PrefBlog

Nothing happened today.

It was another good day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets up 10bp and DeemedRetractibles winning 17bp. A lengthy Performance Highlights table is comprised entirely of winners. Volume was average.

The trouble with financial crises is that they’re boring. Originally, crises with global implications all came from the UK. Then they all came from the US. Nobody else had the size of capital and global connections to transmit mistakes to other countries. However, there is some hope that the next crisis will come from China:

China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, adding to signs of possible fraud in commodities financing deals.

Twenty-five bullion processors made a combined profit of more than 900 million yuan by using the loans to take advantage of the difference between onshore and offshore interest rates, and the appreciation of Chinese currency, according a report on the National Audit Office’s website. China is the biggest producer and consumer of gold.

Public security authorities are also probing alleged fraud at Qingdao Port where the same stockpiles of copper and aluminum may have been pledged multiple times as collateral for loans. As much as 1,000 tons of gold may be tied up in financing deals in China, in which commodities including metals and agricultural products are used to get credit amid restrictions on lending, according to World Gold Council estimates through 2013.

A recent lawsuit illustrates the total intellectual bankruptcy of the money management industry:

Schneiderman’s case is the boldest initiative and may open fissures in the decade-old defense of U.S. equity markets that has been championed by brokerages and traders. In their version of the story, dark pools serve as havens for institutional investors tired of seeing orders to buy and sell stocks front-run on public exchanges. According to Schneiderman, institutions may not have been much safer on Barclays’ platform.

“There’s going to be a significant amount more scrutiny on routing practices at dark pools, and I think you’re going to see more oversight,” said Larry Tabb, chief executive officer of Tabb Group LLC.
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Barclays was so bent on lifting its private trading venue to the upper ranks of Wall Street dark pools that it falsified marketing materials to hide how much high-frequency traders were buying and selling, the complaint said.

Seeking to reassure customers that their stock orders wouldn’t be picked off by predatory counterparts, Barclays touted a system designed to keep that from happening called liquidity profiling, according to the complaint. Marketing material including charts purported to show that very little of the trading within the dark pool was “aggressive” and that operating there was safe for institutions.

“The representations were false,” according to the complaint. The chart and accompanying statements obscured the trading taking place in Barclays’ dark pool. Senior Barclays personnel de-emphasized the presence of high-frequency traders and left out reference to one of the largest and most toxic participants, it said.

Um … who cares? If your order is filled, it’s filled. If it ain’t, it ain’t. Only morons care about the identity of their counterparty. “Sorry, Mr. Smith, your portfolio underperformed the benchmark by 500bp, but on the positive side, we traded only with retired Sunday School teachers.”

You don’t choose a broker on the basis of its marketing materials, for God’s sake. You make a choice based on execution. But maybe I’m just old fashioned.

Here’s a good reason to pay cash – always:

You may soon get a call from your doctor if you’ve let your gym membership lapse, made a habit of picking up candy bars at the check-out counter or begin shopping at plus-sized stores.

That’s because some hospitals are starting to use detailed consumer data to create profiles on current and potential patients to identify those most likely to get sick, so the hospitals can intervene before they do.

Information compiled by data brokers from public records and credit card transactions can reveal where a person shops, the food they buy, and whether they smoke. The largest hospital chain in the Carolinas is plugging data for 2 million people into algorithms designed to identify high-risk patients, while Pennsylvania’s biggest system uses household and demographic data. Patients and their advocates, meanwhile, say they’re concerned that big data’s expansion into medical care will hurt the doctor-patient relationship and threaten privacy.

I told you guys this was coming! I told you! But does anybody ever listen to me? No.

Could it be that Putin’s policies are creating Soviet Union Redux:

State enterprises now account for more than half of the economy, up from 30 percent when Putin came to power at the end of 1999, according to BNP Paribas SA. (BNP) As the bureaucracy swelled during that period, Russia emerged as the world’s most corrupt major economy. It ranks alongside Pakistan and Nicaragua at 127th, out of 176 nations, by Transparency International, down from 82nd in 2000.

With Russia’s $2 trillion economy stagnating, fixed investment falling and the U.S. and the EU warning of a tougher round of sanctions over the pro-Russian revolt in eastern Ukraine, Putin’s solution is a list of proposals revealed in May that involve a greater role for the state. He ordered the central bank to set up long-term financing for manufacturers and called for rules to force “systemically important” companies to move their registrations inside Russia.

On the other hand, there are sufficient interconnections to keep things interesting:

Western companies are already wrestling with the thorny problem of complying with existing curbs on dealings with a limited number of wealthy Putin allies and their businesses, many of which have murky ownership structures and bases in tax havens. Now, the U.S. Chamber of Commerce and the National Association of Manufacturers have taken out full-page ads in The New York Times, Wall Street Journal and Washington Post to decry the prospect of unilateral sanctions that would only hurt U.S. companies in foreign markets, while benefiting their competitors.
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Indeed, 83 per cent of economists polled by Bloomberg now think Washington will steer clear of stronger sanctions, compared with 66 per cent a month earlier. And 96 per cent expect no further action from the European Union.

“There is no sense in seeking sanctions which would harm the EU as much as Russia,” Czech State Secretary for European Affairs Tomas Prouza declared.

Bullard is sounding rather like a hawk:

Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens.

Asked about his forecast for the timing of the first interest-rate increase since 2006, he said: “I’ve left mine at the end of the first quarter of next year.”

“The Fed (FDTR) is closer to its goal than many people appreciate,” Bullard said today in an interview with Fox Business Network. “We’re really pretty close to normal.”
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Bullard predicted the jobless rate may fall below 6 percent and inflation rise near 2 percent by the end of this year.

If his forecasts bear out, “you’re basically going to be right at target on both dimensions possibly later this year,” Bullard said. “That’s shocking, and I don’t think markets, and I’m not sure policy makers, have really digested that that’s where we are.”

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts winning 12bp, FixedResets up 8bp and DeemedRetractibles gaining 2bp. Volatility was average. Volume was above average.

The first quarter in the US was worse than we thought:

The U.S. economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled.

Gross domestic product fell at a 2.9 percent annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1 percent drop, the Commerce Department said today in Washington. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. The revision reflected a slowdown in health care spending.
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The revision reflected a drop in spending tied to health care services. The Bureau of Economic Analysis had estimated that major provisions of President Obama’s signature health care law would boost outlays. A quarterly services survey released this month showed the assumptions were too optimistic. Outlays for health spending actually slowed in the first quarter, subtracting 0.16 percentage point from GDP. The Commerce Department previously estimated those outlays added 1 percentage point to GDP.

Naturally, the US government wants Treasury debt to be unaffected by corporate-like inventory constraints:

• •The Volcker Rule bars banks from “proprietary trading” in credit.
• •But it allows proprietary trading in rates products such as Treasury and agency bonds.
• •So Citi set up a prop desk to trade agency bonds, managing over $1 billion of Citi’s money.
• •It’s run by a woman named Anna Raytcheva, who lost billions of dollars trading agency bonds during the financial crisis.

Obviously, some people are scandalized because people are scandalized by everything related to the Volcker Rule. And because the Volcker Rule is light on coherence. For instance, why does the Volcker Rule allow prop trading in rates? Well:

Lawmakers sought the flexibility to finance government spending and didn’t see the trading as particularly risky, said Barney Frank, who as a Massachusetts congressman helped draft the 2010 Dodd-Frank Act that mandated the Volcker Rule.

“To the extent the instruments being traded are completely secure, some of the rationale for the rule disappears,” Frank, a Democrat, said in a phone interview.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 9bp, FixedResets winning 12bp and DeemedRetractibles gaining 6bp. Volatility was well above average and dominated by winning FixedResets. Volume was above average, with the highlights dominated by RY issues for some reason; the top two are both extremely likely to be called in August, for what that’s worth.

Looks like we’ve entered the Even Greater Moderation:

Expectations for price swings in the dollar-yen currency pair fell to a record as signs of an uneven U.S. economic recovery fueled bets the Federal Reserve will keep borrowing costs at unprecedented lows.
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Three-month implied volatility in dollar-yen was at 5.795 percent at 6:46 a.m. in London after declining to 5.715 percent, the lowest level since Bloomberg began compiling the data in December 1995.

The SEC has demanded a test of small-stock tick-sizes to see whether a larger tick-size improves liquidity of these stocks:

The experiment was sought by exchange operators including Nasdaq OMX Group Inc. (NDAQ) and Intercontinental Exchange Inc. (ICE), which have seen their share of trading fall as private platforms such as dark pools have taken 37 percent of total share volume, according to data compiled by Bloomberg. The test will prevent trading outside the exchanges unless a competing venue or broker offers a significantly better price or size lot to investors, according to an order posted on the SEC’s website.

Other features of the program, which will last one year, will strictly test the impact of rolling back penny pricing in stocks of smaller-cap companies. Under that experiment, the shares of companies with market values under $5 billion will only be quoted in five-cent increments.

Supporters of the test say it will encourage market makers that facilitate trading to buy and sell more shares and create conditions that would persuade more companies to go public. The SEC has been considering the experiment for more than a year as some lawmakers in Congress have pushed legislation to force a change.

Regrettably, other tests have not been announced – repealing Sarbanes-Oxley for these companies, for instance, or reducing capital requirements for market-makers who are banks, or actually increasing maker-taker exchange pricing for these issues.

Manulife Financial, proud issuer of MFC.PR.A, MFC.PR.B, MFC.PR.C, MFC.PR.E, MFC.PR.F, MFC.PR.G, MFC.PR.H, MFC.PR.I, MFC.PR.J, MFC.PR.K and MFC.PR.L, has been confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the ratings on Manulife Financial Corporation (Manulife or the Company) and its affiliates, including The Manufacturers Life Insurance Company, its primary operating company. The rating on the Senior Unsecured Notes issued by Manulife Finance Holdings Limited has been discontinued due to repayment. All trends are Stable.

The ratings reflect the Company’s strong position in a number of geographic and product markets, including Canada and the fast-growing Asian market through the Manulife brand, and in the United States through the John Hancock brand. The Company is also well diversified by customer, distribution channel and product line. Risk management policies and procedures are rigourous, giving rise to a high-quality asset portfolio, though legacy issues associated with the Company’s policy liabilities continue to be a potential source of adverse reserve development given the macroeconomic and regulatory environments. While DBRS regards Manulife’s reduction of market-related risks over the past few years as having been critical to maintaining the Company’s high rating, it also notes that with unexceptional financial risk metrics, under DBRS’s methodology it is the Company’s franchise strength and business that provide most of the rating strength.

It was a mixed day for the Canadian preferred share market, with PerpatualDiscounts down 19bp, FixedResets up 9bp and DeemedRetractibles gaining 1bp. Volatility was a little more than usual, heavily skewed towards winning FixedResets. Volume was very low.

Matt Levine of Bloomberg ran a thoughtful – if disjointed – piece on bond market structure philosophy titled SEC Wants to Give Everyone a Chance to Be a Bond Trader:

There are more fundamental structural worries about declining liquidity in the bond markets: What will happen if investors want to sell and there are no dealers to buy?7 How risky is it to have so many bonds held by ETFs? Should big bond managers such as BlackRock and Pimco be regulated as too-big-to-fail risks to financial stability?

These are tough questions, but one plausible way of addressing them might be to open up trading of bonds somewhat. The current model of investors calling dealers for quotes makes sense if dealers provide a lot of liquidity; but if the dealers are just working as well-paid, information-hoarding middlemen between investors, then maybe there are more efficient ways for investors to interact. And in fact there have been efforts to develop electronic, inter-institution trading platforms that would make the bond markets a bit more like the stock markets, by allowing investors and dealers to post quotes in the same place, and trade directly with each other.
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But what’s gotten attention was [chairman of the Securities and Exchange Commission Mary Jo] White’s call for more transparency in bond markets. In particular, White wants more technology-supported pre-trade transparency: That is, she wants more publicly available, electronically distributed, quotes for bonds, so you can know before you trade what prices are being offered in the market for the bond you want to buy. This would be a move toward making the bond market more like the equity market, with publicly posted quotes and potentially electronic (and high-frequency! maybe) trading.
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The SEC’s job is to regulate the financial markets. One way to approach that job would be to put a priority on optimizing market efficiency and stability. Another way to approach it would be to put a priority on protecting retail investors and preventing two-bit frauds. Obviously both are good but one is more important. If you think about bond market structure in terms of protecting the little guy, you will make one set of choices; if you think about it in terms of providing a stable liquid platform for massive flows of capital, you will make a second, probably somewhat different, set of choices.14 The second set of choices is probably right.

Quite right, and this is something I have reiterated in PrefBlog to the point of boredom. Increased price transparency will result in shallower, more brittle bond markets; there’s tons of evidence supporting this thesis. But the SEC is leaning in the other direction:

The main U.S. securities regulator is ramping up calls to democratize a $40 trillion bond market, proposing that smaller investors receive more price information to avoid getting fleeced when buying less-traded debt.

The Securities and Exchange Commission wants retail investors to have the same access to privately negotiated bond prices as big institutions, allowing them to make better decisions about how much to pay for the securities, Chair Mary Jo White said yesterday. Releasing such information on corporate and municipal transactions would promote competition and better execution, she said.
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Finra is expanding its bond-price reporting into the $1.5 trillion market for private company debt, which is only sold to institutional buyers.

Another effect will be the continued acceleration of the current trend towards private placements. So retail will be able to get lots of pricing information on every publicly traded bond there is, but there won’t be too many. So we’ll see even more retail portfolios highly concentrated with big household names – the GMACs and GMs of this world, as worked out so well during the Credit Crunch. Another possibility, that I would like to see more of, would be institutional accounts trading directly with each other, bypassing the dealers completely. Naturally, you’ll get a few institutional houses running hedge-fund-like actively managed bond portfolios dominating the market – I see nothing wrong with that.

There are few inflation worries in the Treasury market:

In the past 13 months, the gap between yields of two- and five-year Treasuries has doubled to 1.22 percentage points, according to data compiled by Bloomberg. At the same time, the difference between those of five- and 30-year securities has narrowed to the least since 2009 as the long bond rallied.

Because yields on longer-dated debt usually rise more than shorter-term notes when investors see faster inflation spurring rate increases, the moves suggest a more sanguine outlook, according to Priya Misra, the New York-based head of U.S. rates strategy at Bank of America Corp., one of 22 primary dealers obligated to bid at U.S. debt auctions.

Taken together, the relationship now implies that while investors anticipate the Fed will eventually lift its benchmark rate after holding it close to zero for six years, they don’t foresee the central bank’s stimulus measures creating the kind of inflationary pressures that would force its hand, she said.

“The bond vigilantes have all been quieted,” Misra said by telephone on June 19. “The idea that just the act of printing money gets you inflation has been debunked.”

That view also indicates there’s little concern over a repeat of 1994, one of the worst years for bonds when Treasuries lost more than 4 percent in the first six months as the Fed began to double its benchmark rate to 6 percent, according to the Bank of America Merrill Lynch U.S. Treasury Index. In part because of the Fed’s success as an inflation fighter, Treasuries generated returns in 2004, 2005 and 2006 even though the bank boosted rates to 5.25 percent from 1 percent.

This year, Treasuries have advanced 2.58 percent in the biggest year-to-date gain since 2011, even as the Fed began to pare back its $85 billion-a-month bond buying program.

I’ll believe it’s not 1994 all over again when the Fed actually hikes its policy rate! But we’ll see.

There is some concern about the bond market’s vulnerability to mass ETF redemptions – particularly in odd sectors:

It’s never been easier for individuals to enter some of the most esoteric debt markets. Wall Street’s biggest firms are worried that it’ll be just as simple for them to leave.

Investors have piled more than $900 billion into taxable bond funds since the 2008 financial crisis, buying stock-like shares of mutual and exchange-traded funds to gain access to infrequently-traded markets. This flood of cash has helped cause prices to surge and yields to plunge.

Now, as the Federal Reserve discusses ending its easy-money policies, concern is mounting that the withdrawal of stimulus will lead to an exodus that’ll cause credit markets to freeze up. While new regulations have forced banks to reduce their balance-sheet risk, analysts at JPMorgan Chase & Co. (JPM) are focusing on the problems that individual investors could cause by yanking money from funds.
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That concern is also revealed in BlackRock Inc.’s pitch in a paper published last month that regulators should consider redemption restrictions for some bond mutual funds, including extra fees for large redeemers.

A year ago, bond funds suffered record withdrawals amid hysteria about a sudden increase in benchmark yields. A 0.8 percentage point rise in the 10-year Treasury yield in May and June last year spurred a sell-off that caused $248 billion of market value losses on the Bank of America Merrill Lynch U.S. Corporate and High Yield Index.

Of course, yields on 10-year Treasuries (USGG10YR) have since fallen to 2.6 percent from 3 percent at the end of December and company bonds have resumed their rally. Analysts are worrying about what happens when the gift of easy money goes away for good.

US municipalities are a little gun-shy when it comes to infrastructure:

Across the U.S., localities are refraining from raising new funds in the $3.7 trillion municipal-bond market after the worst financial crisis since the Great Depression left them with unprecedented deficits. Rather than take advantage of Federal Reserve (FDTR) policy that’s held benchmark interest rates at historic lows since December 2008, they’re repaying obligations by the most on record.
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Issuance this year has tumbled to $123 billion nationwide through June 13, down 20 percent from the 2013 pace, according to data compiled by Bloomberg. It’s also 30 percent below levels seen in 2010, the final year of the federally subsidized Build America Bonds program, which was designed to spur infrastructure investment.

Since 2010, states and localities have lowered their bond load by $111 billion, the most since the Fed began keeping records in 1945. They’ve paid down the liabilities even as yields on 20-year general obligations have averaged 4.25 percent in the five years since the recession, the lowest since 1969, according to Bond Buyer data.
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America’s governments would need to spend about $3.6 trillion through 2020 to put everything from roads and water to sewers and electricity networks into adequate shape, according to the American Society of Civil Engineers, based in Reston, Virginia. That’s about $1.6 trillion more than governments are expected to dispense.

Meanwhile, the Minister of Asset Allocation has market-timing advice:

Canada’s Finance Minister Joe Oliver warned on Monday that investors could be mispricing risk as they hunt for better investment returns, and said policymakers should keep the issue under close review.

Oliver is in London to promote trade and investment, and told Reuters in an interview that the global economy remained vulnerable to financial shocks.

“We’ve said again and again … that international financial markets are still fragile. Part of that is macroeconomic and monetary issues, but there is a geopolitical issue,” he said at the London residence of Canada’s envoy to London.

James Langton of Investment Executive highlights some interesting research in his piece Video better than text in boosting financial literacy:

New research finds that online video may be a particularly effective way of bolstering financial literacy.

According to a new paper (Visual Tools and Narratives: New Ways to Improve Financial Literacy) published by the U.S. National Bureau of Economic Research (NBER), video appears to be better at improving basic financial literacy than text-based approaches. The conclusion is based on an experiment financed by a grant from the U.S. Social Security Administration (SSA), and funded as part of the Financial Literacy Research Consortium.

Researchers developed four different online approaches to explaining the concept of risk diversification — a brochure, an interactive visual tool, a written narrative, and a video — and then tested them with a sample of 900 people. Overall, they found that video performed the best at both improving financial literacy scores and increasing people’s levels of confidence in their financial knowledge.

The actual paper is titled Visual Tools and Narratives: New Ways to Improve Financial Literacy:

We developed and experimentally evaluated four novel educational programs delivered online: an informational brochure, a visual interactive tool, a written narrative, and a video narrative. The programs were designed to inform people about risk diversification, an essential concept for financial decision- making. The effectiveness of these programs was evaluated using the RAND American Life Panel. Participants were exposed to one of the programs, and then asked to answer questions measuring financial literacy and self-efficacy. All of the programs were found to be effective at increasing self-efficacy, and several improved financial literacy, providing new evidence for the value of programs designed to help individuals make financial decisions. The video was more effective at improving financial literacy scores than the written narrative, highlighting the power of online media in financial education.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Well, I’m not paying for it.

Anyway, I had been hoping to read it to check what their actual conclusion regarding videos is. I suspect – although without reading the paper this is mere speculation, of course – that what they have measured is people’s ease of learning via different media, rather than anything specific to financial literacy. I hate videos and lectures. If I’m going to learn anything, I’ve got to read it. It’s entirely possible that all that has been discovered is that I am in the minority, which I knew already.

Nice to see such work being done, though. Here in Canada, potential funding for such research is instead splashed out to cronies with zero public benefit.

It was a modestly good day for the Canadian preferred share market, with PerpetualDiscounts gaining 7bp, FixedResets winning 9bp and DeemedRetractibles up 8bp. Volatility was average, skewed to winners. Volume was below average.