PrefBlog

Accrued Interest comments on the extraordinary new-issue concession for Citigroup 5-years:

The new issue was sold at a yield spread of 337.5bps over the 5-year Treasury. Prior to the announcement of the new issue, Citigroup’s 5.5% bond due in April 2013 was bid at +275.
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First, this is an extreme concession for a plain vanilla debt sale of a Aa3 rated bank. In 2006, the concession might have been 5 or 10bps at the most for a new issue. Alternatively, Baa-rated Deutsche Telecom recently brought a new 10-year issue, and the concession was around 15bps. This tells you that while there are buyers of Citigroup debt, they pretty much have to give it away.

Second, at a spread to Treasuries of +337.5, the deal has a very large negative basis to credit default swaps. This means that buyers of Citi bonds could also buy CDS and realize an arbitrage. Citi CDS closed Tuesday at 160bps and 5-year swap spreads closed at +98.5.

Meanwhile, in an incident that doesn’t have the credit rating agencies looking all that good, Bluepoint’s gone BK:

Wachovia Corp.’s BluePoint Re Ltd. unit, which insures structured finance and municipal transactions, filed for bankruptcy protection, citing defaults on securitized mortgages.

BluePoint filed a petition in Manhattan yesterday, saying it has more than $100 million in debt.
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Wachovia, the fourth-biggest U.S. bank, reported a $330 million charge in the second half of 2007 related to BluePoint’s losses on credit default swaps on collateralized debt obligations, or CDOs. BluePoint decided to liquidate after failing to negotiate a restructuring with banks including UBS AG that were counterparties to its swaps, according to court papers.
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BluePoint Re, the smallest reinsurer in the bond-insurance industry according to Moody’s Investors Service, had its credit rating cut 14 levels to Ca from A2 by the agency yesterday. Moody’s had lowered its rating two notches from Aa3 on July 11.

The only possible excuse I can find for such a swift downgrade is found in Moody’s press release:

In contrast to most other financial guarantors, BluePoint Re is much more exposed to liquidity risk in its CDS contracts due to payment and settlement terms, including market value termination rating triggers that take effect below the single-A rating level.

… but it doesn’t look good! S&P said:

it lowered its financial strength and financial enhancement ratings on BluePoint Re Ltd. to ‘R’ from ‘A’. An insurer rated ‘R’ is under regulatory supervision because of its financial condition.

According to a S&P request for comment, the lowest 3-year projected rating for an issue currently rated A is B:

Under the proposal, when assigning and monitoring ratings, we would consider whether we believe an issuer or security has a high likelihood of experiencing unusually large adverse changes in credit quality under conditions of moderate stress (for example, recessions of moderate severity, such as the U.S. recessions of 1960 and 1991 and the European recession of 1991 or appropriate sector-specific stress scenarios). In such cases, we would assign the issuer or security a lower rating than we would have otherwise.

I don’t like the proposal, by the way. I prefer a volatility modifier.

Yet another day of recovery for PerpetualDiscounts; their total return index has returned to above that of July 2, but still below the June 30 close. Average yield is 6.14%, equivalent to 8.60% interest (with the 1.4x equivalency factor), which is long corporates +250bp.

There were sixteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Asset- and mortgage-backed spreads are widening:

Fannie’s current-coupon 30-year fixed-rate bonds currently yield 6.04 percent, 212 basis points more than 10-year Treasuries, according to data compiled by Bloomberg. That’s 26 points from the 22-year high of 238 basis points reached March 6, a week before the Federal Reserve engineered a bailout of Bear Stearns & Co.
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The yield over the one-month London interbank offered rate on AAA rated auto asset-backed bonds maturing in three years rose 25 basis points to a 12-month high of 200 in the week ended Aug. 7, according to Bank of America Corp. data. Spreads on similar credit-card securities rose 15 basis points to a three-month high of 110 over Libor. Libor is currently set at 2.47 percent.
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BlackRock has out muscled competitors such as Legg Mason Inc. in the current crisis. The company collected $63.2 billion in new business from investors in the second quarter, including advisory assignments, the most of any publicly traded asset manager.

This may have to do with rumbling that Lehman is seeking to delever:

Lehman Brothers Holdings Inc., seeking to restore investor confidence after a $2.8 billion second-quarter loss, is negotiating to sell commercial real estate assets to a group including BlackRock Inc., said three people briefed on the discussions.

Lehman is seeking to sell about $14 billion of its $40 billion in commercial property and related securities by the end of the year, according to two potential buyers approached by the New York-based firm.
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[Ladenburg Thalmann & Co. analyst Richard] Bove expects Lehman to sell its entire $29.4 billion commercial mortgage portfolio. The firm also owns $10.4 billion of property. It may record a loss of $4.9 billion on the sale of the commercial mortgages, Sanford C. Bernstein & Co. analyst Brad Hintz estimated in a report last week.

Last year, as the market collapsed, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85 billion portfolio, 44 percent more than Morgan Stanley’s and almost four times the $22.5 billion of shareholder equity Lehman had as a buffer against losses.

An interesting column on VoxEU looks at Optimal Central Bank Transparency, reasoning that since:

Inflation targeting has been the most popular monetary policy regime of recent decades. Under this policy, central banks effectively target inflation forecasts. To a large extent these forecasts are determined by expectations of economic agents. Communicating information is the central bank’s major instrument for managing expectations. It is therefore logical that the issue of central bank transparency came to the fore when inflation targeting became the dominant monetary policy strategy, often studied in the context of a New Keynesian model.

and:

More recently, the potential negative effects of higher transparency have attracted attention (see Ellen Meade’s Vox column).

Since transparency has positive and negative aspects, the obvious next step is to investigate the notion of an optimal degree of central bank transparency.

The authors make some good points more generally related to investments:

It is well known that people sometimes neglect important information when it is supplied with a lot of other information. People also fall back to simple rules of thumb if the content of the information becomes too complicated.
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By providing more and more information, paradoxically central banks show how little they actually know.
This risk is especially relevant when the central bank provides information on all the uncertainties surrounding forecasts and analyses. By doing so, it may also convey how dependent the central bank ultimately is on the relatively powerless instrument that is the very short-term interest rate. Thus result may be a drop in the central bank’s credibility.

With respect to transparency, Willem Buiter has recently opined that The ECB should vote on interest rates and then publish its minutes:

Even French president Nicolas Sarkozy can be right about some things – malgré soi. He wants the ECB to publish the minutes of the rate-setting meetings of its Governing Council, including an account of each member’s view on the appropriate level of the ECB’s official policy rate – the inelegantly named Main refinancing operations Minimum bid rate. And about time too. But before it makes sense for the ECB to publish the minutes of its rate-setting meetings, the ECB has to start voting on its interest rate decisions.

Remarkably, the fact that the ECB’s Governing Council has never voted on the interest rate it sets does not appear to be widely known.
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The ECB has never had a formal vote on interest rates. I know this straight from the mouths of horses who between them have attended every single one of the ECB Governing Council’s rate-setting meetings since the first one in January 1999. Instead of voting on the interest rate, the ECB’s Governing Council ‘reach a consensus’ without ever taking a vote.
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To conclude: corruption of the mandate and purpose of the ECB are much more likely when there is no voting on rate decisions, when the individual votes are not in the public domain and when no informative minutes explaining individual votes are published.

It is clear that the Treaty and Protocols (a) require voting on interest rates (why bother with the voting procedures otherwise) and (b) permit the publication of individual voting records and minutes. Article 10.4 of the Protocol states: 10.4. The proceedings of the meetings shall be confidential. The Governing Council may decide to make the outcome of its deliberations public.

Another up-day for PerpetualDiscounts, making the eleventh straight trading day without a loss. There has only been one down-day (July 28) in the nineteen trading days since the nadir on July 16.

There were sixteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Freddie Mac has announced that they will no longer buy New York subprime mortgages:

Freddie Mac, the second-largest U.S. mortgage finance company, will stop buying subprime loans issued in New York state as a new law takes effect that holds investors accountable for mortgage fraud.

Freddie won’t buy loans dated on or after Sept. 1 that meet the state’s subprime definition, the McLean, Virginia-based company said today in a lender bulletin on its Web site. New York Governor David Paterson last week signed new foreclosure and lending laws that tighten legal protections for borrowers.

The story has been picked up – very briefly – by Calculated Risk and Naked Capitalism.

Sadly, nobody seems to want to delve into the legislation and the arguments that can be made; I don’t have a lot of information on this, so I won’t say much … but, at least to some extent, this is what I’ve been afraid of as a regulatory response: there are so many liabilities built into the system that the business is no longer worth doing. Maybe, in this particular case, this is a desirable result. As I said, I don’t have any details (if anybody has links to some informed discussion, they will be greatly appreciated!). But the regulators at all their levels are at great risk of throwing babies out with the bathwater.

PerpetualDiscounts had another good day, returning +0.42% to yield 6.18% dividends, equivalent to 8.65% interest at the 1.4x equivalency factor. With long corporates yielding 6.1% the pre-tax interest-equivalent spread is now 255bp. PerpetualDiscounts have now returned +7.63% since the July 16 nadir and the total return index has almost crawled back to July 2 levels.

There were eightteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Today’s top news is that inflation is no longer a problem:

Schroder Investment Management’s David Scammell is so convinced inflation has crested that the bond fund manager this quarter has sold securities designed to protect from rising consumer prices.
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Scammell is no lonely voice. A survey out today of 25 bond fund managers controlling $1.41 trillion of assets by Jersey City, New Jersey-based Ried, Thunberg & Co. found that 79 percent expect inflation “to moderate late this year into 2009.”

And certainly the market expectations computed by the Cleveland Fed are in a downturn. Isn’t it exciting? I wonder how the world will end next week!

Somebody made a massive bet against Bear Stearns just before its collapse, which is leading to mutterings that the firm’s collapse was a confidence game. This was last discussed on July 17. The Internuts’ position to date has been that BSC was a stupid firm, leveraged up to the eyeballs with junk and having a negative net worth. It will be most interesting to see if they switch to the “evil hedge fund rumour-monger” meme. As for me … sudden losses of confidence happen. Bear Stearns was an extreme example; they shouldn’t have gone under, but management shouldn’t have made them vulnerable either.

Predictions, of course, have a very poor track record. But there’s one prediction I hope comes true … the bond vigilantes were FUN:

The bond vigilantes who’ve been missing in action under George W. Bush may be preparing for a return engagement once Barack Obama or John McCain takes office next year.
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“Though times are different and a lot of the government spending is necessary, we’re going to see rates rise in a saw- tooth pattern over the next few years,” says E. Craig Coats Jr., the head of Salomon Brothers’ government securities desk when it was the world’s biggest bond trader. Coats considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates, persuading Clinton to place deficit-reduction above fulfilling his spending promises.

That course-reversal prompted Clinton political adviser James Carville to observe at the time: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Another good strong day in the markets, with volume picking up slightly.

There were twenty-two other index-included $25-pv-equivalent issues trading over 10,000 shares today.