For all the recent hope about the US – given its recent jobs number – the rest of the world isn’t doing all that well:
International Monetary Fund Managing Director Christine Lagarde signaled a cut in the institution’s global growth forecasts, saying investment is still weak and that risks remain in the U.S. even as its rebound accelerates.
“The global economy is gathering speed, though the pace may be a bit less than we previously predicted because the growth potential is lower and investment” spending remains lackluster, Lagarde told the Cercle des Economistes conference in Aix-en-Provence, France.
The remarks underline the threats to global economic growth at a time when the U.S. Federal Reserve is trimming stimulus and the European Central Bank is fighting inflation that is less than half its targeted level. The IMF is preparing to update its economic forecasts this month after predicting April 8 that the global economy will expand 3.6 percent this year and 3.9 percent in 2015.
In the meantime, all the new rules are disrupting the repo market:
The Federal Reserve’s bond purchases combined with demand from banks to meet tightened regulatory requirements is making it harder for traders to easily borrow and lend certain desired securities in the $1.6 trillion-a-day market for repurchase agreements. That’s causing such trades to go uncompleted at some of the highest rates since the financial crisis.
Disruptions in so-called repos, which Wall Street’s biggest banks rely on for their day-to-day financing needs, are another unintended consequence of extraordinary central-bank policies that pulled the economy out of the worst financial crisis since the Great Depression. They also belie the stability projected by bond yields at about record lows.
…
Negative rates happen when certain Treasuries are in such high demand or short supply that lenders of cash are actually paying collateral providers interest so they can obtain the needed securities. Traders said that is a big reason why repo rates on desired Treasuries have recently gotten as low as negative 3 percent.Now, more repo trades are going uncompleted, or failing, because it’s either too difficult or expensive for the borrower to obtain and deliver Treasuries. Such failures to deliver Treasuries have averaged $65.6 billion a week this year, reaching as much as $197.6 billion in the week ended June 18, Fed data show.
Uncompleted trades averaged $51.6 billion in 2013, and $28.8 billion in 2012, according to the Fed.
…
“The effect of all the collateral issues we see now is an indication of not so much how things are, but how bad things will be when you really need liquidity,” said Jeffrey Snider, chief investment strategist at West Palm Beach, Florida-based Alhambra Investment Partners LLC, in a telephone interview June 30. “That’s when you get into potentially dire situations.”The conditions for repo stress were on display last month. The 2.5 percent note due in May 2024 reached negative 3 percentage points in repo in the days preceding a June 11 Treasury auction of $21 billion in notes to finance government operations.
Repo rates have been most prone to go negative, a situation known as specials in the market, in the days preceding an auction as traders who previously sold the debt seek to buy the securities to cover those positions.
Those fascinated by the topic might want to read the New York Fed paper Key Mechanics of The U.S. Tri-Party Repo Market.
League Assets Corp. and its IGW REIT have given us what may well be a foretaste of the market’s next disaster – private equity:
League made a name for itself by telling investors that their money was safer within a private REIT because it wouldn’t be subject to fluctuations in the public markets. However, cracks started to show over the past few years, and major caution flags were raised in 2013 when League tried to restructure itself by going public. Some investors worried that tapping new, unknowing public investors for fresh funds was the only way League would be able to resolve its cash crunch. (The detailed story of League’s rise and fall was reported in Report on Business Magazine earlier this year.)
Since League filed for protection under the Companies’ Creditors Arrangement Act, PwC has tried to untangle the company’s complex structure and determine who would get paid what. Through this process, the firm concluded that the following were the main problems that led to League’s undoing:
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At the time of its CCAA filing, League hoped it would be able to restructure itself and continue operating. PwC disagreed. Instead, all of the buildings are being sold off, and only two have yet to be sold. While this process has generated funds to help pay back creditors and investors, it has only generated $235-million because League had to sell its properties in what has quickly become a weak commercial property market.
Norm Cham of the SEC had this to say about Private Equity recently:
There is no single methodology for determining the fair value of a security or other asset because fair value depends upon the facts and circumstances of each situation. As a general principle, however, the fair value of a security or other asset held by a fund would be the amount that the fund might reasonably expect to receive for the security or other asset upon its current sale. When determining the fair value of a security or other asset held by an alternative mutual fund, all indications of value that are available must be taken into account.[6] One key to effective valuation is the development of robust valuation policies and procedures. Issues that alternative mutual fund managers may consider addressing in their policies and procedures include: (1) the requirement that the fund monitor for circumstances that may necessitate the use of fair value prices, (2) the provision of a methodology by which a fund determines fair value, (3) the process for price overrides, (4) assurance that controls are in place to review, monitor and approve all overrides in a timely manner, and (5) the prompt notification to, and review and approval by, persons not directly involved in portfolio management to mitigate conflicts of interest.[7]
In other words … “tick the box”. And the blind led the blind into the abyss.
Japan has learned nothing from the western solar energy boondoggle:
The Japanese government’s subsidy program originally paid about triple the amount Germany extended for its solar industries.
Japan approved a cut in tariffs for solar power as a building boom meant the technology made up 97 percent of new renewable capacity since it offered incentives.
The tariff was reduced in April 2013 to 37.8 yen per kilowatt hour from 42 yen. Japan’s method of subsidy for the industry is similar to the program Germany, Spain and the U.K. implemented, offering an above-market rate for solar power.
Japan gave final approval in March for the 11 percent cut to 32 yen a kilowatt-hour for the 20 years from the fiscal year starting April and offered 36 yen for offshore wind, the Ministry of Economy, Trade and Industry said in a statement.
The recent Ontari-ari-ari-Owe election has brought with it the promise of a new fund that will provide citizens with extra pension income – provided, of course, that all the Ontario Bonds this fund will buy doesn’t go bust! The US Treasury has other ideas:
Retirees with 401(k) plans and individual retirement accounts will have more flexibility to purchase annuities that don’t start paying out until age 80 or 85, under final rules from the U.S. Treasury Department.
The rules announced today provide a new way for retirees to limit the drawdowns of their account balances that are now required starting after age 70 1/2. Instead, under the rules, they could use as much as 25 percent of their account balances up to $125,000 to purchase deferred annuities.
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The Treasury Department’s final rules give the government’s blessing to the concept of longevity insurance, which hasn’t taken hold in the market, in part because of the required distribution rules and because of relatively high fees that deter potential purchasers.
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In 2013, deferred income annuities were a $2.2 billion market, less than 1 percent of all annuity sales, according to the Limra Secure Retirement Institute. Deferred income annuity sales have more than doubled for each of the past two years.A man who purchases a deferred annuity at age 60 for $50,000 can receive $17,614 in annual income for life starting at age 80, according to New York Life.
And that’s with today’s rates!
There was little overall movement in the Canadian preferred share market today, with PerpetualDiscounts and FixedResets both up 2bp and DeemedRetractibles flat. Volatility was minimal. Volume was average.
| 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 | 3.16 % | 3.15 % | 23,152 | 19.34 | 1 | -0.9607 % | 2,511.8 |
| FixedFloater | 4.24 % | 3.52 % | 28,202 | 18.28 | 1 | 0.2685 % | 4,050.4 |
| Floater | 2.87 % | 2.97 % | 46,804 | 19.83 | 4 | -0.6507 % | 2,762.8 |
| OpRet | 4.00 % | -10.02 % | 86,887 | 0.08 | 1 | 0.3922 % | 2,730.7 |
| SplitShare | 4.68 % | 4.05 % | 85,835 | 4.06 | 7 | -0.1012 % | 3,117.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3922 % | 2,496.9 |
| Perpetual-Premium | 5.51 % | -4.45 % | 80,883 | 0.08 | 17 | 0.0023 % | 2,422.5 |
| Perpetual-Discount | 5.24 % | 5.18 % | 111,872 | 15.02 | 20 | 0.0192 % | 2,571.3 |
| FixedReset | 4.38 % | 3.64 % | 202,583 | 4.48 | 76 | 0.0223 % | 2,562.4 |
| Deemed-Retractible | 4.98 % | 1.94 % | 129,854 | 0.14 | 43 | 0.0028 % | 2,547.9 |
| FloatingReset | 2.66 % | 2.14 % | 115,813 | 3.86 | 6 | 0.2967 % | 2,515.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.X | FixedReset | -1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-07 Maturity Price : 21.84 Evaluated at bid price : 22.11 Bid-YTW : 4.06 % |
| BAM.PR.B | Floater | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-07 Maturity Price : 17.68 Evaluated at bid price : 17.68 Bid-YTW : 2.98 % |
| BAM.PR.C | Floater | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-07 Maturity Price : 17.75 Evaluated at bid price : 17.75 Bid-YTW : 2.97 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PF.C | FixedReset | 136,141 | RBC crossed 38,600 at 25.33; Nesbitt crossed 20,000 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-07 Maturity Price : 23.23 Evaluated at bid price : 25.33 Bid-YTW : 4.15 % |
| BAM.PF.F | FixedReset | 130,800 | RBC crossed 126,800 at 25.44. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.48 Bid-YTW : 4.20 % |
| GWO.PR.S | Deemed-Retractible | 118,960 | Nesbitt crossed 100,000 at 25.50. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 5.12 % |
| TD.PR.I | FixedReset | 112,443 | Called for redemption July 31. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 24.99 Bid-YTW : 3.77 % |
| HSE.PR.A | FixedReset | 107,116 | Nesbitt crossed 102,700 at 23.18. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-07 Maturity Price : 22.75 Evaluated at bid price : 23.13 Bid-YTW : 3.71 % |
| CM.PR.K | FixedReset | 101,265 | Called for redemption July 31. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 3.64 % |
| There were 30 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: 25.86 – 26.50 Spot Rate : 0.6400 Average : 0.3785 YTW SCENARIO |
| BAM.PR.G | FixedFloater | Quote: 22.41 – 23.00 Spot Rate : 0.5900 Average : 0.4378 YTW SCENARIO |
| MFC.PR.H | FixedReset | Quote: 26.26 – 27.50 Spot Rate : 1.2400 Average : 1.1003 YTW SCENARIO |
| MFC.PR.F | FixedReset | Quote: 23.37 – 23.77 Spot Rate : 0.4000 Average : 0.2859 YTW SCENARIO |
| ELF.PR.H | Perpetual-Discount | Quote: 24.64 – 25.00 Spot Rate : 0.3600 Average : 0.2481 YTW SCENARIO |
| CU.PR.D | Perpetual-Discount | Quote: 24.20 – 24.75 Spot Rate : 0.5500 Average : 0.4449 YTW SCENARIO |