There will be a chance to see a milestone in the recovery of the credit market this week – commercial paper held by the Fed will mature:
About $245 billion of 90-day commercial paper that companies sold to the Federal Reserve starting in October will mature this week and next, central bank data show. As much as $50 billion to $70 billion of the debt may be rolled over and bought by investors, according to Barclays Capital in New York.
…
Rates on AA ranked financial commercial paper due in 90 days fell to a record low of 0.28 percent on Jan. 8, or 21 basis points more than the U.S. borrowing rate, Fed data show. They have since jumped to 1.04 percent, or 94 basis points more than the government yield on 90-day Treasury bills, as investors prepared to absorb at least $486 billion of overall paper coming due this week, according to Fed data. The gap peaked at 374 basis points on Oct. 15.The Fed demands 2.24 percent to own unsecured debt, including a one percentage point fee, under its Commercial Paper Funding Facility.
…
Fed purchases declined in the first two weeks of the year as investors picked up the slack, reducing government buying to $179 million. First-tier commercial paper assets in prime money- market funds increased 26 percent to $790.6 billion as of Jan. 13, iMoneyNet data show.Purchases jumped last week to $15.7 billion, the most since November, as some companies remained unable to sell 90-day commercial paper to investors at rates below the cost of issuing to the Fed.
…
Policy makers also may force companies to wean themselves from federal help by making it “increasingly expensive” to use the CPFF, said Louis Crandall, the chief economist at Jersey City, New Jersey-based Wrightson ICAP, a research unit of ICAP Plc, the world’s largest inter-dealer broker.
The Fed should indeed be increasing its spread to get the banks inter alia to pick up the slack. This would be an important step in removing the Fed from routine intermediation and shrinking the balance sheet. Across the Curve, however, cites some street chatter to the effect that the rollover will be a non-event. But … that’s what we like. Non-events. Aren’t they lovely?
There is an encouraging sign! $150-billion in 84-day TAF money attracted only $136-billion bids and went at 0.25%. This follows a bid-to-cover of 0.72 on January 12, 0.69 on Dec 29, 0.42 on Dec 15 and 0.44 on Dec 2. So this is good. Unfortunately, the Fed is having to purchase agencies in size so don’t celebrate too soon! On the other hand – any more hands and I’ll become an economist – today’s $40-billion 2-Year auction went well and lit up the Treasury market.
I will admit though, that I am becoming a little concerned. Across the Curve contains several ecstatic references to positive carry today – for example, here and here. I heard a lot of remarks about positive carry in 1993 … and we all know what happened in 1994, don’t we?
Carney gave a speech on deflation:
It is worth noting that our lower overnight rates have largely been passed through at shorter maturities. Since the easing cycle began in December 2007, we have lowered the overnight rate by 350 basis points. The prime rate has fallen by 325 basis points, Bankers Acceptance rates (key short-term financing instruments for corporations) have fallen by about 380 basis points, and variable rate mortgages by about 185 basis points.
At longer maturities, the declines have been more modest. In part, this reflects the typical pattern, as long-term rates tend to be less volatile than short-term rates over the business cycle. For example, five-year fixed-rate mortgages have fallen by just over one and a half percentage points. Corporate bond yields have been virtually flat, as a substantial increase in the risk premium charged by investors has offset the decline in government bond yields. While the widening of spreads at longer maturities is larger than usual, this partly reflects the fact that these spreads were unusually narrow to begin with.
The Bank has taken into consideration the higher risk premiums demanded in today’s markets in setting its overnight rate. As well, it has taken into account the effect on future Canadian inflation of the lower level of foreign demand that has resulted, in part, from financial difficulties in other countries. The policy rate is lower than it otherwise would be in the absence of these difficulties.
…
To conclude, let me say that the inflation target that has served Canada so well when inflation was above the 1 to 3 per cent control range, will also serve it well when inflation falls temporarily below that range. So let me leave no doubt, no uncertainty about the Bank’s commitment. Our focus is clear, our actions consistent, and our objective explicit: 2 per cent CPI inflation.
And the Bank published another working paper, What Accounts for the U.S.-Canada Education-Premium Difference?:
This paper analyzes the differences in wage ratios of university graduates to less than university graduates, the education premium, in Canada and the United States from 1980 to 2000. Both countries experienced a similar increase in the fraction of university graduates and a similar increase in skill biased technological change based on capital-embodied technological progress, but only the United States had a large increase in the education premium. Using a calibrated Krussel et al. (2000) model, the paper finds that the cross country difference is in equal proportion due to the effective stock of capital equipment, the growth in skilled labor supply relative to unskilled labor and the relative abundance of skilled population in 1980. Growth in the working age population is unimportant for the difference.
In other words, we don’t really need a lot more graduates; what we need is money to buy equipment for existing graduates to put their skills to use. I confidently predict that this nuance will be ignored in all future political debates.
Spend-Every-Penny introduced his pre-election budget today. There are some good things … some bad things. In summary:
After taking into account the cost of the measures proposed in Budget 2009 to support the economy, the Government is projecting deficits of $1.1 billion in 2008–09, $33.7 billion in 2009–10, $29.8 billion in 2010–11, $13.0 billion in 2011–12, $7.3 billion in 2012–13 and a surplus of $0.7 billion in 2013–14.
It will take many years of $0.7-billion surpluses to pay for the planned spending, but it didn’t stop him from cutting taxes, just like Mr. Bush:
Taxpayers will begin to benefit from the proposed personal income tax reductions as soon as the Canada Revenue Agency revises its tax withholding tables, in spring 2009.
It is estimated that, together, these measures will cost $470 million in 2008–09, $1,885 million in 2009–10 and $1,950 million in 2010–11.
There is funding for new infrastructure, but no indication that recipients must have a credible plan to pay for maintenance. The word “dividend” does not appear in the document, so I will assume that implications for preferred share investment are minor.
I will reserve special scorn for the “Extraordinary Financing Framework”, partially because it is doomed to be ignored by most. Essentially, the government will provide up to $200-billion worth of intermediation, taking assets onto its books financed by sale of Canada bonds. There’s nothing wrong with that, in principle. However:
To help manage the EFF, the Government will form the Advisory Committee on Financing. This committee will include users and suppliers of financing, along with other experts. The committee will advise on financing conditions and the design, scope and scale of initiatives under the EFF.
There’s already a competent body to administer the programme: it’s called the Bank of Canada. What-Debt’s politicization of monetary policy is absurd – but, after all, he’s the guy who went out of his way to politicize nuclear power regulation.
PerpetualDiscounts managed to eke out a marginal gain today, while FixedResets continued their recent decline.
| 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 | 6.93 % | 7.75 % | 43,115 | 13.35 | 2 | -0.4618 % | 844.5 |
| FixedFloater | 7.46 % | 7.02 % | 161,551 | 13.73 | 8 | -1.6067 % | 1,372.9 |
| Floater | 5.37 % | 4.51 % | 34,065 | 16.39 | 4 | 3.7676 % | 979.0 |
| OpRet | 5.31 % | 4.82 % | 151,949 | 4.04 | 15 | -0.0446 % | 2,022.5 |
| SplitShare | 6.28 % | 10.44 % | 77,090 | 4.11 | 15 | 0.6697 % | 1,772.0 |
| Interest-Bearing | 7.02 % | 8.25 % | 36,212 | 0.89 | 2 | 1.6910 % | 2,014.0 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0337 % | 1,552.9 |
| Perpetual-Discount | 6.90 % | 6.95 % | 231,245 | 12.61 | 71 | 0.0337 % | 1,430.2 |
| FixedReset | 6.08 % | 5.40 % | 774,565 | 14.34 | 22 | -0.4492 % | 1,782.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BCE.PR.G | FixedFloater | -12.44 % | Not as bad as it looks! Closed at 14.01-16.20 (!) 13×13 after trading 7,700 shares in a range of 16.00-20. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 25.00 Evaluated at bid price : 14.01 Bid-YTW : 7.83 % |
| IAG.PR.C | FixedReset | -3.32 % | Still struggling with the implications of the abortive Inventory Blow-out Sale. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 22.06 Evaluated at bid price : 22.10 Bid-YTW : 6.36 % |
| LBS.PR.A | SplitShare | -2.76 % | Asset coverage of 1.2+:1 as of January 22 according to Brompton Group. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2013-11-29 Maturity Price : 10.00 Evaluated at bid price : 8.11 Bid-YTW : 10.44 % |
| PWF.PR.F | Perpetual-Discount | -1.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 18.65 Evaluated at bid price : 18.65 Bid-YTW : 7.10 % |
| TD.PR.Q | Perpetual-Discount | -1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 20.95 Evaluated at bid price : 20.95 Bid-YTW : 6.73 % |
| BMO.PR.M | FixedReset | -1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 21.95 Evaluated at bid price : 22.00 Bid-YTW : 4.44 % |
| W.PR.H | Perpetual-Discount | -1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 7.42 % |
| SLF.PR.A | Perpetual-Discount | -1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 16.56 Evaluated at bid price : 16.56 Bid-YTW : 7.28 % |
| BNA.PR.B | SplitShare | -1.16 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2016-03-25 Maturity Price : 25.00 Evaluated at bid price : 21.26 Bid-YTW : 7.91 % |
| PWF.PR.G | Perpetual-Discount | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 21.06 Evaluated at bid price : 21.06 Bid-YTW : 7.06 % |
| PWF.PR.H | Perpetual-Discount | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 20.50 Evaluated at bid price : 20.50 Bid-YTW : 7.07 % |
| CIU.PR.A | Perpetual-Discount | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 16.81 Evaluated at bid price : 16.81 Bid-YTW : 6.99 % |
| RY.PR.F | Perpetual-Discount | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 17.24 Evaluated at bid price : 17.24 Bid-YTW : 6.47 % |
| TCA.PR.Y | Perpetual-Discount | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 43.94 Evaluated at bid price : 45.00 Bid-YTW : 6.24 % |
| BNA.PR.A | SplitShare | 1.13 % | Asset coverage of 1.8+:1 as of December 31 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2010-09-30 Maturity Price : 25.00 Evaluated at bid price : 23.36 Bid-YTW : 11.34 % |
| SBN.PR.A | SplitShare | 1.14 % | Asset coverage of 1.6-:1 as of January 22 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.91 Bid-YTW : 7.67 % |
| SBC.PR.A | SplitShare | 1.15 % | Asset coverage of 1.3-:1 as of January 22 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-11-30 Maturity Price : 10.00 Evaluated at bid price : 7.91 Bid-YTW : 12.40 % |
| BNS.PR.K | Perpetual-Discount | 1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 19.08 Evaluated at bid price : 19.08 Bid-YTW : 6.34 % |
| GWO.PR.F | Perpetual-Discount | 1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 21.70 Evaluated at bid price : 22.00 Bid-YTW : 6.79 % |
| BAM.PR.K | Floater | 1.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 7.60 Evaluated at bid price : 7.60 Bid-YTW : 7.01 % |
| BMO.PR.K | Perpetual-Discount | 1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 19.60 Evaluated at bid price : 19.60 Bid-YTW : 6.84 % |
| POW.PR.A | Perpetual-Discount | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 20.38 Evaluated at bid price : 20.38 Bid-YTW : 6.95 % |
| PPL.PR.A | SplitShare | 1.64 % | Asset coverage of 1.4+:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2012-12-01 Maturity Price : 10.00 Evaluated at bid price : 8.68 Bid-YTW : 9.26 % |
| ALB.PR.A | SplitShare | 1.66 % | Asset coverage of 1.1-:1 as of January 22 according to Scotia. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2011-02-28 Maturity Price : 25.00 Evaluated at bid price : 20.23 Bid-YTW : 15.80 % |
| NA.PR.K | Perpetual-Discount | 1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 20.72 Evaluated at bid price : 20.72 Bid-YTW : 7.09 % |
| BAM.PR.N | Perpetual-Discount | 1.75 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 12.22 Evaluated at bid price : 12.22 Bid-YTW : 9.91 % |
| FTN.PR.A | SplitShare | 2.08 % | Asset coverage of 1.3+:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2015-12-01 Maturity Price : 10.00 Evaluated at bid price : 7.86 Bid-YTW : 9.77 % |
| ELF.PR.F | Perpetual-Discount | 2.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 15.60 Evaluated at bid price : 15.60 Bid-YTW : 8.61 % |
| TRI.PR.B | Floater | 3.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 11.75 Evaluated at bid price : 11.75 Bid-YTW : 4.51 % |
| FIG.PR.A | Interest-Bearing | 3.96 % | Asset coverage of 1.1-:1 as of January 19, based on Capital Units NAV of 1.42 and 0.53 Capital Units per preferred. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-31 Maturity Price : 10.00 Evaluated at bid price : 7.61 Bid-YTW : 12.25 % |
| DFN.PR.A | SplitShare | 4.05 % | Asset coverage of 1.7-:1 as of January 15 according to the company. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-12-01 Maturity Price : 10.00 Evaluated at bid price : 9.00 Bid-YTW : 7.53 % |
| PWF.PR.A | Floater | 8.60 % | The bid came back after taking yesterday off. Closed at 12.00-99, 7×2, after trading 800 shares in one trade at 12.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 12.00 Evaluated at bid price : 12.00 Bid-YTW : 4.37 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TRI.PR.B | Floater | 171,000 | Nesbitt crossed 169,500 at 11.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 11.75 Evaluated at bid price : 11.75 Bid-YTW : 4.51 % |
| BCE.PR.A | FixedFloater | 153,500 | Nesbitt crossed 100,000 at 17.00, then another 50,000 at 16.99. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 25.00 Evaluated at bid price : 17.06 Bid-YTW : 6.65 % |
| BCE.PR.F | FixedFloater | 153,000 | Nesbitt crossed 100,000 at 16.00, then another 50,000 at 15.99. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 25.00 Evaluated at bid price : 15.62 Bid-YTW : 6.36 % |
| BAM.PR.K | Floater | 147,615 | Nesbitt crossed 140,000 at 7.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 7.60 Evaluated at bid price : 7.60 Bid-YTW : 7.01 % |
| TD.PR.E | FixedReset | 131,115 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 24.94 Evaluated at bid price : 24.99 Bid-YTW : 6.27 % |
| RY.PR.P | FixedReset | 116,833 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 24.96 Evaluated at bid price : 25.01 Bid-YTW : 6.14 % |
| BNS.PR.T | FixedReset | 101,791 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-01-27 Maturity Price : 24.96 Evaluated at bid price : 25.01 Bid-YTW : 6.10 % |
| There were 34 other index-included issues trading in excess of 10,000 shares. | |||