August 13, 2008

Asset- and mortgage-backed spreads are widening:

Fannie’s current-coupon 30-year fixed-rate bonds currently yield 6.04 percent, 212 basis points more than 10-year Treasuries, according to data compiled by Bloomberg. That’s 26 points from the 22-year high of 238 basis points reached March 6, a week before the Federal Reserve engineered a bailout of Bear Stearns & Co.

The yield over the one-month London interbank offered rate on AAA rated auto asset-backed bonds maturing in three years rose 25 basis points to a 12-month high of 200 in the week ended Aug. 7, according to Bank of America Corp. data. Spreads on similar credit-card securities rose 15 basis points to a three-month high of 110 over Libor. Libor is currently set at 2.47 percent.

BlackRock has out muscled competitors such as Legg Mason Inc. in the current crisis. The company collected $63.2 billion in new business from investors in the second quarter, including advisory assignments, the most of any publicly traded asset manager.

This may have to do with rumbling that Lehman is seeking to delever:

Lehman Brothers Holdings Inc., seeking to restore investor confidence after a $2.8 billion second-quarter loss, is negotiating to sell commercial real estate assets to a group including BlackRock Inc., said three people briefed on the discussions.

Lehman is seeking to sell about $14 billion of its $40 billion in commercial property and related securities by the end of the year, according to two potential buyers approached by the New York-based firm.

[Ladenburg Thalmann & Co. analyst Richard] Bove expects Lehman to sell its entire $29.4 billion commercial mortgage portfolio. The firm also owns $10.4 billion of property. It may record a loss of $4.9 billion on the sale of the commercial mortgages, Sanford C. Bernstein & Co. analyst Brad Hintz estimated in a report last week.

Last year, as the market collapsed, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85 billion portfolio, 44 percent more than Morgan Stanley’s and almost four times the $22.5 billion of shareholder equity Lehman had as a buffer against losses.

An interesting column on VoxEU looks at Optimal Central Bank Transparency, reasoning that since:

Inflation targeting has been the most popular monetary policy regime of recent decades. Under this policy, central banks effectively target inflation forecasts. To a large extent these forecasts are determined by expectations of economic agents. Communicating information is the central bank’s major instrument for managing expectations. It is therefore logical that the issue of central bank transparency came to the fore when inflation targeting became the dominant monetary policy strategy, often studied in the context of a New Keynesian model.


More recently, the potential negative effects of higher transparency have attracted attention (see Ellen Meade’s Vox column).

Since transparency has positive and negative aspects, the obvious next step is to investigate the notion of an optimal degree of central bank transparency.

The authors make some good points more generally related to investments:

It is well known that people sometimes neglect important information when it is supplied with a lot of other information. People also fall back to simple rules of thumb if the content of the information becomes too complicated.

By providing more and more information, paradoxically central banks show how little they actually know.
This risk is especially relevant when the central bank provides information on all the uncertainties surrounding forecasts and analyses. By doing so, it may also convey how dependent the central bank ultimately is on the relatively powerless instrument that is the very short-term interest rate. Thus result may be a drop in the central bank’s credibility.

With respect to transparency, Willem Buiter has recently opined that The ECB should vote on interest rates and then publish its minutes:

Even French president Nicolas Sarkozy can be right about some things – malgré soi. He wants the ECB to publish the minutes of the rate-setting meetings of its Governing Council, including an account of each member’s view on the appropriate level of the ECB’s official policy rate – the inelegantly named Main refinancing operations Minimum bid rate. And about time too. But before it makes sense for the ECB to publish the minutes of its rate-setting meetings, the ECB has to start voting on its interest rate decisions.

Remarkably, the fact that the ECB’s Governing Council has never voted on the interest rate it sets does not appear to be widely known.

The ECB has never had a formal vote on interest rates. I know this straight from the mouths of horses who between them have attended every single one of the ECB Governing Council’s rate-setting meetings since the first one in January 1999. Instead of voting on the interest rate, the ECB’s Governing Council ‘reach a consensus’ without ever taking a vote.

To conclude: corruption of the mandate and purpose of the ECB are much more likely when there is no voting on rate decisions, when the individual votes are not in the public domain and when no informative minutes explaining individual votes are published.

It is clear that the Treaty and Protocols (a) require voting on interest rates (why bother with the voting procedures otherwise) and (b) permit the publication of individual voting records and minutes. Article 10.4 of the Protocol states: 10.4. The proceedings of the meetings shall be confidential. The Governing Council may decide to make the outcome of its deliberations public.

Another up-day for PerpetualDiscounts, making the eleventh straight trading day without a loss. There has only been one down-day (July 28) in the nineteen trading days since the nadir on July 16.

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.63% 4.36% 58,600 16.47 7 +0.2655% 1,104.8
Floater 4.05% 4.09% 49,602 17.20 3 +0.1310% 910.7
Op. Retract 4.97% 4.26% 117,200 2.92 17 +0.0119% 1,047.0
Split-Share 5.34% 5.94% 56,662 4.44 14 -0.1203% 1,037.8
Interest Bearing 6.16% 6.44% 49,451 5.27 2 +0.5079% 1,137.0
Perpetual-Premium 6.16% 6.01% 68,795 2.25 1 +0.1580% 991.6
Perpetual-Discount 6.11% 6.17% 202,166 13.48 70 +0.1874% 869.4
Major Price Changes
Issue Index Change Notes
IGM.PR.A OpRet -1.3448% Now with a pre-tax bid-YTW of 4.45% based on a bid of 26.41 and a call 2010-7-30 at 25.67.
BNA.PR.B SplitShare -1.1352% Asset coverage of 3.3+:1 as of July 31, according to the company. Now with a pre-tax bid-YTW of 8.81% based on a bid of 20.03 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (6.08% to 2010-9-30) and BNA.PR.C (9.35% to 2019-1-10).
BNA.PR.C SplitShare -1.1002% Now with a pre-tax bid-YTW of 9.35% based on a bid of 17.08 and a hardMaturity 2019-1-10 at 25.00. See BNA.PR.B, above.
POW.PR.B PerpetualDiscount -1.0633% Now with a pre-tax bid-YTW of 6.34% based on a bid of 21.40 and a limitMaturity.
BSD.PR.A InterestBearing +1.0246% Asset coverage of 1.6+:1 as of August 8, according to Brookfield Funds. Now with a pre-tax bid-YTW of 6.50% (mostly as interest) based on a bid of 9.86 and a hardMaturity 2015-3-31 at 10.00.
SLF.PR.A PerpetualDiscount +1.0411% Now with a pre-tax bid-YTW of 6.22% based on a bid of 19.41 and a limitMaturity.
SLF.PR.B PerpetualDiscount +1.1429% Now with a pre-tax bid-YTW of 6.27% based on a bid of 19.47 and a limitMaturity.
BAM.PR.I OpRet +1.2314% Now with a pre-tax bid-YTW of 6.73% based on a bid of 23.84 and a softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (6.46% to 2012-3-30), BAM.PR.J (6.25% to 2018-3-30) and BAM.PR.O (7.24% to 2013-6-30).
ENB.PR.A PerpetualDiscount +1.4566% Now with a pre-tax bid-YTW of 5.83% based on a bid of 23.60 and a limitMaturity.
HSB.PR.D PerpetualDiscount +1.4595% Now with a pre-tax bid-YTW of 6.30% based on a bid of 20.16 and a limitMaturity.
CM.PR.E PerpetualDiscount +1.8642% Now with a pre-tax bid-YTW of 6.65% based on a bid of 21.31 and a limitMaturity.
NA.PR.L PerpetualDiscount +2.3025% Now with a pre-tax bid-YTW of 6.25% based on a bid of 19.55 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
SLF.PR.A PerpetualDiscount 45,318 Now with a pre-tax bid-YTW of 6.22% based on a bid of 19.41 and a limitMaturity.
CM.PR.P PerpetualDiscount 34,656 CIBC crossed 25,000 at 20.99. Now with a pre-tax bid-YTW of 6.65% based on a bid of 20.90 and a limitMaturity.
RY.PR.G PerpetualDiscount 24,465 Now with a pre-tax bid-YTW of 6.13% based on a bid of 18.47 and a limitMaturity.
BCE.PR.Z FixFloat 21,666 Desjardins crossed 12,000 at 24.10.
RY.PR.A PerpetualDiscount 19,600 Now with a pre-tax bid-YTW of 6.13% based on a bid of 18.26 and a limitMaturity.

There were sixteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Leave a Reply

You must be logged in to post a comment.