There is muttering that increased regulation has not only deliquified the corporate market but that the Treasury market is also suffering:
It was still early in the New York trading day on Oct. 15 and investors were already pouring into U.S. government bonds as global financial markets from Asia to Europe buckled. Because yields were falling so fast, Comiskey, the head Treasury dealer at Bank of Nova Scotia, realized that he ran the risk of being stuck with losses or unwanted inventory if his computers automatically generated quotes to buy and sell with customers.
So for about half an hour, as yields on 10-year Treasuries tumbled below 2 percent in the biggest plummet in five years, he executed client orders individually over the phone.
…
Bank of Nova Scotia was hardly alone in taking steps to protect itself in one of the most volatile trading days since the collapse of Lehman Brothers Holdings Inc. in 2008, showing how regulators’ efforts to rein in risk-taking among the world’s biggest banks is causing disruptions in what is supposed to be the deepest, most liquid market in the world — that of U.S. Treasury securities. Because dealers have cut back so much in recent years, concern is deepening that parts of the market have become less efficient in times of turmoil.
…
JPMorgan & Chase Co., a primary dealer, estimates the amount of U.S. debt available to trade at one time without moving prices has plunged 48 percent to $150 million since April. The measure is based on the average size of the best three bids and offers that go through the New York-based bank’s trading desks on a weekly basis.
…
An unprecedented $946 billion of U.S. government debt changed hands through London-based ICAP Plc on Oct. 15, which suggests that concerns over liquidity may be overblown and were due more to the fact buyers couldn’t get the prices they wanted when everyone else wanted to buy at the same time.Richard Prager, the head of trading and liquidity strategies at BlackRock Inc., the world’s largest asset manager, says regulations are one of the reasons why bond dealers have less incentive to facilitate trades for clients.
To comply with higher capital requirements from the Basel Committee on Banking Supervision, firms with bond trading desks have responded by reducing inventories. Primary dealers have slashed their U.S. debt holdings 56 percent to $64 billion from a record high in October 2013, data compiled by Bloomberg show.
But dealer holdings of junk have fallen off a cliff:
Wall Street’s biggest debt dealers have been dumping speculative-grade securities at the fastest pace on record ahead of annual stress tests by the Fed. They reduced their holdings by 68 percent in the week ended Oct. 15 as the market posted losses of 1.5 percent that week alone, according to data released by the Fed last week.
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The Fed is homing in on speculative-grade corporate debt in particular because such bonds and loans tend to suffer disproportionately in times of stress.Under a worst-case scenario being simulated in the latest round of Fed stress tests, “U.S. corporate credit quality deteriorates sharply,” according to an Oct. 23 Fed report. Relative yields on high-yield bonds and loans would “widen to levels the same as the peaks reached in the 2007–2009 recession.”
At 4.38 percentage points, the extra yield investors currently demand to own junk bonds instead of government debt is just a fifth the 21.8-percentage-point spread reached in December 2008, according to Bank of America Merrill Lynch index data.
The ECB is getting serious about deflation:
The European Central Bank said it settled 1.704 billion euros ($2.2 billion) of covered-bond purchases last week as it started its latest effort to revive the euro-area economy.
The Frankfurt-based institution began purchases on Oct. 20, returning to the market for a third time in six years as part of a renewed attempt to stave off deflation and pump life into a moribund recovery.
Investors have been closely watching the ECB’s first week of asset buying to gauge how quickly President Mario Draghi plans to fulfill his pledge of expanding the institution’s balance sheet by as much as 1 trillion euros. Even though the ECB will add asset-backed securities to the purchase plan this year, stimulus may not be enough to revive the region’s economy.
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German opposition to sovereign-bond purchases means officials have chosen covered bonds and ABS as the latest tools to help expand the balance sheet. While policy makers say their plans will spark new issuance, economists at firms including Morgan Stanley and Commerzbank AG say the central bank will probably need to buy other assets to reach the target.Of the region’s 2.6 trillion-euro covered-bond market, the ECB will only buy assets acceptable under its collateral framework for refinancing loans. Purchases will be announced weekly, starting today, and the pool of bonds eligible is about 600 billion euros, ECB Vice President Vitor Constancio said this month.
ABS buying is scheduled to begin later this quarter and there are about 400 billion euros of such assets eligible to buy, according to Constancio.
Who remembers Osborne Computer Corporation? Not Ford!:
The problem with high-tech hardware, whether it’s a smartphone or a pickup truck, is that everyone wants the newest thing. When Apple (AAPL) has a new iPhone in the works, would-be buyers delay their purchases until the next iteration hits the market. Turns out, that tricky timing dynamic happens with cars, too.
Ford Motor (F), in particular, is facing a bad bit of product whiplash at the moment. It has 16 vehicle launches next year, ranging from facelifts to entirely new models, in the most aggressive schedule to date of what car folks call “product cadence.”
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The so-called “product launch effects” drove Ford’s auto-related sales down 3 percent in the recent quarter. Profit plummeted 34 percent, in part because Ford idled factories to retool assembly lines for making its new vehicles. Sales of the Ford Edge slid 18 percent in North America as buyers awaited an all-new version expected to hit dealers in the spring. And some 11 percent fewer Ford Fiestas zipped off lots, a vehicle that hasn’t been changed drastically since 2008.Nowhere is the product path more fraught than for the F-150 pickup, the long-time best-selling vehicle in North America and Ford’s big metal enchilada. Not only is Ford making a new F-150; it’s making a drastically new one. Huge plates of steel will be replaced with lighter aluminum in a bid for fuel efficiency. It’s a massive overhaul, and truck buyers definitely took notice.
So, Toronto civic election results are beginning to trickle in and it appears heavy turnout is favouring Tory. So every Councillor elected tonight will stay up late to put together a grab-bag list of little projects that will just cost pennies per taxpayer each, and they’ll all get approved. Inclusiveness, you know. An end to divisiveness.
It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 24bp, FixedResets up 14bp and DeemedRetractibles gaining 9bp. Volatility was average. Volume was 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 | 3.19 % | 3.20 % | 19,388 | 19.24 | 1 | -0.4237 % | 2,615.8 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2145 % | 3,982.8 |
| Floater | 3.00 % | 3.12 % | 65,301 | 19.42 | 4 | 0.2145 % | 2,674.3 |
| OpRet | 4.03 % | -0.44 % | 97,718 | 0.08 | 1 | 0.0000 % | 2,743.3 |
| SplitShare | 4.29 % | 3.92 % | 75,303 | 3.79 | 5 | 0.1035 % | 3,152.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,508.4 |
| Perpetual-Premium | 5.48 % | -0.31 % | 69,715 | 0.08 | 18 | -0.0153 % | 2,461.3 |
| Perpetual-Discount | 5.28 % | 5.13 % | 98,102 | 15.17 | 18 | 0.2377 % | 2,611.7 |
| FixedReset | 4.21 % | 3.68 % | 171,651 | 8.61 | 75 | 0.1369 % | 2,559.0 |
| Deemed-Retractible | 5.01 % | 2.77 % | 102,438 | 0.25 | 42 | 0.0925 % | 2,571.8 |
| FloatingReset | 2.55 % | 1.44 % | 75,943 | 0.16 | 6 | 0.0000 % | 2,547.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| HSB.PR.D | Deemed-Retractible | -1.18 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.11 Bid-YTW : 4.64 % |
| GWO.PR.H | Deemed-Retractible | 1.14 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.97 Bid-YTW : 5.46 % |
| FTS.PR.F | Perpetual-Discount | 1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-27 Maturity Price : 24.07 Evaluated at bid price : 24.55 Bid-YTW : 5.04 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| CU.PR.C | FixedReset | 53,654 | Nesbitt crossed 49,000 at 25.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.85 Bid-YTW : 2.90 % |
| NA.PR.W | FixedReset | 47,650 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-27 Maturity Price : 23.13 Evaluated at bid price : 24.95 Bid-YTW : 3.68 % |
| BAM.PF.E | FixedReset | 42,350 | RBC crossed 40,000 at 24.95. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-27 Maturity Price : 23.05 Evaluated at bid price : 24.74 Bid-YTW : 4.11 % |
| CM.PR.O | FixedReset | 37,944 | Desjardins crossed 25,000 at 25.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-27 Maturity Price : 23.26 Evaluated at bid price : 25.24 Bid-YTW : 3.67 % |
| ENB.PR.F | FixedReset | 24,352 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-27 Maturity Price : 23.20 Evaluated at bid price : 24.73 Bid-YTW : 3.99 % |
| TD.PR.Q | Deemed-Retractible | 23,876 | RBC crossed 20,000 at 26.14. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-11-26 Maturity Price : 25.75 Evaluated at bid price : 26.10 Bid-YTW : -11.40 % |
| There were 19 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| PWF.PR.L | Perpetual-Premium | Quote: 24.86 – 25.22 Spot Rate : 0.3600 Average : 0.2230 YTW SCENARIO |
| TRP.PR.D | FixedReset | Quote: 24.91 – 25.20 Spot Rate : 0.2900 Average : 0.1697 YTW SCENARIO |
| FTS.PR.K | FixedReset | Quote: 24.62 – 24.95 Spot Rate : 0.3300 Average : 0.2219 YTW SCENARIO |
| IFC.PR.A | FixedReset | Quote: 23.60 – 23.97 Spot Rate : 0.3700 Average : 0.2632 YTW SCENARIO |
| MFC.PR.K | FixedReset | Quote: 25.00 – 25.29 Spot Rate : 0.2900 Average : 0.1944 YTW SCENARIO |
| GWO.PR.S | Deemed-Retractible | Quote: 25.57 – 25.80 Spot Rate : 0.2300 Average : 0.1350 YTW SCENARIO |