Today’s FOMC release was ‘Steady as she goes’:
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
Joshua Zumbrun & Jeff Kearns of Bloomberg comment:
The consumer price index increased 0.2 percent after rising 0.1 percent the prior month, a Labor Department report showed today. The Fed’s preferred gauge of inflation, the personal consumption expenditures index, rose 1.2 percent in August and hasn’t breached 2 percent since March 2012.
The Fed removed a sentence from the previous statement that had said tighter financial conditions could slow the improvement in the economy.
Kansas City Fed President Esther George dissented for the seventh meeting in a row, citing the risk the Fed’s stimulus could create financial imbalances and cause long-term inflation expectations to rise.
Richard Vedder of Bloomberg rages against the cost of US universities’ hubris:
I have written before on how the expansion of federal student-loan programs has encouraged colleges to simply raise their costs. Students are left to pile up more debt while colleges indulge in their Edifice Complex — building luxury dorms and gyms and stadiums (all “sustainable,” of course) at the expense of poorer students. There is another, related government subsidy that also has perverse effects and needs reform: the tax-exempt debt binge by universities.
Schools are exuberantly borrowing, in some cases issuing 100-year (century) bonds. Some bond offerings are justified, even wise, as schools are taking advantage of low interest rates to reduce future debt-service obligations. But a lot of this activity is financing construction of high-end student housing, faddish “centers” and stadiums.
These perquisites appeal to the most affluent. For many students, however, the costs of college are rising relative to the perceived benefits, pushing them to consider lower-cost substitutes (online education, nondegree certificate programs).
Many bonds are tax-exempt. The more money borrowed, the more generous the exemption, creating in effect a taxpayer subsidy for rich universities. Should there be no cap on the tax exemptions private colleges can claim on their bond debt, and is it appropriate for the government to subsidize all types of projects at these schools?
And the argument regarding the cost of Too-Big-to-Fail rages on as well:
McCloskey’s confusion about the nature of the too-big-to-fail subsidy leads directly to another misconception: that regulatory compliance costs could somehow offset the subsidy. Compliance may or may not put a greater burden on larger banks (I suspect executives at small banks would disagree). In any case, the costs do nothing to reduce the taxpayer subsidy or the incentive to preserve it by becoming as big and systemically threatening as possible.
In other words, U.S. taxpayers are paying big banks to put the economy in danger, which is crazy. The best solution is to make banks less likely to fail by requiring that they finance themselves with more equity capital, which absorbs losses in bad times.
Regulators have taken a small step in that direction by proposing that bank holding companies have at least $5 in capital for every $100 in assets — a 5 percent leverage ratio that is a bit more than the global minimum of 3 percent. The proposal, to which banks are adamantly opposed, falls far short of the 20 percent that economists have argued would be best for the economy, but at least it’s a start. Let’s hope they stick to it.
Matt Levine writes a more sensible than usual piece about the so-call FX manipulation scandal, which I never-the-less disagree with:
There are two problems with this. One, while the bank is guaranteeing the client the WM/Reuters fix price, nobody’s guaranteeing the bank anything. The bank has to actually go trade and try to hit that price. The way the fix works is that it’s set by sampling trades over a 60-second window, so you have to have a certain amount of skill and luck to trade at (or better than) the official price. It’s risky.
Two — and this is important, too — banks are in the business of making money, and the trade they want is not “buy at WM/Reuters fix and sell at WM/Reuters fix” but rather “buy at less than WM/Reuters fix and sell at WM/Reuters fix.”
If your client tells you at 3:30 that they want to buy francs at the 4 p.m. price, there are fairly straightforward ways to try to ensure a profit. Like: If they’re buying a lot of francs, then you’d expect that to push the market for francs up. So what you could do is start buying francs at 3:30 when they’re trading at $1.1150 or whatever,**** and keep buying steadily until 4 p.m. when they’re trading at $1.1200, for an average price of like $1.1175, and then sell to the client at the 4 p.m. fix of $1.1200. You buy francs for $1.1175, you sell them for $1.1200, you make $0.0025 per franc, you do it a lot, boom, good business.
…
Also some things are right out:In June, Bloomberg News reported that dealers pooled information about their positions through instant messages, executed their own trades before client orders and sought to manipulate the benchmark WM/Reuters rates by pushing through trades around the 60-second windows when the benchmarks are set.
The sharing client data among dealers seems self-evidently bad. The “executed their own trades before client orders and sought to manipulate the benchmark” is either bad, or just legit hedging that looks bad, or something in between, or some combination thereof, it is hard to know.
This shows a fundamental misconception of the order.
The bank has not agreed to act as agent, with fiduciary responsibility, for the client. What the bank has done is sold a very short-term (intra-day) forward contract to the client. When the dealers talk to each other, they’re not sharing information about client orders, they’re sharing information about their own orders, which they will be placing as principal in order to cover their position.
The big problem with the market is that there are too many fools and charlatans in charge of too much client money. Dealers are not your friends. Dealers are counterparties, just like Loblaws is my counterparty when I buy groceries. Loblaws and I get on well and have a mutually beneficial relationship – but they’re always trying to make it a little more beneficial for them and I’m always trying to make it a little more beneficial for me. Sadly, this fundamental truth escapes the Boo-hoo-hoo brigade.
The industry is staffed with MBAs, which stands for Minimal Brain Activity. There is nothing the dealers do that a large client – large enough to matter, large enough to be asked their intentions – cannot do himself. Trades can be sampled over a given period, whether it’s the period of the fix, or the run-up to it, or the aftermath … but, unfortunately, that involves actual work, which MBAs are fundamentally incapable of doing, or even understanding. Why, one might have to write, or commission, an algorithmic programme to buy your USD 100-million in million dollar chunks! Computer programmes? Those are for geeks! Daddy didn’t pay for a good school so I could write computer programmes! It might take more than one ‘phone call to execute the trade! More than one call? How are you going to discuss the analysis of Warren Buffet’s pronouncement on Yellen’s approach to the Fed if you have to make more than one call. Can’t be done. Call a dealer, just like Daddy calls his stockbroker.
It may be ugly and awful, but US sequestration might be working anyway:
Senator Jeff Sessions of Alabama, the top Republican on the Budget Committee, said today in an interview such an accord could be a way to replace for a year or two the automatic spending cuts, known as sequestration, that both parties decry.
“A great number of entitlement programs, mandatory programs, are not Social Security and Medicare,” Sessions said. “There are a whole bunch of programs that are mandatory in nature and have never been looked at” and weren’t in the law setting up the automatic cuts, he said, citing farm subsidies and food stamps.
Asked if such a deal is a fallback to a broader deal, he said. “I would hope so.”
BAM closed a big deal:
If you have a railroad or a port for sale, there’s a big new buyer as Brookfield Asset Management just closed a massive $7-billion (U.S.) infrastructure fund that will invest in such things as transportation and energy assets. The new money has the potential to bump up Brookfield’s fee income markedly.
Brookfield blew right through the $5-billion target. There are more than 60 investors, including sovereign wealth funds, insurers, and public and private pension plans. Brookfield is putting in $2.8-billion of its own money (through its Brookfield Infrastructure Partners and Brookfield Renewable Energy Partners LP subsidiaries), meaning $4.2-billion is coming from outside investors. Brookfield said half the investors are rookies at putting money into Brookfield funds.
The new fund will surely significantly boost Brookfield’s fee income.
At a 1.5 per cent management fee, which is in the ballpark for funds of that size, the new outside assets would represent about $63-million a year in additional income for Brookfield. That would be before any performance fees.
It’s very encouraging to see business trying to take back control of the Republican party:
The U.S. Chamber of Commerce fired an opening salvo yesterday in the battle for control of the Republican Party, endorsing a self-described “pro-business” candidate in a special U.S. House race whose opponent is backed by Tea Party groups and is vowing to “be like Ted Cruz.”
The endorsement in the Alabama contest is the chamber’s first political move since the 16-day partial U.S. government shutdown and debt-ceiling battle, which exposed a rift between the Republican establishment wing and the smaller-government movement. Cruz, a Republican senator from Texas, was the chief proponent of the ill-fated plan to link defunding Obamacare to lifting the debt ceiling and passing a government spending bill.
In reaction to the shutdown, which Standard & Poor’s estimated cost the U.S. economy $24 billion, the chamber and other business groups said they will engage in elections — including Republican primaries — to help candidates aligned with their economic goals.
It would be nice to see that in Canada, too.
It was a strong day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets gaining 10bp and DeemedRetractibles winning 59bp. The Floating Rate sector got whacked, perhaps in response to the FOMC release and those issues figured prominently on the wrong side of the Performance Highlights table. BAM issues were notable on the winning side. Volume was very 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 | -0.6193 % | 2,482.8 |
| FixedFloater | 4.28 % | 3.55 % | 27,931 | 18.30 | 1 | -2.1145 % | 3,926.0 |
| Floater | 2.73 % | 2.98 % | 63,138 | 19.77 | 5 | -0.6193 % | 2,680.7 |
| OpRet | 4.63 % | 3.21 % | 68,522 | 0.57 | 3 | -0.0385 % | 2,637.8 |
| SplitShare | 4.75 % | 5.04 % | 63,148 | 3.96 | 6 | 0.0894 % | 2,952.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0385 % | 2,412.0 |
| Perpetual-Premium | 5.79 % | 1.39 % | 105,518 | 0.08 | 7 | 0.2954 % | 2,295.8 |
| Perpetual-Discount | 5.51 % | 5.52 % | 181,895 | 14.36 | 30 | 0.3445 % | 2,366.6 |
| FixedReset | 4.92 % | 3.62 % | 232,654 | 3.55 | 86 | 0.0995 % | 2,452.1 |
| Deemed-Retractible | 5.08 % | 4.23 % | 196,136 | 1.67 | 43 | 0.5898 % | 2,414.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.G | FixedFloater | -2.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 22.56 Evaluated at bid price : 22.22 Bid-YTW : 3.55 % |
| PWF.PR.P | FixedReset | -1.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 22.91 Evaluated at bid price : 23.62 Bid-YTW : 3.60 % |
| BAM.PR.K | Floater | -1.73 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 17.63 Evaluated at bid price : 17.63 Bid-YTW : 3.00 % |
| BAM.PR.B | Floater | -1.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 17.73 Evaluated at bid price : 17.73 Bid-YTW : 2.98 % |
| BAM.PR.C | Floater | -1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 17.70 Evaluated at bid price : 17.70 Bid-YTW : 2.98 % |
| BNS.PR.Z | FixedReset | 1.06 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.80 Bid-YTW : 3.95 % |
| MFC.PR.C | Deemed-Retractible | 1.12 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.75 Bid-YTW : 6.22 % |
| FTS.PR.F | Perpetual-Discount | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 23.06 Evaluated at bid price : 23.35 Bid-YTW : 5.32 % |
| GWO.PR.I | Deemed-Retractible | 1.14 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.15 Bid-YTW : 5.99 % |
| PWF.PR.L | Perpetual-Discount | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 23.13 Evaluated at bid price : 23.42 Bid-YTW : 5.46 % |
| BAM.PF.B | FixedReset | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 22.82 Evaluated at bid price : 24.15 Bid-YTW : 4.41 % |
| GWO.PR.R | Deemed-Retractible | 1.24 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.88 Bid-YTW : 5.93 % |
| TRP.PR.C | FixedReset | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 22.23 Evaluated at bid price : 22.54 Bid-YTW : 3.75 % |
| GWO.PR.H | Deemed-Retractible | 1.28 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.02 Bid-YTW : 5.91 % |
| MFC.PR.B | Deemed-Retractible | 1.32 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.25 Bid-YTW : 6.12 % |
| BAM.PR.N | Perpetual-Discount | 1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 20.35 Evaluated at bid price : 20.35 Bid-YTW : 5.91 % |
| BAM.PF.C | Perpetual-Discount | 1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 20.33 Evaluated at bid price : 20.33 Bid-YTW : 6.04 % |
| FTS.PR.H | FixedReset | 1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 21.37 Evaluated at bid price : 21.68 Bid-YTW : 3.79 % |
| SLF.PR.B | Deemed-Retractible | 1.58 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.16 Bid-YTW : 5.78 % |
| PWF.PR.A | Floater | 1.60 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 23.20 Evaluated at bid price : 23.50 Bid-YTW : 2.19 % |
| SLF.PR.A | Deemed-Retractible | 1.61 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.71 Bid-YTW : 5.96 % |
| GWO.PR.G | Deemed-Retractible | 1.67 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.40 Bid-YTW : 5.58 % |
| TD.PR.O | Deemed-Retractible | 1.90 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-30 Maturity Price : 25.25 Evaluated at bid price : 25.73 Bid-YTW : -16.80 % |
| BAM.PR.X | FixedReset | 2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 21.74 Evaluated at bid price : 22.05 Bid-YTW : 4.25 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.P | Deemed-Retractible | 54,300 | RBC crossed 49,800 at 26.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-12-01 Maturity Price : 25.75 Evaluated at bid price : 25.91 Bid-YTW : -2.13 % |
| CM.PR.M | FixedReset | 52,190 | TD crossed 50,000 at 25.77. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.76 Bid-YTW : 2.43 % |
| PWF.PR.S | Perpetual-Discount | 36,833 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 22.40 Evaluated at bid price : 22.72 Bid-YTW : 5.30 % |
| GWO.PR.H | Deemed-Retractible | 34,814 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.02 Bid-YTW : 5.91 % |
| POW.PR.D | Perpetual-Discount | 32,009 | TD bought 10,000 from Scotia at 22.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 22.42 Evaluated at bid price : 22.85 Bid-YTW : 5.50 % |
| CU.PR.G | Perpetual-Discount | 31,565 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-10-30 Maturity Price : 21.24 Evaluated at bid price : 21.24 Bid-YTW : 5.39 % |
| There were 65 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.G | FixedFloater | Quote: 22.22 – 22.82 Spot Rate : 0.6000 Average : 0.4348 YTW SCENARIO |
| BAM.PR.K | Floater | Quote: 17.63 – 18.00 Spot Rate : 0.3700 Average : 0.2258 YTW SCENARIO |
| BNS.PR.J | Deemed-Retractible | Quote: 24.99 – 25.29 Spot Rate : 0.3000 Average : 0.1642 YTW SCENARIO |
| FTS.PR.K | FixedReset | Quote: 24.41 – 24.74 Spot Rate : 0.3300 Average : 0.2168 YTW SCENARIO |
| BAM.PR.T | FixedReset | Quote: 23.10 – 23.39 Spot Rate : 0.2900 Average : 0.1834 YTW SCENARIO |
| PWF.PR.L | Perpetual-Discount | Quote: 23.42 – 23.70 Spot Rate : 0.2800 Average : 0.1811 YTW SCENARIO |