October 14, 2014

The Fed is very excited about a new extension to regulatory power:

The Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation welcome the announcement today by the International Swaps and Derivatives Association (ISDA) of the agreement of a new resolution stay protocol.

This initiative is an important step toward mitigating the financial stability risks associated with the early termination of bilateral, OTC derivatives contracts triggered by the failure of a global banking firm with significant cross-border derivatives activities. Initially, 18 large banking organizations have agreed to sign onto the protocol. The protocol provides for temporary stays on certain default and early termination rights within standard ISDA derivatives contracts in the event one of the large banking organizations is subject to an insolvency or resolution proceeding in its home jurisdiction.

The resolution stay amendments of the protocol are intended to facilitate an orderly resolution of a major global banking firm and reduce the potential negative impact of the resolution on financial stability by giving the bankruptcy court or resolution authority the ability to prevent early termination of financial contracts of the firm’s global subsidiaries. The Federal Reserve and the FDIC are encouraged by this effort and look forward to the continuation of this important work.

ISDA adds:

The Protocol essentially enables adhering counterparties to opt into certain overseas resolution regimes via a change to their derivatives contracts. While many existing national resolution frameworks impose stays on early termination rights following the start of resolution proceedings, these stays might only apply to domestic counterparties trading under domestic law agreements, and so might not capture cross-border trades.

Regulators have committed to develop new regulations in their jurisdictions in 2015 that will promote broader adoption of the stay provisions beyond the G-18 banks. Banks have also committed through the Protocol to expand coverage once such regulations are enacted to include a stay that could be used when a US financial holding company becomes subject to proceedings under the US Bankruptcy Code. Those regulations will be made under the rule-making process in each jurisdiction.

The contractual approach is meant to support current statutory regimes and ensure wider, more consistent application. By adhering to the Protocol, the G-18 banks will extend the coverage of stays to more than 90% of their outstanding derivatives notional, and that proportion will increase as other firms sign the Protocol.

The backgrounder (available via a link on the ISDA release) gleefully celebrates the coming extension of regulatory power over investors:

Buy-side firms are not included in the first phase. These institutions are unable to voluntarily adopt the protocol due to fiduciary responsibilities to their clients. By voluntarily giving up advantageous contractual rights, they potentially leave themselves open to lawsuits. The FSB has recognised this issue, and FSB members have committed to encourage broader adoption of the protocol by imposing new regulations in their jurisdictions throughout 2015.

Hyperinflation has been rescheduled:

Federal Reserve Vice Chairman Stanley Fischer said weaker-than-expected global growth could prompt the U.S. central bank to slow the pace of eventual interest-rate increases.

“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Fischer said in speech today in Washington.

Fischer, 70, said the Fed won’t raise rates until the U.S. expansion “has advanced far enough,” and most emerging markets should be able to weather the increase.

Fischer’s remarks highlight growing concern among U.S. central bank officials about the impact of a global slowdown and a strengthening dollar. He spoke to central bankers and finance ministers gathered in Washington for the annual meetings of the World Bank and International Monetary Fund.

The Fed’s policy making body last month expressed concern that weak demand, particularly in Europe, could add to the dollar’s appreciation, hurting U.S. exporters and damping inflation, according to minutes released Oct. 8.

I’m a big fan of transparency at the top of central banks – even, or perhaps especially, when it gets ugly:

Mario Draghi and Jens Weidmann are clashing anew over how much more stimulus the ailing euro-area economy needs from the European Central Bank.

As Europe’s woes again proved the chief concern at weekend meetings of the International Monetary Fund in Washington, President Draghi repeated he’s ready to expand the ECB’s balance sheet by as much as 1 trillion euros ($1.3 trillion) to beat back the threat of deflation. Bundesbank head Weidmann responded by saying that a target value isn’t set in stone.

The differences at the heart of policy making risk leaving the ECB hamstrung as the region’s economy stalls and inflation fades further from the central bank’s target of just below 2 percent. History suggests Draghi will ultimately prevail over his German colleague.

The public nature of the dispute will force Draghi to disclose more of his thinking than might otherwise be the case – and this is a Good Thing.

But I’m wondering about the ‘set in stone’ metaphor. Is it mixed? You can carve something in stone, which means the same thing as casting it in iron, but can you actually set something in stone to make it permanent? You can set it in concrete, if you like, and you can set a stone in a ring or a driveway, for instance, but I’m not fully convinced that “set in stone” means much. The intending meaning doesn’t match any of the standard dictionary definitions of “set”, nor does this standard dictionary list “set in stone” as an idiom. It’s all very curious.

Anyway, there is considerable controversy regarding Germany’s approach:

In Washington, Mr. Schaeuble not only endured lectures from longtime critics such as Larry Summers, the former U.S. Treasury Secretary who in an unusually frank panel discussion accused Germany of leading Europe down a path of Japanese-style deflation with a misguided focus on budget consolidation.

He also had to listen to advice from traditional allies such as Finland’s Jyrki Katainen, a future vice president of the European Commission, who warned that Germany could not remain strong forever if it failed to invest more in its own infrastructure and education system.

In its lead editorial on Sunday, conservative newspaper Die Welt argued that a weakening German economy should force a policy rethink and warned that Schaeuble’s push to achieve a “schwarze Null” – a federal budget that is in the black – in 2015 should not turn into a mindless “fetish.”

The Sueddeutsche Zeitung suggested Chancellor Angela Merkel’s Christian Democrats (CDU) risked turning into the “Tea Party of Europe” with their single-minded focus on deficit reduction.

Meanwhile, it appears that hyperinflation has been rescheduled again:

When it comes to spurring inflation in the U.S. economy, the bond market is becoming convinced that the Federal Reserve has almost no chance of achieving its 2 percent target before the end of the decade.

Inflation expectations have plummeted in the past three months, with yields of Treasuries (BUSY) implying consumer prices will rise an average 1.5 percent annually through the third quarter of 2019. In the past decade, those predictions have come within 0.1 percentage point of the actual rate of price increases in the following five years, data compiled by Bloomberg show.

Based on the gap between yields of government notes and TIPS, traders have scaled back estimates for average inflation through 2019 by a half-percentage point since June to 1.52 percent, Fed data compiled by Bloomberg show.

That decline has significance for policy makers because yields have historically been accurate in predicting the future pace of annual cost-of-living increases.

The market’s five-year forecast has understated actual inflation based on the U.S. consumer price index by a median of just 0.04 percentage point since the data began in 2003.

… and nominals had a good day:

Treasuries climbed, with two-year note yields dropping the most in more than a year, as signs of economic weakness in Germany fueled speculation that slowing global growth will delay Federal Reserve interest-rate increases.

Thirty-year bond yields dropped below 3 percent for the first time since May 2013 as reports showed U.K. inflation dropped to a five-year low in September and German investor confidence eroded. A gauge of inflation expectations measured by the difference between yields on 10-year notes and similar-maturity inflation-index debt traded close to the lowest in more than a year. Volatility reached the highest level since January.

The two-year note yield dropped five basis points, or 0.05 percentage point, to 0.38 percent at 3:02 p.m. New York time, according to Bloomberg Bond Trader prices. The 0.5 percent securities maturing in September 2016 added 3/32, or 94 cents per $1,000 face amount, to 100 7/32. The yield fell as much as six basis points, the largest decline since September 2013.

The 30-year (USGG30YR) bond fell five basis points to 2.96 percent and touched 2.94 percent, the lowest since May 3, 2013. The benchmark 10-year yield dropped seven basis points to 2.21 percent. It earlier reached 2.19 percent, a level not seen since June 2013.

And equities – particularly energies – got thumped:

U.S. stocks may have perked up today but the commodity-sensitive Toronto market slipped into correction mode.

Equities in Toronto moved into that zone this morning, though pulled back later, only to drop further again in the afternoon, closing down more than 190 points, or 1.3 per cent, at 14,036.68. That marked a drop of some 10 per cent from its peak in early September, thus meeting the definition of a correction.

But is it a plot?

The decline in oil prices may be depriving Russian President Vladimir Putin of his biggest ally.

Oil has been the key to Putin’s grip on power since he took over from Boris Yeltsin in 2000, fueling a booming economy that grew 7 percent on average from 2000 to 2008.

Brent crude is down more than 20 percent from its June high, cutting billions of dollars in tax revenue from Russia’s most valuable export. The budget will fall into deficit next year if oil is less than $104 a barrel, according to investment bank Sberbank CIB. At $90, close to the current level, Russia will have a shortfall of 1.2 percent of gross domestic product.

Top Kremlin officials said after the annexation of Crimea that they expected the U.S. to artificially push oil prices down in collaboration with Saudi Arabia in order to damage Russia, according to Khryshtanovskaya. Putin’s spokesman, Dmitry Peskov, didn’t respond to a request for comment on this issue, nor did he respond over four days of calls requesting comment about oil’s importance to Putin.

“Prices are being manipulated,” state-run Rosneft’s spokesman Mikhail Leontyev said Oct. 12 in an interview with Russkaya Sluzhba Novostei radio. “Saudi Arabia has started offering big discounts on oil. This is political manipulation, manipulation by Saudi Arabia, which can end badly for it.”

The reason Saudi Arabia cut its crude prices earlier this month was to boost margins for refinery clients and the move didn’t signal rising competition for market share, a person familiar with the nation’s oil policy said last week.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 9bp, FixedResets down 4bp and DeemedRetractibles off 3bp. Volatility was average, with some of the usual stupidity in recorded figures brought to you courtesy of the twerps at the Toronto Stock Exchange. 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
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 3.12 % 3.12 % 23,796 19.44 1 -1.1111 % 2,674.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.2776 % 4,075.1
Floater 2.92 % 3.09 % 60,786 19.51 4 -0.2776 % 2,736.3
OpRet 4.04 % 2.62 % 108,755 0.08 1 0.0000 % 2,732.5
SplitShare 4.32 % 3.81 % 84,249 3.83 5 -0.6828 % 3,131.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,498.6
Perpetual-Premium 5.49 % 1.52 % 74,288 0.08 18 -0.0307 % 2,451.6
Perpetual-Discount 5.33 % 5.14 % 97,606 15.07 18 0.0933 % 2,590.4
FixedReset 4.23 % 3.72 % 165,837 16.47 75 -0.0370 % 2,546.3
Deemed-Retractible 5.03 % 2.93 % 99,645 0.36 42 -0.0277 % 2,558.2
FloatingReset 2.56 % -0.48 % 64,095 0.08 6 -0.1826 % 2,546.5
Performance Highlights
Issue Index Change Notes
PVS.PR.D SplitShare -4.95 % Not real, since there’s a bid on Alpha at 24.10 and the low for the day was 24.24, so this is either the Toronto Exchange continuing its tradition of sloppy market making, or a bid at the close was cancelled before 4:30.
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 23.24
Bid-YTW : 5.86 %
TRP.PR.B FixedReset -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-14
Maturity Price : 19.00
Evaluated at bid price : 19.00
Bid-YTW : 3.74 %
BAM.PR.E Ratchet -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-14
Maturity Price : 23.75
Evaluated at bid price : 24.03
Bid-YTW : 3.12 %
Volume Highlights
Issue Index Shares
NA.PR.W FixedReset 140,963 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2044-10-14
Maturity Price : 23.06
Evaluated at bid price : 24.78
Bid-YTW : 3.72 %
BAM.PF.G FixedReset 83,982 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2044-10-14
Maturity Price : 23.14
Evaluated at bid price : 25.05
Bid-YTW : 4.28 %
BNS.PR.P FixedReset 48,275 Scotia crossed 25,000 at 25.28 and bought two blocks of 10,000 each from TD at 25.27 a piece.
Maturity Type : Call
Maturity Date : 2018-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.24
Bid-YTW : 3.02 %
BMO.PR.T FixedReset 42,300 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-10-14
Maturity Price : 23.27
Evaluated at bid price : 25.30
Bid-YTW : 3.68 %
RY.PR.I FixedReset 41,289 Nesbitt crossed 40,000 at 25.53.
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 3.16 %
ENB.PR.D FixedReset 41,050 Nesbitt crossed 37,200 at 24.07.
Maturity Type : Limit Maturity
Maturity Date : 2044-10-14
Maturity Price : 22.94
Evaluated at bid price : 24.04
Bid-YTW : 4.03 %
There were 12 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PVS.PR.D SplitShare Quote: 23.24 – 24.24
Spot Rate : 1.0000
Average : 0.5555

Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 23.24
Bid-YTW : 5.86 %

PVS.PR.C SplitShare Quote: 25.90 – 26.90
Spot Rate : 1.0000
Average : 0.7372

Maturity Type : Call
Maturity Date : 2015-12-10
Maturity Price : 25.50
Evaluated at bid price : 25.90
Bid-YTW : 3.81 %

BAM.PR.Z FixedReset Quote: 25.62 – 25.88
Spot Rate : 0.2600
Average : 0.1794

Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 4.06 %

TRP.PR.B FixedReset Quote: 19.00 – 19.26
Spot Rate : 0.2600
Average : 0.1818

Maturity Type : Limit Maturity
Maturity Date : 2044-10-14
Maturity Price : 19.00
Evaluated at bid price : 19.00
Bid-YTW : 3.74 %

PWF.PR.R Perpetual-Premium Quote: 25.67 – 25.90
Spot Rate : 0.2300
Average : 0.1597

Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.67
Bid-YTW : 5.00 %

MFC.PR.F FixedReset Quote: 22.20 – 22.80
Spot Rate : 0.6000
Average : 0.5375

Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.20
Bid-YTW : 4.58 %

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