The Bank of Canada has released Staff Working Paper 2025-2 by Michael Brolley and David A. Cimon titled Non-Bank Dealing and Liquidity Bifurcation in Fixed-Income Markets:
Non-bank financial institutions, such as principal-trading firms and hedge funds, increasingly compete with bank-owned dealers in fixed-income markets. Some market participants worry that if non-bank financial institutions push out established bank dealers, liquidity will become unreliable during times of stress. We model non-bank entry and state-dependent liquidity provision. Non-bank participants improve liquidity more during normal times than in stress, leading to a bifurcation of liquidity. In the cross-section, their entry improves liquidity for large and previously unserved small clients; however, banks may no longer provide reliable liquidity to marginal clients. Central bank lending may limit harmful bifurcation during times of stress if that lending is predictable and at sufficiently favourable terms.
…
In modern fixed income markets, expanding competition in liquidity provision has improved trading costs for investors. In corporate bond markets, Hendershott et al. (2021) estimate that the direct impact of increased competition for liquidity provision reduces trading costs by 10 to 20 percent. Li and Sch¨urhoff (2019) provide evidence that improved trading costs through better prices arise when clients are not served only by a small subset of core dealers, further echoing the benefits of intermediary competition. However, incumbent dealers are raising the alarm that the increased competition can have serious unintended consequences.In government bond markets, banks have historically assumed the primary intermediary role. These bank dealers argue that during times of stress, they provide liquidity to institutional investors who require guaranteed access to liquidity to meet demands of margin calls or redemptions. If bank dealers must now compete with non-bank intermediaries (e.g., principal trading firms and hedge funds), the concern is that increased competition in ‘good times’ will reduce their capacity to absorb liquidity demands during times of stress—when non-bank intermediaries would withdraw—leading to greater market instability.1 Hence, focusing on liquidity improvements in stable markets
ignores this important role that bank dealers play, and competition from non-bank intermediaries may worsen liquidity during times of stress.
It’s kind of interesting to look at this through the lens of current politics – one can think of the non-bank intermediaries as emphasizing a transactional basis for deals (like Trump, we have so often been told) while the banks emphasize the relationship. And then you have to ask yourself: what are the causes and other effects of that?
TXPR was down 21bp today, erasing about half of yesterday’s 42bp “4pm gain”. An Assiduous Reader wrote in to claim that this was due to CPD reinvesting the L.PR.B redemption money, which seems reasonable enough, but illustrates my big problem with slavish devotion to mechanical, price-insensitive trading strategies: telegraphing your intent to perform big trades costs money.
I complain about this particularly with respect to pre-announcements of index composition changes. In Fund Comparison 2012, I discussed the Market Impact of the 12Q4 TXPR Revision, which was quite substantial; in yesterday’s particular case, it seems clear that CPD’s insistence on reinvesting redemption money with the objective of minimizing tracking error against the index cost its investors money, as the reinvestment price was artificially boosted by their action. Investors would have been better off had the reinvestment taken place in a more discreet manner, even if this had resulted in an increased tracking error; but many investors worship at the altar of tracking error and the fund, while performing better, would have seemed less attractive.
It’s a complicated world and cannot be solved with simple rules!
| 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 | 0.5591 % | 2,301.9 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5591 % | 4,415.1 |
| Floater | 7.58 % | 7.87 % | 33,983 | 11.54 | 4 | 0.5591 % | 2,544.5 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 3,632.7 |
| SplitShare | 4.76 % | 3.71 % | 53,082 | 0.17 | 8 | 0.0000 % | 4,338.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 3,384.8 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3334 % | 2,915.8 |
| Perpetual-Discount | 5.89 % | 6.06 % | 53,195 | 13.80 | 32 | -0.3334 % | 3,179.6 |
| FixedReset Disc | 5.34 % | 6.43 % | 98,354 | 12.97 | 50 | -0.2127 % | 2,851.9 |
| Insurance Straight | 5.80 % | 5.93 % | 64,670 | 14.01 | 21 | 0.3708 % | 3,118.7 |
| FloatingReset | 6.30 % | 6.35 % | 36,347 | 13.38 | 3 | -0.3859 % | 3,406.9 |
| FixedReset Prem | 5.67 % | 5.47 % | 167,378 | 3.38 | 12 | -0.1012 % | 2,599.4 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2127 % | 2,915.2 |
| FixedReset Ins Non | 5.17 % | 6.01 % | 73,738 | 13.93 | 14 | -0.7963 % | 2,922.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.Z | Perpetual-Discount | -8.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 6.58 % |
| CU.PR.H | Perpetual-Discount | -3.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 6.20 % |
| MFC.PR.I | FixedReset Ins Non | -2.93 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 23.12 Evaluated at bid price : 24.21 Bid-YTW : 6.08 % |
| IFC.PR.C | FixedReset Ins Non | -2.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 21.46 Evaluated at bid price : 21.80 Bid-YTW : 6.22 % |
| IFC.PR.A | FixedReset Ins Non | -2.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 21.10 Evaluated at bid price : 21.10 Bid-YTW : 5.66 % |
| MFC.PR.M | FixedReset Ins Non | -2.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 21.91 Evaluated at bid price : 22.39 Bid-YTW : 6.09 % |
| BN.PR.T | FixedReset Disc | -1.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 18.15 Evaluated at bid price : 18.15 Bid-YTW : 7.05 % |
| PWF.PR.K | Perpetual-Discount | -1.39 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.63 Evaluated at bid price : 20.63 Bid-YTW : 6.13 % |
| PVS.PR.H | SplitShare | -1.27 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2027-02-28 Maturity Price : 25.00 Evaluated at bid price : 24.85 Bid-YTW : 5.25 % |
| PWF.PR.P | FixedReset Disc | -1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 16.20 Evaluated at bid price : 16.20 Bid-YTW : 6.87 % |
| BN.PF.J | FixedReset Disc | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 22.75 Evaluated at bid price : 23.55 Bid-YTW : 6.52 % |
| FTS.PR.M | FixedReset Disc | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 21.28 Evaluated at bid price : 21.28 Bid-YTW : 6.54 % |
| IFC.PR.K | Insurance Straight | -1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 22.15 Evaluated at bid price : 22.50 Bid-YTW : 5.87 % |
| BN.PF.E | FixedReset Disc | -1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.45 Evaluated at bid price : 20.45 Bid-YTW : 6.80 % |
| CU.PR.J | Perpetual-Discount | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.10 Evaluated at bid price : 20.10 Bid-YTW : 6.00 % |
| PWF.PR.A | Floater | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 13.65 Evaluated at bid price : 13.65 Bid-YTW : 7.13 % |
| BIP.PR.A | FixedReset Disc | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 23.49 Evaluated at bid price : 24.25 Bid-YTW : 6.69 % |
| GWO.PR.I | Insurance Straight | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 19.60 Evaluated at bid price : 19.60 Bid-YTW : 5.79 % |
| MFC.PR.C | Insurance Straight | 1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.28 Evaluated at bid price : 20.28 Bid-YTW : 5.61 % |
| SLF.PR.G | FixedReset Ins Non | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 17.20 Evaluated at bid price : 17.20 Bid-YTW : 6.32 % |
| GWO.PR.Q | Insurance Straight | 1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 6.05 % |
| GWO.PR.R | Insurance Straight | 1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.40 Evaluated at bid price : 20.40 Bid-YTW : 5.94 % |
| SLF.PR.E | Insurance Straight | 1.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.76 Evaluated at bid price : 20.76 Bid-YTW : 5.47 % |
| PWF.PR.S | Perpetual-Discount | 1.95 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.34 Evaluated at bid price : 20.34 Bid-YTW : 6.02 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PF.G | FixedReset Disc | 54,759 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 19.28 Evaluated at bid price : 19.28 Bid-YTW : 7.28 % |
| ENB.PR.P | FixedReset Disc | 51,983 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 20.45 Evaluated at bid price : 20.45 Bid-YTW : 6.98 % |
| TD.PF.J | FixedReset Prem | 45,200 | YTW SCENARIO Maturity Type : Call Maturity Date : 2028-04-30 Maturity Price : 25.00 Evaluated at bid price : 25.44 Bid-YTW : 5.57 % |
| CM.PR.S | FixedReset Prem | 36,435 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 25.32 Evaluated at bid price : 25.32 Bid-YTW : 5.47 % |
| CU.PR.I | FixedReset Disc | 29,958 | YTW SCENARIO Maturity Type : Call Maturity Date : 2025-12-01 Maturity Price : 25.00 Evaluated at bid price : 24.92 Bid-YTW : 5.46 % |
| MFC.PR.K | FixedReset Ins Non | 26,340 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2055-01-09 Maturity Price : 23.03 Evaluated at bid price : 24.34 Bid-YTW : 5.61 % |
| There were 12 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| PWF.PR.Z | Perpetual-Discount | Quote: 20.00 – 21.82 Spot Rate : 1.8200 Average : 1.0692 YTW SCENARIO |
| TD.PF.A | FixedReset Disc | Quote: 23.80 – 24.75 Spot Rate : 0.9500 Average : 0.5601 YTW SCENARIO |
| CU.PR.H | Perpetual-Discount | Quote: 21.50 – 22.45 Spot Rate : 0.9500 Average : 0.6887 YTW SCENARIO |
| MFC.PR.I | FixedReset Ins Non | Quote: 24.21 – 25.00 Spot Rate : 0.7900 Average : 0.5617 YTW SCENARIO |
| MFC.PR.M | FixedReset Ins Non | Quote: 22.39 – 22.90 Spot Rate : 0.5100 Average : 0.3192 YTW SCENARIO |
| BN.PR.Z | FixedReset Disc | Quote: 22.77 – 23.45 Spot Rate : 0.6800 Average : 0.4898 YTW SCENARIO |