July 18, 2014

It seems that the Canadian economy is picking up a bit:

Consumers are still driving growth in Canada’s economy, with indicators showing faster inflation led by higher food and clothing costs and increased auto wholesales adding to recent housing-market strength.

The consumer price index quickened to a two-year high of 2.4 percent in June, and a 13.3 percent jump in automobile receipts led a 2.2 percent rise in wholesale sales, according to reports today from Ottawa-based Statistics Canada. A July 15 realtor report showed home resales reached a four-year high with prices up 6.9 percent from a year earlier.

The figures suggest indebted consumers are continuing to shoulder the burden of growth as policy makers such as Bank of Canada Governor Stephen Poloz await a rebound in business investment to bring the economy to full output. Poloz kept his key lending at 1 percent two days ago and stressed weak exports and slack in the economy will hold down inflation through a temporary price surge.

Canada’s ratio of household debt to disposable income rose to a record last year before two quarterly declines through March. Credit-market debt such as mortgages fell to 163.2 percent of disposable income, compared with a revised 163.9 percent in the fourth quarter and a record 164.1 percent in the third quarter of last year, Statistics Canada said June 19.

Perhaps it’s due to the idea that our houses will make us all rich?

Meanwhile, the Bloomberg Nanos Canadian Confidence Index, which measures the economic mood of Canadians through a weekly survey, shows that people in this country have become upbeat – especially when they think about their property values. It found that perceptions related to the value of real estate in people’s neighbourhoods are 10 percentage points above the six-year average and seven points above the 2014 average.

“Consumer confidence in Canada is noticeably propelled by views on real estate,” Nanos Research Group chairman Nik Nanos observes.

And we’ll get even richer from our condominium rentals!

Toronto condominium sales jumped in the second quarter, as investors in Canada’s biggest city soaked up a wave of supply to feed demand for rentals.

Unit sales rose 10 percent to 6,553 in the three months ended in June from the same period a year ago, according to figures from the Toronto Real Estate Board. That follows a 9 percent annual gain in the first quarter.

The average selling price rose 5.5 percent to a record C$367,010 ($342,000), after a 5.6 percent advance in the first quarter.

“Many of these are bought by investors to rent out and there’s just not enough rental supply,” Paul Etherington, president of the board, said by phone today.“The prices will continue to go up in the future but I don’t see them going up as dramatically.”

About a quarter of new condominiums are purchased by investors who rent the units to residents in a city where the supply of purpose-built rentals is limited, he said.

Groupthink, and its perceived desirability among bond pseudo-managers, has reached global proportions:

Junk bond investors have had enough of borrowers in Europe eroding safeguards as sales of the high-yield, high-risk debt surge to a record $110 billion.

Representatives from at least six firms met in London last week with the Association for Financial Markets in Europe to discuss reinforcing language in documents governing bond sales that protect investors, according to Gary Simmons, director of the group’s high-yield division. Legal & General Investment Management, Castle Hill Asset Management and Pioneer Investments are among money managers listed as members, according to AFME.

Bondholders are seeking to challenge private-equity firms and bankers who arrange debt sales about changes to terms, including shortening the time during which securities can’t be repaid and diluting change of control clauses protecting bondholders in a takeover. The weakening of covenants has drawn warnings from policy makers, with Federal Reserve Chair Janet Yellen saying last month she was concerned about “reach-for-yield behavior.”

“In a hot market, pricing can get tighter but safeguards such as call protection and change of control should stay the same,” said Henry Craik-White, a senior investment analyst at ECM Asset Management who attended AFME’s meeting. “The correct approach is to reach out to the wider investor community and highlight the issues before they ruin the market for everybody.”

Well, golly, we wouldn’t want anybody to ruin the market for everybody, would we? That might mean that long-term performance for some firms might exceed the long-term performance of other firms, which would be disastrous. What would be the point of networking?

Brazil’s Caixa bank might be giving us a foretaste of the next crisis:

As Brazilian state-owned bank Caixa Economica Federal prepared to sell bonds this month, Marco Aurelio de Sa, the head of trading at Credit Agricole SA, told his clients to stay away.

The securities are too risky because Caixa is the lender most vulnerable to losses after a court ruling against the nation’s banks in May fueled concern they may also lose related lawsuits that would put them on the hook for an estimated 341.5 billion reais ($151 billion). The costs could force the government to re-capitalize Caixa, causing the bank to exercise a clause in the bonds to write off the principal and interest.

“Caixa could have serious capitalization issues if the Supreme Court rules against the banks, and then there’s a big risk the bond is written off,” de Sa, a 20-year emerging-market veteran, said in an e-mail. “Even if it’s a quasi-sovereign, the clauses are very clear on what could lead to a write-off. The returns aren’t enough to compensate for the risk. We didn’t recommend it to clients.”

But American investment grade credit remains popular:

They piled back into benchmark U.S. Treasuries (USGG10YR) yesterday after a civilian plane got shot down in eastern Ukraine and as Israeli troops entered Gaza. They accelerated withdrawals from the riskiest debt in the past week, yanking $2.3 billion from high-yield bond funds, the biggest outflow since June 2013, according to a Wells Fargo & Co. (WFC) report.

Wall Street’s largest bond dealers cut their net junk-bond holdings to $4.8 billion in the week ended July 9, the lowest level since the Federal Reserve began reporting the data in April 2013.

Buyers funneled $2.4 billion into investment-grade corporate debt funds, the 30th consecutive week of deposits, the Wells Fargo report shows. Money is flowing in even though analysts predict a rise in benchmark yields by year-end, which would eat into the notes’ returns.

It was a modestly negative day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets losing 5bp and DeemedRetractibles down 3bp. Volatility was negligible. 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
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 3.09 % 3.07 % 21,546 19.50 1 1.5886 % 2,574.3
FixedFloater 4.16 % 3.39 % 28,200 18.66 1 0.0877 % 4,167.5
Floater 2.84 % 2.92 % 45,489 19.94 4 -0.0810 % 2,789.6
OpRet 4.01 % -5.40 % 76,891 0.08 1 -0.2345 % 2,723.2
SplitShare 4.27 % 3.98 % 44,234 4.02 6 -0.1665 % 3,106.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2345 % 2,490.1
Perpetual-Premium 5.52 % -4.47 % 81,926 0.09 17 0.0023 % 2,429.9
Perpetual-Discount 5.23 % 5.14 % 115,766 15.19 20 -0.0192 % 2,580.5
FixedReset 4.39 % 3.58 % 202,893 4.60 77 -0.0485 % 2,562.2
Deemed-Retractible 4.98 % 0.41 % 123,249 0.10 43 -0.0296 % 2,551.3
FloatingReset 2.66 % 0.72 % 93,766 0.16 6 -0.0262 % 2,528.4
Performance Highlights
Issue Index Change Notes
BAM.PR.E Ratchet 1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 23.86
Evaluated at bid price : 24.30
Bid-YTW : 3.07 %
Volume Highlights
Issue Index Shares
BMO.PR.K Deemed-Retractible 394,115 Scotia crossed 160,000 at 26.10. TD crossed two blocks of 40,000 each, both at the same price. RBC crossed 73,500 and 75,000, both at the same price again.
Maturity Type : Call
Maturity Date : 2014-08-17
Maturity Price : 25.75
Evaluated at bid price : 26.10
Bid-YTW : -2.24 %
BNS.PR.O Deemed-Retractible 280,388 Scotia crossed blocks of 80,000 and 50,000, both at 26.25; RBC crossed blocks of 74,800 and 75,000, both at the same price.
Maturity Type : Call
Maturity Date : 2014-08-17
Maturity Price : 25.75
Evaluated at bid price : 26.20
Bid-YTW : -17.23 %
HSB.PR.D Deemed-Retractible 277,787 Scotia crossed blocks of 108,900 and 100,000, both at 25.43. RBC crossed 40,000 at 25.43; TD crossed 25,000 at 25.43.
Maturity Type : Call
Maturity Date : 2014-08-17
Maturity Price : 25.25
Evaluated at bid price : 25.43
Bid-YTW : -0.75 %
CM.PR.O FixedReset 163,415 Scotia crossed 40,000 at 25.49. RBC crossed blocks of 50,000 and 25,000 at the same price; Nesbitt crossed 40,000 at the same price again.
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.47
Bid-YTW : 3.60 %
ENB.PF.E FixedReset 123,673 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 23.10
Evaluated at bid price : 24.97
Bid-YTW : 4.15 %
RY.PR.H FixedReset 89,273 RBC bought 19,400 from Nesbitt at 25.55, then crossed 24,000 at the same price.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 23.28
Evaluated at bid price : 25.39
Bid-YTW : 3.65 %
There were 35 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PVS.PR.B SplitShare Quote: 24.58 – 24.90
Spot Rate : 0.3200
Average : 0.1967

Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 24.58
Bid-YTW : 4.92 %

BAM.PR.G FixedFloater Quote: 22.82 – 23.25
Spot Rate : 0.4300
Average : 0.3188

Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 22.87
Evaluated at bid price : 22.82
Bid-YTW : 3.39 %

MFC.PR.F FixedReset Quote: 23.50 – 23.83
Spot Rate : 0.3300
Average : 0.2308

Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 3.94 %

NEW.PR.D SplitShare Quote: 32.40 – 32.69
Spot Rate : 0.2900
Average : 0.1995

Maturity Type : Call
Maturity Date : 2015-06-26
Maturity Price : 32.07
Evaluated at bid price : 32.40
Bid-YTW : 3.33 %

PVS.PR.D SplitShare Quote: 24.13 – 24.38
Spot Rate : 0.2500
Average : 0.1616

Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.13
Bid-YTW : 5.13 %

RY.PR.H FixedReset Quote: 25.39 – 25.69
Spot Rate : 0.3000
Average : 0.2386

Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 23.28
Evaluated at bid price : 25.39
Bid-YTW : 3.65 %

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