November 6, 2008

There were massive rate cuts in Europe:

The Bank of England led European central banks in reducing borrowing costs to counter the worst financial crisis in almost a century, cutting its key rate by 1.5 percentage points to the lowest level since 1955.

The U.K. central bank reduced its key rate by the most since 1992, taking it to 3 percent. The European Central Bank lowered its benchmark by 50 basis points to 3.25 percent and Swiss policy makers cut their main lending rate by the same margin to 2 percent after an unscheduled meeting.

The BoE press release is unusually sombre:

Since mid-September, the global banking system has experienced its most serious disruption for almost a century. While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time. As a consequence, money and credit conditions have tightened sharply. Equity prices have fallen substantially in many countries.

In the United Kingdom, output fell sharply in the third quarter. Business surveys and reports by the Bank’s regional Agents point to continued severe contraction in the near term. Consumer spending has faltered in the face of a squeeze on household budgets and tighter credit. Residential investment has fallen sharply and the prospects for business investment have weakened. Economic conditions have also deteriorated in the UK’s main export markets.

With the expansion of the Fed’s balance sheet comes an extraordinary level of Treasury issuance:

Over the October – December 2008 quarter, the Treasury expects to borrow $550 billion of marketable debt, assuming an end-of-December cash balance of $300 billion, which includes $260 billion for the Supplementary Financing Program (SFP). Without the SFP, the end-of-December cash balance is expected to be $40 billion. This borrowing estimate is $408 billion higher than announced in July 2008. The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of State and Local Government Series securities.

Over the January – March 2009 quarter, the Treasury expects to borrow $368 billion of marketable debt, assuming an end-of-March cash balance of $75 billion.

This issuance is causing dislocation in the Treasury yield curve:

One trader pointed out some amazing anomalies on the 3 year /4 year portion of the curve. For instance, one can sell the 3 3/8s of November 2012 and buy the new 3 year (November 2011) at even yield. The curve is quite steep so unless one expects dramatic flattening soon that trader is a winner,

Similarly, an investor can sell the 4 1/4s September 2012 and buy a combination of three year notes and 5 year notes and pick up 88 basis points of gross yield. That just does not make sense and anyone owning those bonds should sell them in favor of most anything else.

There are rumours GMAC will become a bank:

Cerberus is weighing a plan to distribute its GMAC stake to investors in its private-equity funds, according to the people, who declined to be identified because the deliberations aren’t public. The tactic, one of several options under discussion, may enable Detroit-based GMAC to become a bank and get funding from the U.S. Treasury and Federal Reserve without subjecting Cerberus to banking regulations.

In a bit of good news Wells Farge raised significant equity:

Wells Fargo & Co., the biggest bank on the U.S. West Coast, raised $11 billion in a stock sale to help fund its purchase of Wachovia Corp., exceeding its estimate for the offering.

The bank sold 407.5 million shares for $27 each, 6.2 percent below today’s closing price of $28.77, according to a company statement. The company may sell an additional 61 million shares if demand warrants. The San Francisco-based lender had planned to raise $10 billion.

The U.S. Treasury bought $25 billion of Wells Fargo’s preferred shares in October as part of its rescue of the banking industry. Wells Fargo is expanding its deposit base to the East Coast and creating the biggest U.S. bank by branches with its purchase of Charlotte, North Carolina-based Wachovia.

Wells Fargo joins other banks in raising capital, including JPMorgan Chase & Co’s $11.5 billion offering in September and $10 billion pulled in by Bank of America Corp. in October.

A day enlivened by news of the new GWO Fixed-Reset 6.00%+307 issue; PerpetualDiscounts gave up some of the gains they made in the first part of the week. Volume remained vigorous.

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
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 5.20% 5.23% 69,022 15.32 6 +2.2961% 1,005.5
Floater 7.14% 7.26% 52,851 12.18 2 -3.2164% 488.4
Op. Retract 5.29% 6.03% 135,941 3.98 15 +0.0596% 999.6
Split-Share 6.31% 10.70% 58,374 3.94 12 -0.8761% 935.3
Interest Bearing 8.10% 14.17% 59,414 3.21 3 -0.5261% 875.3
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 6.79% 6.86% 178,964 12.76 71 -0.9708% 803.2
Fixed-Reset 5.39% 5.16% 1,030,535 15.09 12 -0.4709% 1,081.0
Major Price Changes
Issue Index Change Notes
FTN.PR.A SplitShare -7.7658% Asset coverage of 1.9-:1 as of October 31, according to the company. Now with a pre-tax bid-YTW of 9.91% based on a bid of 7.72 and a hardMaturity 2015-12-1 at 10.00. Closing quote of 7.72-00, 5×6. Day’s range of 7.66-8.22
GWO.PR.I PerpetualDiscount -5.7382% Now with a pre-tax bid-YTW of 7.26% based on a bid of 15.77 and a limitMaturity. Closing quote 15.77-29, 3×4. Day’s range 15.76-71.
BAM.PR.B Floater -5.2684%  
MFC.PR.C PerpetualDiscount -4.4879% Now with a pre-tax bid-YTW of 6.91% based on a bid of 16.60 and a limitMaturity. Closing Quote 16.60-73, 12×3. Day’s range of 16.60-45.
PWF.PR.I PerpetualDiscount -4.3043% Now with a pre-tax bid-YTW of 6.87% based on a bid of 22.01 and a limitMaturity. Closing Quote 22.01-23.50, 8×16. Day’s range of 22.01-23.50.
RY.PR.E PerpetualDiscount -4.0437% Now with a pre-tax bid-YTW of 6.44% based on a bid of 17.56 and a limitMaturity. Closing Quote 17.56-79, 3×4. Day’s range of 17.41-18.64.
BSD.PR.A InterestBearing -4.0323% Asset coverage of 1.0+:1 as of October 31, according to Brookfield Funds. Now with a pre-tax bid-YTW of 16.97% based on a bid of 5.95 and a hardMaturity 2015-3-31 at 10.00. Closing quote of 5.95-99, 87×1. Day’s range of 5.90-15.
PWF.PR.K PerpetualDiscount -3.2520% Now with a pre-tax bid-YTW of 7.00% based on a bid of 17.85 and a limitMaturity. Closing Quote 17.85-00, 5×12. Day’s range of 17.85-45.
ELF.PR.G PerpetualDiscount -3.0243% Now with a pre-tax bid-YTW of 8.17% based on a bid of 14.75 and a limitMaturity. Closing Quote 14.75-94, 8×5. Day’s range of 14.75-50.
RY.PR.G PerpetualDiscount -2.7933% Now with a pre-tax bid-YTW of 6.50% based on a bid of 17.40 and a limitMaturity. Closing Quote 17.40-85, 10×12. Day’s range of 17.25-96.
GWO.PR.H PerpetualDiscount -2.7778% Now with a pre-tax bid-YTW of 7.05% based on a bid of 17.50 and a limitMaturity. Closing Quote 17.50-94, 2×2. Day’s range of 17.50-25.
RY.PR.A PerpetualDiscount -2.6752% Now with a pre-tax bid-YTW of 6.14% based on a bid of 18.19 and a limitMaturity. Closing Quote 18.19-52, 1×4. Day’s range of 18.00-33.
BNA.PR.B SplitShare -2.4582% Asset coverage of just under 2.8:1 as of September 30 according to the company. Coverage now of 2.0-:1 based on BAM.A at 20.80 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 10.14% based on a bid of 18.65 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (17.29% to 2010-9-30) and BNA.PR.C (13.28% to 2019-1-10). Closing quote 18.65-96, 16×12. Day’s range 18.26-50.
POW.PR.A PerpetualDiscount -2.4085% Now with a pre-tax bid-YTW of 7.00% based on a bid of 20.26 and a limitMaturity. Closing Quote 20.26-99, 1×2. Day’s range of 20.00-99.
CIU.PR.A PerpetualDiscount -2.2005% Now with a pre-tax bid-YTW of 7.21% based on a bid of 18.50 and a limitMaturity. Closing Quote 16.00-25, 2×15. Day’s range of 16.27-50.
BAM.PR.J OpRet -2.1739% Now with a pre-tax bid-YTW of 10.28% based on a bid of 18.00 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (9.24% to 2012-3-30), BAM.PR.I (9.96% to 2013-12-30) and BAM.PR.O (10.48% to 2013-6-30) and the perpetuals at 9.44%. Closing quote of 18.00-30, 2×3. Day’s range of 18.00-50.
BCE.PR.R FixFloat +2.3091%  
SBN.PR.A SplitShare +2.6637% Asset coverage of 1.9+:1 as of October 31 according to Mulvihill. Now with a pre-tax bid-YTW of 6.87% based on a bid of 9.25 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 9.25-50, 7×1. Both trades today at 9.25.
BCE.PR.I FixFloat +2.7353%  
BNA.PR.C SplitShare +4.1633% See BNA.PR.B, above. Closing quote of 13.01-40, 10×7. Day’s range of 12.60-40.
BCE.PR.Z FixFloat +4.2677%  
BCE.PR.G FixFloat +4.3333%  
Volume Highlights
Issue Index Volume Notes
GWO.PR.G PerpetualDiscount 283,039 Nesbitt crossed 250,000 at 19.70, then another 17,000 at the same price. Now with a pre-tax bid-YTW of 6.77% based on a bid of 19.51 and a limitMaturity.
TD.PR.C Fixed-Reset 147,200 New issue settled Nov. 5
TD.PR.N Fixed-Reset 85,800 CIBC crossed 33,800 at 25.00, then another 50,000 at the same price.
CM.PR.A OpRet 70,000 TD crossed 33,000 at 25.35, then another (the same?) 33,000 at the same price. Now with a pre-tax bid-YTW of 4.95% based on a bid of 25.28 and a softMaturity 2011-7-30 at 25.00.
MFC.PR.A OpRet 68,975 CIBC crossed 47,200 at 24.30. Now with a pre-tax bid-YTW of 5.02% based on a bid of 23.81 and a softMaturity 2015-12-18 at 25.00.

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

2 Responses to “November 6, 2008”

  1. lystgl says:

    There are rumours GMAC will become a bank:

    Rumours?
    http://www.gmacbank.com/index.html

    They are already on the TV advertising as an FDIC insured bank and check out their website.

  2. jiHymas says:

    GMAC owns GMAC Bank, but isn’t actually a bank itself.

    See the FDIC’s recent list of Industrial Loan Companies, with such familiar names as “Merrill Lynch Bank”, “Morgan Stanley Bank” and “Lehman Brothers Bank”.

    GMAC Bank was in organization in 2000.

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