PrefBlog

TXPR closed at 574.32, up 1.04% on the day. Volume today was 4.81-million, by far the highest of the past 21 trading days.

CPD closed at 11.46, up 1.24% on the day. Volume was 83,140, third-highest of the past 21 trading days.

ZPR closed at 9.82, up 1.76% on the day. Volume was 303,330, fifth-highest of the past 21 trading days.

Five-year Canada yields were up to 3.40%.

Readers of PrefLetter will remember that in the December 2023 edition, the appendix discussing ZPR contained a discussion of “edge effects” as they applied to quantitative investment management. This was brought to mind by recent reports of a huge edge effect (bolding added to highlight cause of edge effect):

The $72.34 billion Technology Select Sector SPDR Fund (XLK.P), managed by State Street Global Advisors, will buy some $10 billion shares of Nvidia while slashing its exposure to Apple, Matthew Bartolini, head of SPDR Americas research at State Street confirmed.

The changes are being made so the fund can bring its holdings inline with pending changes to the S&P Dow Jones Technology Select Sector index, which it tracks. The reshuffle would leave Microsoft (MSFT.O) and Nvidia sharing the top spot in both the fund and the index, with Apple becoming the runner-up, according to Bartolini.

On Tuesday, chipmaker Nvidia became the world’s most valuable company as its market value hit $3.33 trillion, surpassing that of Microsoft (MSFT.O).

Until now, the technology ETF had 22.5% of its assets invested in Microsoft, 21% in Apple, and only 6% in Nvidia, according to Jay Woods, chief global strategist at Freedom Capital Markets. That caused the fund to underperform its benchmark as Nvidia’s shares rose 173% this year.

By the end of trading this Friday, when the index rebalancing takes place based on last Friday’s market cap values, Microsoft will retain its dominance within the SPDR ETF’s portfolio, with a 21% weighting. Nvidia will have a 21% weighting as well, while Apple will plunge to 4.5%.
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Index and portfolio construction rules mean that only two of the three technology giants can be held at a full weight — 21% — in the ETF. Any other large positions can’t exceed 4.5%. The rule, set in place in 1998 when the index was launched, caps total exposure to all stocks with a weighting of more than 5% in the broader Standard & Poor’s 500 index at 50% of the portfolio.

This is just dumb and it’s going to cost investors a big pile of money as prices, naturally enough, are already reflecting the monster orders that are currently being written. But take heart, investment management fans! This completely unnecessary cost won’t be reflected in the fund’s performance against its index, because guess what? Thanks to the miracle of modern sleaziness, index providers routinely announce changes well in advance of their taking effect, so the cost is actually borne by the index vs. a ‘meta-index’ that has rational construction rules and does not permit (some might say “encourage”) speculators and facilitators to get in front of investment vehicles. And, of course, such ‘meta-indices’ aren’t calculated by anybody of note so the cost is never discussed.

Also, it’s worth pointing out that if these three behemoths start jostling for position in the market-capitalization department due simply to share prices, there’s the potential for more such idiotic switches. This will be bad not only for technical reasons due to market impact of the ensuing trading, but because the practitioners will be trapped in a cycle of buy-high, sell-low, which is not usually an investment goal.

In cheerier news, the UK is being urged to get with the programme:

Britain should set a date for halving the time it takes to settle a stock trade – and stick with it, U.S. Securities and Exchange Commission Chair Gary Gensler said on Thursday.

Britain has said that UK stock markets should halve the time it takes to settle a trade on the London Stock Exchange and other platforms by the end of 2027, at the latest, to match Wall Street’s move last month to complete a stock trade within one business day (T+1).

Canada and Mexico also shifted to T+1 last month to cut risks in markets and save on trading costs.

The European Union has said that moving from T+2 to T+1 is a matter of when, rather than if, and some industry officials want Britain and the EU to synchronize the shift given the markets are interlinked.

Gensler told an event in London held by UK Finance, a banking industry body, that the U.S. move cut the average amount of margin required by clearing houses by 25% to 30%, equivalent to about $3.8 billion, in first two days.
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The move to T+1 is seen as a precursor to same day settlement for stocks, already in place in China for A shares.

TXPR closed at 568.42, down 0.71% on the day. Volume today was 2.29-million, above the median of the past 21 trading days.

CPD closed at 11.32, down 0.62% on the day. Volume was 116,970, second-highest of the past 21 trading days.

ZPR closed at 9.65, down 0.82% on the day. Volume was 382,670, third-highest of the past 21 trading days.

Five-year Canada yields were up to 3.34%.

PerpetualDiscounts now yield 6.78%, equivalent to 8.81% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.07% on 2024-6-7 and since then the closing price of ZLC has changed from 15.02 to 15.30, an increase of 186bp in price, implying a decrease of yields of 15bp (BMO reports a duration of 12.31, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.92%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has exploded to 390bp from the 355bp reported June 12.

TXPR closed at 570.98, down 1.50% on the day. Volume today was 2.06-million, above the median of the past 21 trading days.

CPD closed at 11.43, down 0.87% on the day. Volume was 68,410, above the median of the past 21 trading days.

ZPR closed at 9.72, down 1.12% on the day. Volume was 203,040, fourth-highest of the past 21 trading days.

Five-year Canada yields were up to 3.37%.

The day was enlivened by the announcement that IAF.PR.B, a heavily discounted Straight Perpetual, would quite possibly get redeemed. It was enlivened even more by the fact that dissemination of this news was not quite as even-handed as might be considered ideal. Still, it’s entertaining to see a not-insignificant issuer make such a declaration that the preferred share market is cheap, cheap, cheap on the same day that prices fell through the floor.

There are worries about liquidity … in the Treasuries market:

U.S. bond market participants are worried market liquidity will keep deteriorating as the U.S. Treasury continues to issue large amounts of debt to back deficit spending while dealers struggle to keep up with the ballooning size of the market.

Liquidity – or the ability to trade an asset without significantly moving its price – has worsened over the past few years. U.S. government bond prices have fluctuated sharply since the Federal Reserve started hiking interest rates to tame inflation and the issue was discussed during several panels at the Fixed Income Leaders Summit event in Boston on June 13-14.

Regulators and the Treasury itself have launched a slate of reforms to improve trading conditions and avoid disruptions in the world’s biggest bond market, the bedrock of the global financial system. Still, many are concerned that vulnerabilities that emerged in previous incidents, such as in March 2020 when liquidity rapidly deteriorated amid pandemic fears, could still reappear in case of spikes in volatility and as demand struggles to keep up with supply.
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New York Fed researchers said in a paper last year that yield volatility explains most of the variation in Treasury market liquidity. But they also noted “a significant loss in U.S. Treasury market functionality when intensive use of dealer balance sheets is needed to intermediate bond markets, as in March 2020.”

TXPR closed at 579.69, down 0.66% on the day. Volume today was 1.41-million, below the median of the past 21 trading days.

CPD closed at 11.53, down 0.35% on the day. Volume was 44,560, third-lowest of the past 21 trading days.

ZPR closed at 9.83, down 0.20% on the day. Volume was 144,200, near the median of the past 21 trading days.

Five-year Canada yields were down to 3.34%.

Well, that’s been a day of interest! My server-guy bricked my website server this morning and I’ve been without eMail and uncertain about when anything would come back; and all this on a PrefLetter weekend! Things appear to OK … for now.

TXPR closed at 583.56, down 0.72% on the day. Volume today was 2.26-million, fourth-highest of the past 21 trading days.

CPD closed at 11.57, down 0.94% on the day. Volume was 59,790, slightly above the median of the past 21 trading days.

ZPR closed at 9.85, down 1.20% on the day. Volume was 127,530, near the median by far of the past 21 trading days.

Five-year Canada yields were down to 3.38%.

So, US inflation was announced today:

Overall inflation cooled: The Consumer Price Index for May was up 3.3 percent from a year earlier, lower than the 3.4 percent economists had forecast and down from the April reading. And if you compared May prices just to the previous month, they did not climb at all.

“Core” inflation also slowed: A closely watched measure that strips out volatile food and fuel prices to give a sense of the underlying trend climbed 3.4 percent from a year earlier, down from 3.6 percent the previous month and slower than economists had forecast. That was the slowest pace of increase since April 2021.
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One piece of bad news in a mostly good-news report: The cost of shelter continued to rise fairly quickly, particularly for homeowners. That has been one of the most stubborn categories of inflation, which is unfortunate because it is also the single largest component of the Consumer Price Index.
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As investors dial down expectations for interest rates, the two-year Treasury yield has fallen 0.15 percentage points, on course for its biggest move lower this year.

But the FOMC was wary:

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.

Five year Canadas closed at 3.43%, down a fair bit.

PerpetualDiscounts now yield 6.58%, equivalent to 8.55% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.18% on 2024-5-31 and since then the closing price of ZLC has changed from 14.73 to 15.10, an increase of 251bp in price, implying a decrease of yields of 20bp (BMO reports a duration of 12.31, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.98%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 355bp reported June 5.