It’s nice to see a statistic about how many CLOs lost money in the Credit Crunch:
Issuance of CLOs, which helped finance some of the biggest leveraged buyouts in history during the last credit boom, has picked up following an early 2014 slump brought on by the publication of the Volcker Rule designed to limit risk-taking by banks — major buyers of the funds. CLOs are investors in speculative-grade loans, an asset class in which U.S. banking regulators have said underwriting standards have become too lax.
…
CLOs pool high-yield corporate loans and slice them into securities of varying risk and return, typically from AAA ratings down to BB. The lowest portion, known as the equity tranche, offers the highest potential returns and the greatest risk because investors are the first to see their interest payouts reduced when loans backing the CLO default.CLO managers may also be trying to issue deals ahead of risk-retention rules proposed by the Dodd-Frank Act in order to increase assets under management and income, said Kroszner. The regulation may require CLO managers to hold 5 percent of the debt they package or sell.
…
Out of 719 U.S. CLOs that purchased widely syndicated loans and were rated by Moody’s Investors Service between January 1996 and May 2012, only 14 funds lost any of their principal at maturity, according to a July 2012 report from the ratings firm.
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The growth in riskier corporate lending led the Federal Reserve and the Office of the Comptroller of the Currency to warn lenders last year to improve lax underwriting practices. Todd Vermilyea, a Fed official, said May 13 that standards “have continued to deteriorate in 2014” and that “stronger supervisory action” may be needed.While the Volcker Rule hasn’t led to fewer CLOs it has kept the cost to raise the funds elevated.
The average rate paid on CLO portions ranked AAA was about 150 basis points more than the London interbank offered rate in May, according to Wells Fargo. That’s up from a spread as low as 110 basis points on AAA slices last year.
As I have often complained, regulators and politicians are always careful to talk about downgrades of engineered products, rather than actual defaults.
Watch out for falling house prices!
In May, new home prices in 62 Chinese cities edged downward from the month before, dragging down the Chinese average for the first time in nearly two years. The biggest decline came in Shantou, where prices fell 3.64 per cent from April, according to China Index Academy, a research arm of SouFun, which operates the country’s largest real estate portal.
China’s real estate market is the bedrock of its economy. Residential housing is worth some 12.5 per cent of GDP, and homes contain some two-thirds of Chinese household wealth. A fracture in Chinese housing, in other words, is a fracture in China’s financial well-being.
And the slowdown has come with remarkable speed. Last December, Chinese housing prices rose 12 per cent year-on-year, the biggest gain of 2013. By May, sales were down more than 50 per cent from April at Shantou’s Jiacheng Real Estate Agency.
Assiduous Readers will know of my fondness for mocking CalPERS – the politicized fund that doesn’t do credit analysis. I’ve acquired another target – The Norwegian Government Pension Fund, an $853.9 billion pension fund with no trading expertise:
Norway’s $880 billion sovereign wealth fund, the world’s largest, is throwing its support behind Brad Katsuyama’s new exchange.
Katsuyama’s IEX Group Inc., made famous in Michael Lewis’s best-selling book “Flash Boys,” could shield investors from the predatory habits of high-frequency traders, said the fund, which holds $521.2 billion in stocks globally and is Europe’s biggest equity investor.
“IEX is a trading venue where all players participate on the same terms,” oil fund spokesman Thomas Sevang said in an e-mailed response to questions. “We support this.”
The BoC kept overnight rates steady:
Total CPI inflation has moved up to around the 2 per cent target, sooner than anticipated in the Bank’s April Monetary Policy Report (MPR), largely due to the temporary effects of higher energy prices and exchange rate pass-through. Core inflation remains significantly below 2 per cent although it has drifted up slightly, partly owing to past exchange rate movements.
…
The Canadian economy grew at a modest rate in the first quarter, held back by severe weather and supply constraints. The ingredients for a pickup in exports remain in place, including the lower Canadian dollar and an anticipated strengthening of foreign demand. Improved corporate profits, especially in exchange rate-sensitive sectors, should also support higher business investment in the coming quarters. There are continued signs of a soft landing in the housing market and a constructive evolution of household imbalances. We still expect excess supply to be absorbed gradually as the fundamental drivers of growth and inflation in Canada strengthen.Weighing recent higher inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as before. At the same time, the risks associated with household imbalances remain elevated. The Bank judges that the balance of risks remains within the zone for which the current stance of monetary policy is appropriate and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks.
There was some chatter about the effect on the dollar:
The loonie had been as high as about 91.7 cents, but began to slip in anticipation of the announcement, to 91.5 cents. In the wake of the statement, it dipped further to 91.3 cents, and by midday stood at 91.4 cents.
Before today, the currency had been hovering around the 92-cent level, having moved up recently.
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“It could have been expected that downside interest rates moves were taken off the table but this is not the case,” said Rahim Madhavji of Knightsbridge Foreign Exchange.“The Canadian dollar fell lower on the Bank of Canada continuing to harp a tone of we’re still nowhere close to raising interest rates,” he added in a research note titled “Bank of Canada slaps loonie lower.”
“It seems that the Bank of Canada is quite content with the lower Canadian dollar boosting exports and assisting with inflation. Today’s BoC statement removes any catalyst for loonie bulls in the near term.”
… and some criticism of the dovish language:
“Comes a point the central bank will have to drop the dovish language, although it’s clear that it will try to delay as long as possible,” said Krishen Rangasamy, senior economist the National Bank of Canada.
The bank’s insistence that disinflation remains a threat could prove tough to defend as as the summer and fall wear on, Bank of Nova Scotia economists Derek Holt and Dov Zigler said in a research note. “The Bank of Canada faces a greater sales job to explain why the ‘downside risks to the inflation outlook [are] as important as before,’” they said.
… though mind you, the dollar isn’t helping exports much:
For months, Mr. Poloz and other bank officials have stressed the importance of exports and business investment to putting the economy back on track.
But so far, exports continue to underperform – a reality underscored by Statistics Canada’s report Wednesday that exports dropped 1.8 per cent in April, tilting the trade balance back into deficit.
I think it’s unclear as to where all this hyperinflation and wheelbarrowfulls of cash are going to come from. Not Europe!
Euro zone price inflation fell unexpectedly in May, increasing the risks of deflation in the currency area and sealing the case for the European Central Bank to act this week.
Annual consumer inflation in the 18 countries sharing the euro fell to 0.5 per cent in May from 0.7 per cent in April, the EU’s statistics office Eurostat said on Tuesday.
… not with negative interest rates in Europe, it won’t:
Mario Draghi’s experiment with negative interest rates is unlikely to stop investors from seeking something stronger.
The European Central Bank president will herald a new era today by taking the deposit rate below zero, according to economists in a Bloomberg News survey. That probably won’t quell calls for more radical measures such as quantitative easing to stop the euro area from sliding into deflation.
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In the Bloomberg survey, 44 of 50 economists said the ECB will cut its deposit rate to negative from zero, with the median estimate for a level of minus 0.1 percent. The survey also predicts that the benchmark main refinancing rate will be reduced by 15 basis points to a record-low 0.1 percent.The decision will be announced at 1:45 p.m. in Frankfurt. Draghi will hold a press conference 45 minutes later, where he’ll also release revised ECB forecasts on inflation and economic growth.
… which may help a mouthpiece for the UK government carry out his instructions:
Mark Carney has a new ally in his battle to keep Bank of England policy loose: Mario Draghi.
As the BOE’s nine-person Monetary Policy Committee divides between Carney’s view that low rates are still needed and a faction leaning toward higher borrowing costs, events in Frankfurt may favor the governor by weakening the euro against the pound, helping to curb U.K. inflation pressure. The MPC meets in London today and will announce its decision at noon.
It was a mixed day of adjustment for the Canadian preferred share market today, following yesterday’s fireworks, with PerpetualDiscounts down 26bp, FixedResets up 23bp and DeemedRetractibles gaining 4bp. The Performance Highlights table is longer than usual and dominated by winning FixedResets. Volume was on the high side of average.
PerpetualDiscounts now yield 5.30%, equivalent to 6.89% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.35%, so the pre-tax interest-equivalent spread (in this context the “Seniority Spread”) is now about 255bp, a slight (and perhaps spurious) widening from the 250bp reported May 28.
| 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 | -0.4840 % | 2,499.1 |
| FixedFloater | 4.57 % | 3.82 % | 31,867 | 17.77 | 1 | 0.3377 % | 3,759.4 |
| Floater | 2.92 % | 3.04 % | 46,985 | 19.57 | 4 | -0.4840 % | 2,698.3 |
| OpRet | 4.38 % | -13.66 % | 30,546 | 0.09 | 2 | 0.0389 % | 2,711.6 |
| SplitShare | 4.81 % | 4.31 % | 63,765 | 4.15 | 5 | 0.0796 % | 3,113.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0389 % | 2,479.5 |
| Perpetual-Premium | 5.51 % | 1.02 % | 85,658 | 0.08 | 17 | 0.0069 % | 2,402.5 |
| Perpetual-Discount | 5.27 % | 5.30 % | 103,148 | 14.94 | 20 | -0.2568 % | 2,539.0 |
| FixedReset | 4.54 % | 3.72 % | 220,557 | 8.79 | 76 | 0.2269 % | 2,514.5 |
| Deemed-Retractible | 5.02 % | 1.17 % | 151,916 | 0.22 | 43 | 0.0410 % | 2,520.9 |
| FloatingReset | 2.68 % | 2.53 % | 143,048 | 3.99 | 6 | -0.2452 % | 2,476.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TD.PR.Z | FloatingReset | -1.08 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.82 Bid-YTW : 2.76 % |
| MFC.PR.J | FixedReset | 1.07 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.49 Bid-YTW : 3.41 % |
| TRP.PR.A | FixedReset | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-04 Maturity Price : 22.76 Evaluated at bid price : 23.46 Bid-YTW : 3.69 % |
| BAM.PF.B | FixedReset | 1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-04 Maturity Price : 23.05 Evaluated at bid price : 24.65 Bid-YTW : 4.21 % |
| TRP.PR.D | FixedReset | 1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-04 Maturity Price : 22.99 Evaluated at bid price : 24.51 Bid-YTW : 3.97 % |
| CU.PR.C | FixedReset | 1.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-04 Maturity Price : 23.42 Evaluated at bid price : 25.12 Bid-YTW : 3.85 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PF.A | FixedReset | 872,717 | New issue settled today. I know this volume is different from the volume reported on the Issue Comments post; here, it’s TSX; there, it’s consolidated. Sue me. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-04 Maturity Price : 23.12 Evaluated at bid price : 24.94 Bid-YTW : 3.72 % |
| RY.PR.H | FixedReset | 323,000 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-04 Maturity Price : 23.12 Evaluated at bid price : 24.93 Bid-YTW : 3.74 % |
| ENB.PF.C | FixedReset | 76,753 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-06-04 Maturity Price : 23.10 Evaluated at bid price : 24.95 Bid-YTW : 4.17 % |
| GWO.PR.G | Deemed-Retractible | 38,971 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.82 Bid-YTW : 5.28 % |
| BNS.PR.Z | FixedReset | 35,680 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 3.77 % |
| MFC.PR.G | FixedReset | 33,809 | Scotia crossed 30,000 at 25.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-12-19 Maturity Price : 25.00 Evaluated at bid price : 25.67 Bid-YTW : 3.23 % |
| There were 36 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CU.PR.C | FixedReset | Quote: 25.12 – 25.59 Spot Rate : 0.4700 Average : 0.3468 YTW SCENARIO |
| ELF.PR.G | Perpetual-Discount | Quote: 21.81 – 22.29 Spot Rate : 0.4800 Average : 0.3596 YTW SCENARIO |
| VNR.PR.A | FixedReset | Quote: 25.62 – 25.99 Spot Rate : 0.3700 Average : 0.2626 YTW SCENARIO |
| TD.PR.Z | FloatingReset | Quote: 24.82 – 25.07 Spot Rate : 0.2500 Average : 0.1497 YTW SCENARIO |
| FTS.PR.J | Perpetual-Discount | Quote: 23.45 – 23.78 Spot Rate : 0.3300 Average : 0.2312 YTW SCENARIO |
| BAM.PR.T | FixedReset | Quote: 24.22 – 24.55 Spot Rate : 0.3300 Average : 0.2440 YTW SCENARIO |