Matt Levine of Bloomberg has some sensible things to say about institutions victimized by evil derivatives:
This is a general rule to keep in mind when reading about governments and companies that were victimized by swaps that they didn’t understand: Governments and companies don’t understand anything. Governments and companies don’t have brains. Governments and companies do have human agents, and those human agents have brains, and they are capable of understanding many things. Different agents might or might not be capable of understanding the particular formulas at issue here. But most agents are capable of understanding (1) that getting a low low teaser rate now probably means paying a high high rate later, (2) that there are ways of saying that that don’t sound like that, (3) that their interests and the interests of the government or company they work for are not perfectly aligned, and (4) that those interests are likely to drift further apart over time.
A story about an incomprehensible tax dodge is noteworthy for two things:
Executives from Renaissance, founded by billionaire mathematician James Simons, are scheduled to testify about the transactions tomorrow in Washington, as are representatives of Barclays and Deutsche Bank.
…
Renaissance, based in East Setauket, New York, compiled one of the best records in investing history by using advanced mathematics and computer algorithms to identify mispriced securities. Its Medallion fund, open almost exclusively to Renaissance employees, returned more than 35 percent annualized over more than two decades.
“billionaire mathematician”. You don’t hear those two words together very often! The other point is that they’ve been able to do so well – outperformance is entirely possible for those who know what they’re doing.
It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets gaining 5bp and DeemedRetractibles winning 10bp. Volatility was almost non-existent. Volume was extremely low.
| 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 | 3.09 % | 3.07 % | 20,709 | 19.50 | 1 | 0.0000 % | 2,574.3 |
| FixedFloater | 4.17 % | 3.40 % | 28,801 | 18.65 | 1 | -0.0876 % | 4,163.9 |
| Floater | 2.84 % | 2.92 % | 45,010 | 19.92 | 4 | -0.2162 % | 2,783.5 |
| OpRet | 4.02 % | -4.07 % | 78,744 | 0.08 | 1 | -0.0783 % | 2,721.1 |
| SplitShare | 4.26 % | 3.95 % | 44,048 | 4.02 | 6 | 0.3336 % | 3,116.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0783 % | 2,488.2 |
| Perpetual-Premium | 5.52 % | -5.34 % | 82,168 | 0.09 | 17 | 0.0300 % | 2,430.7 |
| Perpetual-Discount | 5.23 % | 5.13 % | 111,916 | 15.24 | 20 | 0.0703 % | 2,582.4 |
| FixedReset | 4.38 % | 3.54 % | 200,305 | 6.57 | 77 | 0.0522 % | 2,563.5 |
| Deemed-Retractible | 4.97 % | 0.36 % | 123,261 | 0.10 | 43 | 0.1027 % | 2,553.9 |
| FloatingReset | 2.65 % | 0.72 % | 98,280 | 0.16 | 6 | 0.0131 % | 2,528.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PVS.PR.B | SplitShare | 1.30 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 24.90 Bid-YTW : 4.60 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.K | FixedReset | 203,248 | 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 : 5.48 % |
| ENB.PF.E | FixedReset | 104,420 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-21 Maturity Price : 23.10 Evaluated at bid price : 24.95 Bid-YTW : 4.11 % |
| BMO.PR.S | FixedReset | 84,556 | Nesbitt crossed 25,000 at 25.76; RBC bought 10,000 from Scotia at 25.79. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.73 Bid-YTW : 3.27 % |
| TD.PF.A | FixedReset | 74,550 | Desjardins crossed 58,600 at 25.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-21 Maturity Price : 23.30 Evaluated at bid price : 25.50 Bid-YTW : 3.56 % |
| CM.PR.K | FixedReset | 65,000 | Called for redemption July 31. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 3.66 % |
| ENB.PF.C | FixedReset | 54,685 | TD crossed 10,000 at 25.12. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-21 Maturity Price : 23.17 Evaluated at bid price : 25.15 Bid-YTW : 4.09 % |
| There were 16 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CIU.PR.C | FixedReset | Quote: 21.80 – 22.51 Spot Rate : 0.7100 Average : 0.5664 YTW SCENARIO |
| IAG.PR.F | Deemed-Retractible | Quote: 26.02 – 26.41 Spot Rate : 0.3900 Average : 0.2665 YTW SCENARIO |
| BAM.PR.E | Ratchet | Quote: 24.30 – 24.60 Spot Rate : 0.3000 Average : 0.2191 YTW SCENARIO |
| PWF.PR.A | Floater | Quote: 20.00 – 20.30 Spot Rate : 0.3000 Average : 0.2266 YTW SCENARIO |
| BAM.PR.M | Perpetual-Discount | Quote: 21.36 – 21.51 Spot Rate : 0.1500 Average : 0.0903 YTW SCENARIO |
| IAG.PR.A | Deemed-Retractible | Quote: 23.14 – 23.47 Spot Rate : 0.3300 Average : 0.2736 YTW SCENARIO |