February 2, 2015

The prospects for global deflation are attracting a lot of ink:

European and Chinese factories slashed prices in January as production flat-lined, heightening global deflation risks that point to another wave of central bank stimulus in the coming year.

While the pulse of activity was livelier in other parts of Asia – Japan, India and South Korea – they too shared a common condition of slowing inflation.

Markit’s final PMI reading for the euro zone, published on Monday, was 51.0, in line with the flash estimate. Although at a six-month high, it was only just above the 50 mark that separates growth from contraction. In December the index came in at 50.6.

Worryingly for policymakers, firms cut prices in January at the steepest rate since mid-2013. Data on Friday showed annual inflation was a record-equalling low of –0.6 per cent in January across the 19 nations using the euro.

In Britain, manufacturing grew slightly faster but factories cut prices at the fastest pace since 2009.

There’s a new estimate for Treasury liquidity:

For decades, the $12.5 trillion market for U.S. government debt was renowned for its “depth,” Wall Street’s way of talking about a market’s ability to handle large trades without big moves in prices. But lately, that resiliency has practically vanished — and that’s a big worry.

Less depth has meant greater volatility. So Treasuries — the world’s haven asset during turmoil — may be prone to more disruptions, particularly as the Federal Reserve prepares to raise interest rates. And if investors begin to doubt whether they’ll still be able to buy and sell on a moment’s notice, that has the potential to elevate the U.S.’s cost to borrow.

How much depth has the market lost? A year ago, you could trade about $280 million of Treasuries without causing prices to move, according to JPMorgan Chase & Co. Now, it’s $80 million.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 54bp, FixedResets gaining 9bp and DeemedRetractibles off 6bp. The relatively mild index numbers masked a lot of individual changes, as the Performance Highlights table is its usual lengthy self. Volume was below average.

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:

impVol_TRP_150202
Click for Big

The TRP FixedResets are very well behaved, with an excellent fit to reasonable numbers!

impVol_MFC_150202
Click for Big

Another excellent fit, but this time the numbers are more perplexing. Implied Volatility for MFC continues to be a conundrum. It is still 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).

impVol_BAM_150202
Click for Big

Here’s another good fit to reasonable numbers. I hope this market doesn’t start making sense, or I’ll be out of work!

The cheapest issue relative to its peers is now BAM.PF.E, resetting at +255bp on 2020-3-31 (more than five years hence!), bid at 22.82 to be $0.59 cheap. BAM.PF.B, resetting at +263bp 2019-3-31 is bid at 24.25 and appears to be $0.43 rich.

impVol_FTS_150202
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 17.07, looks $0.64 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, bid at 23.51, and is still $0.82.

pairs_FR_150202
Click for Big

What can I say? Every Investment Grade FixedReset/FloatingReset pair but one (TRP.PR.A / TRP.PR.F) is now showing a negative break-even average three month bill rate until interconversion.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

pairs_FF_150202
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 -0.4114 % 2,187.0
FixedFloater 4.38 % 3.55 % 20,957 18.33 1 1.0713 % 4,037.2
Floater 3.30 % 3.47 % 57,370 18.58 4 -0.4114 % 2,324.9
OpRet 4.05 % 2.06 % 98,674 0.37 1 0.0000 % 2,750.9
SplitShare 4.28 % 4.25 % 30,885 3.98 5 0.3133 % 3,193.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,515.4
Perpetual-Premium 5.33 % 0.19 % 57,305 0.08 24 -0.0212 % 2,510.3
Perpetual-Discount 4.97 % 4.97 % 115,073 15.46 10 0.5379 % 2,770.0
FixedReset 4.46 % 3.46 % 214,817 17.05 79 0.0939 % 2,395.8
Deemed-Retractible 4.93 % 0.96 % 101,421 0.23 39 -0.0648 % 2,635.8
FloatingReset 2.55 % 3.25 % 78,190 6.42 7 0.0314 % 2,281.5
Performance Highlights
Issue Index Change Notes
BAM.PR.X FixedReset -3.94 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 18.03
Evaluated at bid price : 18.03
Bid-YTW : 3.72 %
TD.PF.C FixedReset -3.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 22.54
Evaluated at bid price : 23.50
Bid-YTW : 3.21 %
IFC.PR.A FixedReset -3.41 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.80
Bid-YTW : 5.77 %
PWF.PR.A Floater -1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 17.20
Evaluated at bid price : 17.20
Bid-YTW : 2.89 %
ENB.PR.D FixedReset -1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 20.02
Evaluated at bid price : 20.02
Bid-YTW : 3.97 %
TRP.PR.E FixedReset -1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 22.51
Evaluated at bid price : 23.40
Bid-YTW : 3.39 %
CU.PR.C FixedReset -1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 23.21
Evaluated at bid price : 24.26
Bid-YTW : 3.15 %
IFC.PR.C FixedReset -1.31 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.05
Bid-YTW : 3.94 %
HSE.PR.A FixedReset -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 17.02
Evaluated at bid price : 17.02
Bid-YTW : 3.61 %
TD.PF.B FixedReset -1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 22.88
Evaluated at bid price : 24.15
Bid-YTW : 3.06 %
BAM.PR.B Floater -1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 14.50
Evaluated at bid price : 14.50
Bid-YTW : 3.47 %
GWO.PR.P Deemed-Retractible -1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.25
Evaluated at bid price : 26.30
Bid-YTW : 4.57 %
TRP.PR.D FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 22.59
Evaluated at bid price : 23.50
Bid-YTW : 3.31 %
CM.PR.P FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 22.88
Evaluated at bid price : 24.25
Bid-YTW : 3.06 %
GWO.PR.Q Deemed-Retractible -1.00 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-09-30
Maturity Price : 25.25
Evaluated at bid price : 25.64
Bid-YTW : 4.91 %
ENB.PR.B FixedReset -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 3.99 %
BAM.PR.G FixedFloater 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 21.89
Evaluated at bid price : 21.70
Bid-YTW : 3.55 %
RY.PR.I FixedReset 1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.09
Bid-YTW : 3.04 %
BNS.PR.P FixedReset 1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 2.68 %
TD.PF.A FixedReset 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 23.15
Evaluated at bid price : 24.90
Bid-YTW : 2.93 %
MFC.PR.H FixedReset 1.22 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.61 %
BAM.PF.F FixedReset 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 23.12
Evaluated at bid price : 24.80
Bid-YTW : 3.63 %
VNR.PR.A FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 23.43
Evaluated at bid price : 25.00
Bid-YTW : 3.43 %
ENB.PF.C FixedReset 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 21.97
Evaluated at bid price : 22.50
Bid-YTW : 3.94 %
ENB.PR.N FixedReset 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 21.31
Evaluated at bid price : 21.60
Bid-YTW : 3.96 %
MFC.PR.N FixedReset 1.49 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.83
Bid-YTW : 3.92 %
BAM.PR.R FixedReset 1.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 21.60
Evaluated at bid price : 22.00
Bid-YTW : 3.47 %
BNS.PR.Z FixedReset 1.80 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.60
Bid-YTW : 3.79 %
CGI.PR.D SplitShare 2.16 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 25.54
Bid-YTW : 3.54 %
BAM.PR.K Floater 2.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 14.32
Evaluated at bid price : 14.32
Bid-YTW : 3.51 %
BAM.PF.G FixedReset 2.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 23.03
Evaluated at bid price : 24.69
Bid-YTW : 3.67 %
ENB.PR.Y FixedReset 2.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 20.75
Evaluated at bid price : 20.75
Bid-YTW : 3.93 %
PWF.PR.T FixedReset 2.92 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 23.14
Evaluated at bid price : 24.70
Bid-YTW : 3.11 %
MFC.PR.M FixedReset 3.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.75
Bid-YTW : 4.14 %
FTS.PR.J Perpetual-Discount 3.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 24.77
Evaluated at bid price : 25.20
Bid-YTW : 4.77 %
SLF.PR.G FixedReset 3.97 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.35
Bid-YTW : 5.65 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.J FixedReset 101,699 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 23.12
Evaluated at bid price : 24.94
Bid-YTW : 3.28 %
PWF.PR.P FixedReset 56,983 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 18.75
Evaluated at bid price : 18.75
Bid-YTW : 3.04 %
BAM.PF.G FixedReset 53,520 Scotia sold two blocks of 10,000 each to TD and crossed another 11,400, all at 24.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 23.03
Evaluated at bid price : 24.69
Bid-YTW : 3.67 %
GWO.PR.N FixedReset 41,875 Desjardins sold blocks of 24,400 and 12,000 to anonymous at 18.28.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.15
Bid-YTW : 5.75 %
SLF.PR.D Deemed-Retractible 32,928 RBC crossed 25,000 at 23.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.61
Bid-YTW : 5.25 %
ENB.PR.B FixedReset 27,548 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 3.99 %
There were 25 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ENB.PR.J FixedReset Quote: 22.25 – 23.47
Spot Rate : 1.2200
Average : 0.7071

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 21.86
Evaluated at bid price : 22.25
Bid-YTW : 3.87 %

TD.PF.C FixedReset Quote: 23.50 – 24.50
Spot Rate : 1.0000
Average : 0.5620

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 22.54
Evaluated at bid price : 23.50
Bid-YTW : 3.21 %

MFC.PR.I FixedReset Quote: 25.26 – 26.05
Spot Rate : 0.7900
Average : 0.4792

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.26
Bid-YTW : 3.67 %

PVS.PR.C SplitShare Quote: 25.66 – 26.50
Spot Rate : 0.8400
Average : 0.5576

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 25.66
Bid-YTW : 4.17 %

ENB.PR.T FixedReset Quote: 20.70 – 21.24
Spot Rate : 0.5400
Average : 0.3378

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 20.70
Evaluated at bid price : 20.70
Bid-YTW : 4.04 %

TRP.PR.E FixedReset Quote: 23.40 – 24.00
Spot Rate : 0.6000
Average : 0.3981

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-02
Maturity Price : 22.51
Evaluated at bid price : 23.40
Bid-YTW : 3.39 %

One Response to “February 2, 2015”

  1. Prefhound says:

    Great ongoing analysis and discussion — thank you James.

    As you know, I’m a guy who likes to arbitrage market gaps in the hopes of earning credit-risk-free returns. For the past few weeks I have noticed your ongoing analysis of fixed resets in the TRP and FTS series. On paper, given the assumptions you made, one could have thought shorting one “rich” member and purchasing another “cheap” member might eventually yield a paper profit potential of $2 to $3.

    Now, a couple of weeks later, “rich” and “cheap” in these series are coming into line within the same series. So now is a good time to look at whether one could have earned any arbitrage gains based on your implied volatility model. How does it look?

    My own cash flow analysis suggested that apparently “rich” or “cheap” prices could make sense if the future long run GOC-5 yield were to vary in certain ways — and I think you have made the point as well (because you assume GOC-5 remains constant at the current level).

    For the Jan 23 FTS series, the lowest reset spread was said to be “cheap”, but its return would only be higher than a higher reset spread if long run GOC-5 rose to an equilibrium around 3%. Current price and reset spreads made sense if the long run equilibrium GOC-5 yield were in the 1-1.5% range (vs 0.85% at the time). Only if the long run equilibrium GOC-5 Yield were 0-0.50% would the original rich/cheap analysis produce substantially different long run returns. This suggested to me that rich/cheap was fairly sensitive to long run GOC-5, so arbitrage returns would depend on changes in (and perception of) that benchmark. As you often note, perception can differ enormously from reality, so fixed reset arbitrage appears to have a substantial element of added GOC-5 risk.

    Arbitrage in Perpetual Discounts is pretty easy and straightforward by comparison!

    Your thoughts?

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