0948 % | 2,637.6 |
| OpRet | 4.62 % | 2.16 % | 63,641 | 0.45 | 3 | -0.0897 % | 2,644.6 |
| SplitShare | 4.76 % | 4.99 % | 63,575 | 4.00 | 6 | 0.1353 % | 2,946.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0897 % | 2,418.2 |
| Perpetual-Premium | 5.80 % | 0.44 % | 109,920 | 0.08 | 8 | 0.0399 % | 2,279.0 |
| Perpetual-Discount | 5.58 % | 5.60 % | 159,991 | 14.44 | 30 | 0.0663 % | 2,333.1 |
| FixedReset | 4.97 % | 3.75 % | 236,380 | 3.59 | 85 | -0.0239 % | 2,445.0 |
| Deemed-Retractible | 5.15 % | 4.40 % | 192,480 | 3.70 | 43 | 0.0067 % | 2,373.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRI.PR.B | Floater | -2.94 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-15 Maturity Price : 19.81 Evaluated at bid price : 19.81 Bid-YTW : 2.66 % |
| CIU.PR.C | FixedReset | -1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-15 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 4.44 % |
| GWO.PR.N | FixedReset | -1.14 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.76 Bid-YTW : 4.84 % |
| SLF.PR.A | Deemed-Retractible | -1.10 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.60 Bid-YTW : 6.53 % |
| TRP.PR.C | FixedReset | -1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-15 Maturity Price : 22.20 Evaluated at bid price : 22.51 Bid-YTW : 3.92 % |
| BAM.PR.K | Floater | -1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-15 Maturity Price : 17.50 Evaluated at bid price : 17.50 Bid-YTW : 3.02 % |
| TRP.PR.D | FixedReset | 1.22 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-04-30 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 4.03 % |
| IFC.PR.A | FixedReset | 1.71 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.36 Bid-YTW : 4.19 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TRP.PR.D | FixedReset | 182,975 | Nesbitt crossed blocks of 100,000 and 30,000, both at 25.02, and bought 10,000 from TD at 25.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-04-30 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 4.03 % |
| BMO.PR.P | FixedReset | 86,910 | RBC crossed 75,000 at 26.21. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-25 Maturity Price : 25.00 Evaluated at bid price : 26.13 Bid-YTW : 2.58 % |
| PWF.PR.S | Perpetual-Discount | 72,150 | TD crossed 58,000 at 22.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-15 Maturity Price : 22.15 Evaluated at bid price : 22.49 Bid-YTW : 5.33 % |
| TD.PR.R | Deemed-Retractible | 51,280 | RBC crossed 50,000 at 25.95. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.75 Evaluated at bid price : 25.95 Bid-YTW : 3.50 % |
| BNS.PR.N | Deemed-Retractible | 44,450 | Nesbitt crossed 15,000 at 25.70; RBC crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-01-27 Maturity Price : 25.00 Evaluated at bid price : 25.69 Bid-YTW : 4.29 % |
| TD.PR.A | FixedReset | 38,689 | Scotia bought 11,900 from Nesbitt at 25.19, then crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.19 Bid-YTW : 1.68 % |
| There were 22 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| HSE.PR.A | FixedReset | Quote: 22.65 – 23.39 Spot Rate : 0.7400 Average : 0.4209 YTW SCENARIO |
| TRI.PR.B | Floater | Quote: 19.81 – 20.49 Spot Rate : 0.6800 Average : 0.5015 YTW SCENARIO |
| GWO.PR.N | FixedReset | Quote: 21.76 – 22.29 Spot Rate : 0.5300 Average : 0.3768 YTW SCENARIO |
| MFC.PR.F | FixedReset | Quote: 22.36 – 23.08 Spot Rate : 0.7200 Average : 0.5749 YTW SCENARIO |
| CU.PR.E | Perpetual-Discount | Quote: 23.40 – 23.83 Spot Rate : 0.4300 Average : 0.2899 YTW SCENARIO |
| BNS.PR.K | Deemed-Retractible | Quote: 25.02 – 25.25 Spot Rate : 0.2300 Average : 0.1449 YTW SCENARIO |