Times are tough! European banks are paying a spread of 542bp for Innovative Tier 1 Capital:
European banks are having to pay the highest costs in at least a decade to raise capital reserves required by regulators.
Investors now demand 542 basis points of extra yield over government debt to buy so-called Tier 1 securities, which regulators demand banks hold to buffer depositors and senior bondholders against losses, according to Merrill Lynch & Co.’s Euro Sub-Debt Tier 1 Index. The index started the year at 284 basis points.
…
Regulators consider Tier 1 securities as close to equity because in some circumstances issuers can defer interest payments. Instead of a fixed due date, the bonds often give the issuer the option of redeeming them after five or 10 years and inflict higher interest payments if that doesn’t happen.As financing costs increase banks may no longer view a higher coupon as penalizing them, meaning investors risk holding bonds that may never mature, said Simon Adamson, an analyst at debt research firm CreditSights Inc. in London.
I don’t know the details of the “Euro Sub-Debt Tier 1 Index”, but the spread probably relates to 10-year governments; the so-called bonds will (probably!) have a call and step-up provision at that time so the salesmen can pretend it’s 10-year money.
By way of comparison, we know from yesterday that PerpetualDiscounts are trading to yield 265bp over long corporates, and long corporates are trading about 200bp over Canadas. As a further comparison, the NBC CaPS II, 7.447% until the pretend-maturity 2020-6-30 (after which it’s BAs + 409bp), are quoted at 370bp over the Canada 2018s.
No prizes will be awarded for guessing which direction the market took today! This is getting awfully depressing, you know? But there’s no way of telling when this trend will reverse … and in the meantime, there are some awfully juicy swaps popping up often enough to make life interesting for a fully invested portfolio that isn’t afraid of trading.
The sloppiness of the market is well illustrated by the fact that the market did not appear to notice that National Bank went ex-Dividend today.
| 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 | 4.29% | -0.48% | 50,270 | 0.08 | 1 | +0.2358% | 1,122.4 |
| Fixed-Floater | 4.64% | 4.37% | 71,686 | 16.38 | 6 | -0.1151% | 1,092.5 |
| Floater | 4.03% | 4.05% | 50,894 | 17.34 | 3 | -0.2713% | 914.3 |
| Op. Retract | 4.96% | 3.78% | 169,146 | 2.54 | 17 | -0.0276% | 1,045.7 |
| Split-Share | 5.37% | 6.35% | 64,972 | 4.13 | 14 | -0.0279% | 1,029.4 |
| Interest Bearing | 6.13% | 5.41% | 45,516 | 1.99 | 3 | +0.4059% | 1,123.6 |
| Perpetual-Premium | 6.03% | 5.94% | 65,096 | 10.91 | 4 | -0.6692% | 999.5 |
| Perpetual-Discount | 6.23% | 6.28% | 243,672 | 13.53 | 67 | -0.4592% | 847.7 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| SLF.PR.D | PerpetualDiscount | -2.9917% | Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.51 and a limitMaturity. |
| ELF.PR.F | PerpetualDiscount | -2.5789% | Now with a pre-tax bid-YTW of 7.21% based on a bid of 18.51 and a limitMaturity. |
| BAM.PR.J | OpRet | -2.5652% | Now with a pre-tax bid-YTW of 6.95% based on a bid of 22.41 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (5.41% to 2012-3-30), BAM.PR.I (5.99% to 2013-12-30) and BAM.PR.O (6.27% to 2013-6-30). |
| PWF.PR.I | PerpetualDiscount | -2.4777% | Now with a pre-tax bid-YTW of 6.25% based on a bid of 24.01 and a limitMaturity. |
| SLF.PR.E | PerpetualDiscount | -2.4658% | Now with a pre-tax bid-YTW of 6.38% based on a bid of 17.80 and a limitMaturity. |
| CM.PR.D | PerpetualDiscount | -2.1304% | Now with a pre-tax bid-YTW of 6.40% based on a bid of 22.51 and a limitMaturity. |
| MFC.PR.B | PerpetualDiscount | -2.1233% | Now with a pre-tax bid-YTW of 6.22% based on a bid of 18.90 and a limitMaturity. |
| CM.PR.I | PerpetualDiscount | -2.1229% | Now with a pre-tax bid-YTW of 6.73% based on a bid of 17.52 and a limitMaturity. |
| SLF.PR.B | PerpetualDiscount | -2.0908% | Now with a pre-tax bid-YTW of 6.31% based on a bid of 19.20 and a limitMaturity. |
| IAG.PR.A | PerpetualDiscount | -2.0430% | Now with a pre-tax bid-YTW of 6.37% based on a bid of 18.22 and a limitMaturity. |
| GWO.PR.I | PerpetualDiscount | -1.9391% | Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.70 and a limitMaturity. |
| HSB.PR.D | PerpetualDiscount | -1.8687% | Now with a pre-tax bid-YTW of 6.50% based on a bid of 19.43 and a limitMaturity. |
| PWF.PR.L | PerpetualDiscount | -1.7500% | Now with a pre-tax bid-YTW of 6.51% based on a bid of 19.65 and a limitMaturity. |
| BNS.PR.O | PerpetualDiscount | -1.6082% | Now with a pre-tax bid-YTW of 5.88% based on a bid of 23.86 and a limitMaturity. |
| PWF.PR.E | PerpetualDiscount | -1.5712% | Now with a pre-tax bid-YTW of 6.48% based on a bid of 21.30 and a limitMaturity. |
| CM.PR.G | PerpetualDiscount | -1.4126% | Now with a pre-tax bid-YTW of 6.70% based on a bid of 20.24 and a limitMaturity. |
| W.PR.J | PerpetualDiscount | -1.4053% | Now with a pre-tax bid-YTW of 6.47% based on a bid of 21.75 and a limitMaturity. |
| PWF.PR.K | PerpetualDiscount | -1.3326% | Now with a pre-tax bid-YTW of 6.45% based on a bid of 19.25 and a limitMaturity. |
| CM.PR.J | PerpetualDiscount | -1.2873% | Now with a pre-tax bid-YTW of 6.70% based on a bid of 16.87 and a limitMaturity. |
| W.PR.H | PerpetualDiscount | -1.1152% | Now with a pre-tax bid-YTW of 6.50% based on a bid of 21.28 and a limitMaturity. |
| GWO.PR.H | PerpetualDiscount | -1.0791% | Now with a pre-tax bid-YTW of 6.36% based on a bid of 19.25 and a limitMaturity. |
| PWF.PR.G | PerpetualDiscount | -1.0352% | Now with a pre-tax bid-YTW of 6.71% based on a bid of 17.96 and a limitMaturity. |
| BAM.PR.I | OpRet | +1.0305% | See BAM.PR.J, above. |
| NA.PR.M | PerpetualDiscount | +1.1838% | Ex-Dividend today but nobody noticed. Now with a pre-tax bid-YTW of 6.08% based on a bid of 24.65 and a limitMaturity. |
| NA.PR.K | PerpetualDiscount | +1.3546% | Ex-Dividend today but nobody noticed. Now with a pre-tax bid-YTW of 6.28% based on a bid of 23.25 and a limitMaturity. |
| POW.PR.D | PerpetualDiscount | +1.4129% | Now with a pre-tax bid-YTW of 6.49% based on a bid of 19.38 and a limitMaturity. |
| BAM.PR.O | OpRet | +2.1505% | See BAM.PR.J, above. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| MFC.PR.B | PerpetualDiscount | 214,850 | CIBC crossed 150,000 at 19.25, then Nesbitt crossed 50,000 at the same price. Now with a pre-tax bid-YTW of 6.22% based on a bid of 18.90 and a limitMaturity. |
| CM.PR.A | OpRet | 53,600 | CIBC crossed 50,000 at 25.85. Now with a pre-tax bid-YTW of -0.48% based on a bid of 25.80 and a call 2008-8-8 at 25.75. |
| TD.PR.P | PerpetualDiscount | 33,798 | Nesbitt crossed 29,300 at 22.30. Now with a pre-tax bid-YTW of 5.85% based on a bid of 22.46 and a limitMaturity. |
| PWF.PR.E | PerpetualDiscount | 33,100 | Nesbitt crossed 30,000 at 21.35. Now with a pre-tax bid-YTW of 6.48% based on a bid of 21.30 and a limitMaturity. |
| TD.PR.O | PerpetualDiscount | 30,986 | Now with a pre-tax bid-YTW of 5.93% based on a bid of 20.50 and a limitMaturity. |
There were nineteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.
It seemed to me the market hardly noticed PWF went ex-dividend on Tuesday, either, at least for my PWF.PR.I, which I happily sold for $24.90 to buy a similar dollar amount (over two days, unfortunately) PWF.PR.E (at $20.65) and .F (at $20.25). Actually, it could have been fortunate because the .F got a lot cheaper in a single day.
Using an ultraconservative yield equivalence criterion (none of that Schmonvexity….), I estimate this swap earned (will earn? someday?) me $1.40 per PR.I in fair value, after costs. This was a long term holding, not an arbitrage trade.
Sad to say that, so far, while the CM.PR.E arb has normalized a bit, the RY arb trade I actually made (short RY.PR.W for RY.PR.F) is still underwater.
Keep up the noble work, James!
The comparison between the July 7 and July 8 prices for PWF (fortuitously entered in tabular form) is pretty interesting – congratulations on a good trade!
The Royals? If I remember correctly, you’ve only had that on for a week or so … give it time!
I’ll have to write another article about Schmonvexity before the year is out … maybe if I go to a previous trough (February/March 2000?) and see what happened to all the PerpetualDiscounts …
Any thoughts on why BNS and particularly BNS.PR.O is taking such a shellacking? I read that Maybach is advising stock avoidance but would think that would only relate to the common? Haven’t heard anything on BNS involvement in large ABCP holdings either?
BNS.PR.O? Shellacking? I see it quoted at 24.00-25 now, so the bid is up on the day; and even at yesterday’s 23.86 bid, it was still yielding only 5.88%, 40bp through the average for PerpetualDiscounts. I have nothing to say against BNS and it’s credit quality, but 40bp is a very lot!
Bought at $25.09 and been going down ever since! Shellacking! You betcha!