Buy on dips? Not if you’re a central banker!
The total amount of reserves held in euros fell 8.1 percent in the third quarter, more than the currency’s 7.8 percent decline in the period against the dollar, according to the most recent figures from the International Monetary Fund. The last two times the euro depreciated 7 percent or more in a quarter, 2011 and 2010, holdings declined much less.
The data suggest reserve managers are passing up the chance to buy euros while they’re cheap, removing a key pillar of support. In August, European Central Bank President Mario Draghi cited the drop in central banks’ euro holdings as a factor that would help weaken the exchange rate and ultimately boost the region’s faltering economy.
…
The ECB has experimented with negative interest rates on deposits in an attempt to draw money out of safe government debt and into the broader economy. Yields on two-year notes in Germany, the Netherlands and France are all below zero on speculation the ECB is losing the battle against deflation.
Negative yields on twos? Well … consider inflation:
The inflation rate in the euro area fell below zero for the first time in more than five years, bolstering the case for more European Central Bank stimulus.
Prices dropped 0.2 percent in December, the European Union’s statistics office in Luxembourg said today. That’s the lowest rate since September 2009. Economists in a Bloomberg survey predicted a decline of 0.1 percent. Unemployment held at 11.5 percent in November, Eurostat said in a separate report.
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Joblessness in Italy rose to a record 13.4 percent in November, separate data showed. German unemployment, calculated under a national measure, fell to 6.5 percent in December, the lowest in more than two decades.
Here’s another idiotic regulation story:
Each year a bank wins the mandate to convert about 3.4 billion euros ($4.1 billion) of subsidies to sterling. The rate they use has less to do with free-market economics than self-interest, according to four traders and salespeople interviewed by Bloomberg News who said their goal was to make the most money they could for their firms to the detriment of their clients.
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The EU requires the U.K. government to exchange the currency at the European Central Bank benchmark rate on the last trading day of September. The price, set at 1:15 p.m. in London, is derived from a snapshot of trades and is supposed to be an independent measure of the value of currencies. It’s anything but, the traders said.When London-based Barclays Plc (BARC) won the job for 2011, the first thing its foreign-exchange desk did was to place bets with its own money that the euro would fall against the pound, knowing that the transaction would move the market lower, said one trader with direct knowledge of the deal who asked not to be identified because he still works in banking.
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Salespeople at Barclays, the world’s third-biggest currency dealer, also told their best customers, including some of the largest hedge funds, that the bank would be selling euros in the expectation the clients would adopt the same trading strategy, turbocharging efforts to push the exchange rate lower, the former employees said.
Well, of course they did. What would anybody with half a brain do? Just think of it … all these high-frequency trading firms spend millions to extract very short-term market movement predictions from the order book, so in order to avoid HFT, the European Union basically announces that Euros will be sold for Sterling in big size at the price determined in a specific way at a specific time.
I haven’t yet been able to figure out a more brain-dead method of trading. Just why the EU insists on conversion at all is a mystery to me, but if they do insist on conversion, surely it could be handled better … ‘exchange it however you like between this time on this date and that time on that date. Open market operations, an auction, whatever. A single auction will still experience disadvantageous price moves in the market during the run up to it … JUST LIKE BONDS. JUST LIKE STOCKS. JUST LIKE EVERY OTHER DAMN THING ON THE MARKET. You really don’t need to be very sophisticated to be able to work this out and observe it for yourself. Are strawberries cheaper in December or June?
But even when aware that they’re being (quite rightfully) penalized for telegraphing their trades, the bureaucrats still insist on using arbitrary quotations:
The U.K. now has the option of exchanging currency using an average of all ECB fixes in September, which will make it harder for banks to rig the rate.
It all fits in with the “Prevention” self-regulatory focus discussed yesterday. If a trader was given the job of conversion, he might underperform some benchmark, whatever it was … so the bureaucrats conclude that paying a fee to convert at that benchmark is a better idea. Then they cannot be criticized for allowing underperformance – even though a large conversion at a small benchmark is a really, really stupid and expensive way to trade, the costs are invisible.
It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 57bp, FixedResets up 13bp and DeemedRetractibles gaining 3bp. The Performance Highlights table is again quite lengthy, this time heavily skewed towards winners. Volume was very low.
PerpetualDiscounts now yield 5.02%, equivalent to 6.53% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 3.9% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 265bp, a significant widening from the 245bp reported December 24.
For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.
Remember that all rich /cheap assessments are:
- based on Implied Volatility Theory only
- are relative only to other FixedResets from the same issuer
- assume constant GOC-5 yield
- assume constant Implied Volatility
- assume constant spread
Here’s TRP:
Click for Big
So according to this, TRP.PR.A, bid at 21.31, is $1.26 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.02 and resetting at +154bp on 2016-1-30 is $0.98 rich.
Click for Big
MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).
Click for Big
There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.42 and appears to be $0.84 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.11 and appears to be $0.88 rich.
It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.
Click for Big
This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.81, looks $1.06 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.23, looks $1.07 expensive and resets 2019-3-1
Click for Big
Pairs equivalence is all over the map.
| 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 | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1280 % | 2,539.9 |
| FixedFloater | 4.35 % | 3.58 % | 23,734 | 18.16 | 1 | 0.8776 % | 4,018.7 |
| Floater | 2.98 % | 3.09 % | 59,190 | 19.52 | 4 | 0.1280 % | 2,700.1 |
| OpRet | 4.05 % | 1.64 % | 98,048 | 0.44 | 1 | 0.0000 % | 2,752.0 |
| SplitShare | 4.26 % | 4.18 % | 37,861 | 4.05 | 5 | 0.2848 % | 3,208.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,516.4 |
| Perpetual-Premium | 5.45 % | -3.16 % | 61,743 | 0.09 | 19 | 0.2680 % | 2,494.2 |
| Perpetual-Discount | 5.15 % | 5.02 % | 106,092 | 15.39 | 16 | 0.5714 % | 2,694.7 |
| FixedReset | 4.18 % | 3.48 % | 209,987 | 16.72 | 77 | 0.1253 % | 2,555.3 |
| Deemed-Retractible | 4.95 % | -0.32 % | 95,504 | 0.14 | 39 | 0.0346 % | 2,619.5 |
| FloatingReset | 2.67 % | 1.93 % | 60,669 | 3.41 | 7 | 0.2589 % | 2,491.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| HSE.PR.A | FixedReset | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 20.72 Evaluated at bid price : 20.72 Bid-YTW : 3.74 % |
| BNS.PR.Z | FixedReset | -1.02 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.34 Bid-YTW : 3.18 % |
| GWO.PR.G | Deemed-Retractible | 1.00 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-06 Maturity Price : 25.00 Evaluated at bid price : 25.21 Bid-YTW : -3.75 % |
| IFC.PR.C | FixedReset | 1.02 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.87 Bid-YTW : 2.20 % |
| CU.PR.F | Perpetual-Discount | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.43 Evaluated at bid price : 22.80 Bid-YTW : 4.97 % |
| CGI.PR.D | SplitShare | 1.16 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2023-06-14 Maturity Price : 25.00 Evaluated at bid price : 26.15 Bid-YTW : 3.17 % |
| POW.PR.D | Perpetual-Discount | 1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 24.34 Evaluated at bid price : 24.65 Bid-YTW : 5.08 % |
| BAM.PF.D | Perpetual-Discount | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.21 Evaluated at bid price : 22.52 Bid-YTW : 5.47 % |
| PWF.PR.P | FixedReset | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 3.42 % |
| BAM.PF.C | Perpetual-Discount | 1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 21.93 Evaluated at bid price : 22.26 Bid-YTW : 5.47 % |
| SLF.PR.B | Deemed-Retractible | 1.41 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.39 Bid-YTW : 5.16 % |
| ENB.PR.Y | FixedReset | 1.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.00 Evaluated at bid price : 22.51 Bid-YTW : 4.15 % |
| CU.PR.G | Perpetual-Discount | 1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.44 Evaluated at bid price : 22.80 Bid-YTW : 4.97 % |
| ELF.PR.H | Perpetual-Premium | 1.91 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-17 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 5.06 % |
| TRP.PR.B | FixedReset | 3.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 17.95 Evaluated at bid price : 17.95 Bid-YTW : 3.60 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PF.C | FixedReset | 272,890 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 23.16 Evaluated at bid price : 25.02 Bid-YTW : 3.46 % |
| BMO.PR.P | FixedReset | 251,818 | Scotia crossed 100,000 at 25.35. Desjardins crossed blocks of 100,000 and 50,000, both at 25.36. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-25 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : -0.29 % |
| CM.PR.P | FixedReset | 130,475 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 23.16 Evaluated at bid price : 25.00 Bid-YTW : 3.46 % |
| NA.PR.W | FixedReset | 62,200 | TD crossed 50,000 at 25.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 23.25 Evaluated at bid price : 25.31 Bid-YTW : 3.48 % |
| MFC.PR.K | FixedReset | 47,398 | TD crossed 43,200 at 25.35. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 3.53 % |
| BMO.PR.L | Deemed-Retractible | 45,278 | RBC bought 10,000 from Scotia at 26.55 and another 10,000 from TD at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-06 Maturity Price : 25.75 Evaluated at bid price : 26.44 Bid-YTW : -17.73 % |
| There were 16 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| PWF.PR.A | Floater | Quote: 19.50 – 20.79 Spot Rate : 1.2900 Average : 1.0443 YTW SCENARIO |
| ELF.PR.G | Perpetual-Discount | Quote: 22.86 – 23.19 Spot Rate : 0.3300 Average : 0.1992 YTW SCENARIO |
| MFC.PR.B | Deemed-Retractible | Quote: 24.00 – 24.41 Spot Rate : 0.4100 Average : 0.3028 YTW SCENARIO |
| ENB.PR.N | FixedReset | Quote: 23.75 – 24.09 Spot Rate : 0.3400 Average : 0.2365 YTW SCENARIO |
| GWO.PR.P | Deemed-Retractible | Quote: 25.96 – 26.25 Spot Rate : 0.2900 Average : 0.1968 YTW SCENARIO |
| SLF.PR.D | Deemed-Retractible | Quote: 23.09 – 23.41 Spot Rate : 0.3200 Average : 0.2286 YTW SCENARIO |