March 29, 2023

The Corporate Bond Market Distress Index was updated:

  • Corporate bond market functioning appears healthy, with the overall market-level CMDI remaining stable around its historical 25th percentile.
  • Market functioning in the investment-grade segment has continued to improve in March. The high-yield segment is slightly up, but still at low historical levels.

BIS has released a working paper by Ernest Dautović, Leonardo Gambacorta and Alessio Reghezza titled Supervisory policy stimulus: evidence from the euro area dividend recommendation:

Focus
In March 2020, the European Central Bank made the recommendation that, at least until October 2020, no “significant institution” should pay out dividends. We investigate the recommendation’s impact on the credit supply to non-financial corporations amid the Covid-19 economic shock. Bank managements effectively faced a choice of how to allocate their capital when deciding whether to follow the ECB recommendation, with differing implications for the credit supply. On the one hand, given constant demand and price effects, they might have opted to use the surplus capital to increase lending supply, thus responding countercyclically to support the economy. On the other hand, they might have decided to increase their resilience to future shocks by saving capital, and/or strengthening their loss-absorption capacity by making additional provisions. The paper asks whether the ECB’s dividend recommendation led to an increase or a decrease in the credit supply to non-financial corporations, and whether this effect varied for different types of firm and sector.

Contribution
The study compares the credit supply of banks affected by the ECB recommendation with a group of unaffected banks, and controls for other pandemic-related support measures. To address identification issues, we rely on credit registry data and a direct measure that captures differences in compliance with the dividend recommendation across banks in the euro area. The analysis disentangles the confounding effects stemming from the wide range of monetary and fiscal policies that supported credit during the Covid-19 downturn and investigates their interaction with the dividend recommendation.

Findings
We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and restricting some forms of procyclical behaviour. In particular, the study finds that the dividend recommendation added 4.4 percentage points to the growth rate of euro area credit supply to non-financial corporations. The effects on lending are larger for small and medium enterprises and for firms operating in sectors that were exposed to the effects of Covid-19. We also find evidence that the dividend recommendation has sustained bank lending even in the absence of government guarantees. At the same time, we do not find evidence of a significant increase in lending to riskier borrowers and “zombie” firms.

Abstract
At the onset of the Covid-19 outbreak, central banks and supervisors introduced dividend restrictions as a new policy instrument aimed at supporting lending to the real economy and strengthening banks’ capacity to absorb losses. In this paper we estimate the impact of the ECB’s dividend recommendation on bank lending and risk-taking. To address identification issues, we rely on credit registry data and a direct measure that captures variation in compliance with the recommendation across banks in the euro area. The analysis disentangles the confounding effects stemming from the wide range of monetary and fiscal policies that supported credit during the Covid-19 downturn and investigates their interaction with the dividend recommendation. We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and limiting some forms of procyclical behaviour. The effects on lending are larger for small and medium enterprises and for firms operating in Covid-19 vulnerable sectors. At the same time, we do not find evidence of a significant increase in lending to riskier borrowers and “zombie” firms.

I must admit, this kind of research makes me nervous. Look at the abstract! “… central banks and supervisors introduced dividend restrictions as a new policy instrument aimed at supporting lending to the real economy and strengthening banks’ capacity to absorb losses.” OK, the second objective is well within the aegis of the supervisory class, but the first? That’s just mission creep. If the authorities want to boost lending, they have lots of less invasive tools in the box already.

And in Canada, thirty year mortgages will become more common:

Proposals from the Financial Consumer Agency of Canada are aimed at ensuring fairness and consistency in terms of relief offered for struggling borrowers. The plan was highlighted in the federal budget this week in a clear sign that Ottawa endorses the idea of allowing mortgages to grow to keep payments down.

The FCAC said it developed the guidelines for mortgage borrowers at risk of missing monthly payments because of what it called “exceptional circumstances.” The FCAC did not provide a measurable definition of “exceptional circumstances” except to say it could be the combined effects of high household debt, rapid interest-rate hikes and higher cost of living.

Under the proposal, banks could lengthen their troubled borrowers’ amortization periods either temporarily or permanently. The guideline would apply to all types of mortgages, including those with a fixed interest rate.

If it is temporary, the watchdog said banks should take into account the borrower’s ability to restore the amortization to the original period within what it said was a “reasonable time frame.” If it is a permanent solution, the bank must ensure the amortization period is “reasonable.” FCAC would not comment on what it considered reasonable.

PerpetualDiscounts now yield 6.25%, equivalent to 8.12% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.95% on 2023-3-24 and since then the closing price has changed from 15.18 to 14.98, a decrease of 132bp in price, with a Duration of 12.41 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 11bp since 3/24 to 5.06%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed substantially to about 305bp from the 330bp reported March 22.

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 0.0000 % 2,388.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0000 % 4,580.5
Floater 9.44 % 9.47 % 49,777 9.99 2 0.0000 % 2,639.8
OpRet 0.00 % 0.00 % 0 0.00 0 -0.1358 % 3,316.8
SplitShare 5.07 % 7.42 % 53,155 2.67 7 -0.1358 % 3,961.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1358 % 3,090.5
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 -0.0948 % 2,767.9
Perpetual-Discount 6.16 % 6.25 % 59,521 13.53 35 -0.0948 % 3,018.2
FixedReset Disc 5.79 % 7.50 % 92,956 12.18 61 -1.1093 % 2,123.1
Insurance Straight 6.07 % 6.13 % 69,196 13.75 20 -0.0049 % 2,960.0
FloatingReset 10.21 % 10.58 % 28,948 9.12 2 -0.2003 % 2,426.9
FixedReset Prem 6.63 % 6.46 % 248,205 12.76 2 -0.1787 % 2,333.0
FixedReset Bank Non 0.00 % 0.00 % 0 0.00 0 -1.1093 % 2,170.2
FixedReset Ins Non 5.66 % 6.99 % 72,851 12.41 13 -0.4522 % 2,328.7
Performance Highlights
Issue Index Change Notes
CU.PR.I FixedReset Disc -3.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 22.32
Evaluated at bid price : 22.75
Bid-YTW : 6.93 %
TRP.PR.G FixedReset Disc -3.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.10
Evaluated at bid price : 16.10
Bid-YTW : 8.42 %
RY.PR.M FixedReset Disc -2.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 17.25
Evaluated at bid price : 17.25
Bid-YTW : 7.47 %
NA.PR.G FixedReset Disc -2.61 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 20.16
Evaluated at bid price : 20.16
Bid-YTW : 7.16 %
BN.PF.G FixedReset Disc -2.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 14.72
Evaluated at bid price : 14.72
Bid-YTW : 9.14 %
RY.PR.Z FixedReset Disc -2.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 17.02
Evaluated at bid price : 17.02
Bid-YTW : 7.51 %
TRP.PR.B FixedReset Disc -2.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 10.37
Evaluated at bid price : 10.37
Bid-YTW : 9.17 %
NA.PR.W FixedReset Disc -2.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.14
Evaluated at bid price : 16.14
Bid-YTW : 7.89 %
MIC.PR.A Perpetual-Discount -2.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 6.64 %
MFC.PR.Q FixedReset Ins Non -2.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 18.90
Evaluated at bid price : 18.90
Bid-YTW : 7.33 %
RY.PR.J FixedReset Disc -2.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 18.03
Evaluated at bid price : 18.03
Bid-YTW : 7.46 %
BIP.PR.E FixedReset Disc -1.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.40
Evaluated at bid price : 21.40
Bid-YTW : 6.98 %
CM.PR.S FixedReset Disc -1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.21
Evaluated at bid price : 21.21
Bid-YTW : 6.54 %
IFC.PR.F Insurance Straight -1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.85
Evaluated at bid price : 21.85
Bid-YTW : 6.11 %
BIP.PR.F FixedReset Disc -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 19.25
Evaluated at bid price : 19.25
Bid-YTW : 7.62 %
BMO.PR.S FixedReset Disc -1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 17.65
Evaluated at bid price : 17.65
Bid-YTW : 7.41 %
BN.PF.D Perpetual-Discount -1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 18.72
Evaluated at bid price : 18.72
Bid-YTW : 6.59 %
CM.PR.O FixedReset Disc -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.86
Evaluated at bid price : 16.86
Bid-YTW : 7.57 %
ELF.PR.F Perpetual-Discount -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 20.60
Evaluated at bid price : 20.60
Bid-YTW : 6.58 %
RY.PR.O Perpetual-Discount -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.84
Evaluated at bid price : 22.30
Bid-YTW : 5.54 %
BN.PR.X FixedReset Disc -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 14.45
Evaluated at bid price : 14.45
Bid-YTW : 8.19 %
RY.PR.N Perpetual-Discount -1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.76
Evaluated at bid price : 22.20
Bid-YTW : 5.57 %
BN.PF.A FixedReset Disc -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 18.75
Evaluated at bid price : 18.75
Bid-YTW : 7.82 %
PWF.PR.P FixedReset Disc -1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 12.78
Evaluated at bid price : 12.78
Bid-YTW : 7.98 %
BN.PR.T FixedReset Disc -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 13.82
Evaluated at bid price : 13.82
Bid-YTW : 8.81 %
BMO.PR.W FixedReset Disc -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.69
Evaluated at bid price : 16.69
Bid-YTW : 7.61 %
FTS.PR.G FixedReset Disc -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 7.32 %
RY.PR.H FixedReset Disc -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 17.15
Evaluated at bid price : 17.15
Bid-YTW : 7.47 %
BMO.PR.Y FixedReset Disc -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 18.03
Evaluated at bid price : 18.03
Bid-YTW : 7.33 %
TD.PF.D FixedReset Disc -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 18.20
Evaluated at bid price : 18.20
Bid-YTW : 7.43 %
BIP.PR.A FixedReset Disc -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 9.20 %
RY.PR.S FixedReset Disc -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 20.01
Evaluated at bid price : 20.01
Bid-YTW : 6.70 %
BN.PF.I FixedReset Disc -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 20.15
Evaluated at bid price : 20.15
Bid-YTW : 7.99 %
BN.PF.B FixedReset Disc -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.01
Evaluated at bid price : 16.01
Bid-YTW : 8.65 %
PWF.PR.T FixedReset Disc -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 17.55
Evaluated at bid price : 17.55
Bid-YTW : 7.62 %
BMO.PR.E FixedReset Disc -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 20.32
Evaluated at bid price : 20.32
Bid-YTW : 6.98 %
BIP.PR.B FixedReset Disc -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.26
Evaluated at bid price : 21.26
Bid-YTW : 8.38 %
BN.PF.H FixedReset Disc -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.41
Evaluated at bid price : 21.41
Bid-YTW : 7.88 %
FTS.PR.M FixedReset Disc -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 8.00 %
CU.PR.C FixedReset Disc -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 19.11
Evaluated at bid price : 19.11
Bid-YTW : 7.03 %
BN.PF.C Perpetual-Discount 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 18.79
Evaluated at bid price : 18.79
Bid-YTW : 6.50 %
POW.PR.B Perpetual-Discount 3.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.49
Evaluated at bid price : 21.75
Bid-YTW : 6.16 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.M FixedReset Disc 42,500 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 17.25
Evaluated at bid price : 17.25
Bid-YTW : 7.47 %
RY.PR.J FixedReset Disc 40,200 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 18.03
Evaluated at bid price : 18.03
Bid-YTW : 7.46 %
MFC.PR.I FixedReset Ins Non 34,212 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 22.16
Evaluated at bid price : 22.75
Bid-YTW : 6.45 %
NA.PR.E FixedReset Disc 26,900 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 20.35
Evaluated at bid price : 20.35
Bid-YTW : 6.89 %
RY.PR.H FixedReset Disc 23,627 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 17.15
Evaluated at bid price : 17.15
Bid-YTW : 7.47 %
TD.PF.A FixedReset Disc 22,800 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.88
Evaluated at bid price : 16.88
Bid-YTW : 7.56 %
There were 19 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IFC.PR.E Insurance Straight Quote: 21.35 – 24.00
Spot Rate : 2.6500
Average : 1.4531

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.35
Evaluated at bid price : 21.35
Bid-YTW : 6.13 %

BN.PR.T FixedReset Disc Quote: 13.82 – 15.99
Spot Rate : 2.1700
Average : 1.2520

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 13.82
Evaluated at bid price : 13.82
Bid-YTW : 8.81 %

BN.PF.J FixedReset Disc Quote: 21.90 – 23.99
Spot Rate : 2.0900
Average : 1.6546

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.58
Evaluated at bid price : 21.90
Bid-YTW : 6.99 %

IFC.PR.K Perpetual-Discount Quote: 21.25 – 22.25
Spot Rate : 1.0000
Average : 0.7061

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 6.22 %

NA.PR.W FixedReset Disc Quote: 16.14 – 17.40
Spot Rate : 1.2600
Average : 1.0011

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.14
Evaluated at bid price : 16.14
Bid-YTW : 7.89 %

TRP.PR.G FixedReset Disc Quote: 16.10 – 16.99
Spot Rate : 0.8900
Average : 0.6321

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2053-03-29
Maturity Price : 16.10
Evaluated at bid price : 16.10
Bid-YTW : 8.42 %

2 Responses to “March 29, 2023”

  1. […] PerpetualDiscounts now yield 6.19%, equivalent to 8.05% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.06% on 2023-3-31 and since then the closing price has changed from 15.14 to 15.19, an increase of 33bp in price, with a Duration of 12.36 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 3bp since 3/31 to 5.03%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to about 300bp from the 305bp reported March 29. […]

  2. […] Spread (between long-term corporate bonds and interest-equivalent PerpetualDiscounts) was 305bp as of 2023-3-29 (chart end-date 2023-3-10) […]

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