{"id":22906,"date":"2013-08-29T22:42:30","date_gmt":"2013-08-30T02:42:30","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=22906"},"modified":"2013-08-29T22:42:30","modified_gmt":"2013-08-30T02:42:30","slug":"august-29-2013","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=22906","title":{"rendered":"August 29, 2013"},"content":{"rendered":"

In the latest tapering chatter<\/a>:<\/p>\n

Tapering talk has already sent 10-year note yields up 120 basis points. Almost the entire increase has been in the real yield, not in inflation expectations. Long-term interest rates aren’t about to retreat if the Fed delays the inevitable until October or December. So if rising long-term rates have policy makers tied in knots, doing nothing buys them time, not yield relief.<\/p>\n

The real 10-year yield (from the 10-year inflation-indexed Treasury note) is 0.6 percent. JPMorgan Chase economist Jim Glassman says that before the recession and introduction of the Fed’s unconventional policies, real long-term rates averaged 2 percent to 2.5 percent. The implied five-year forward real rate — the expected real rate five to 10 years from now, which captures the anticipated normalization of monetary policy — is about 1.75 percent, according to Glassman. “That indicates that much of the adjustment in interest-rate markets has been done already,” he says.<\/p>\n

Of course, markets tend to overshoot, and there’s no reason to think they won’t this time. But that’s the reaction to any Fed action.<\/p>\n

This doesn’t mean “getting it over with” is a good reason to taper; it’s just better than the economic justifications being offered. At the July 30-31 meeting, “almost all members” thought it was too soon to taper. What will have transpired in the six weeks between the July and September meetings? Two more employment reports, that’s what. There is really no quantitative difference between an increase in non-farm payrolls of 162,000 (July) and 199,000 (April). If you don’t believe me, listen to the statisticians at the Bureau of Labor Statistics.<\/p>\n

Inflation is below the Fed’s target. The jobless rate, now 7.4 percent, is being driven as much by declining labor-force participation as new hiring. And Fed officials could look at the 13.4 percent decline in new home sales in July as a harbinger and get squeamish about selling some of the central bank’s stockpile of mortgage-backed securities.<\/p>\n

Four months of tapering chatter has given wannabe sellers adequate notice. The deed itself seems fully priced into the market, and time isn’t on the Fed’s side.<\/p><\/blockquote>\n

But it looks like business has cranked up issuance of cheap debt in advance<\/a>:<\/p>\n

Company debt loads in the U.S. are approaching the highest level since the aftermath of the financial crisis as borrowing to finance mergers and shareholder payouts exceeds earnings growth.<\/p>\n

Debt levels have increased faster than cash flow for six straight quarters, boosting the obligations of investment-grade companies in the second quarter to 2.09 times earnings before interest, taxes, depreciation and amortization, according to JPMorgan Chase & Co. That\u2019s up from 2.07 times in the first three months of 2013 and compares with 2.13 in the third quarter of 2009, when it peaked after the deepest recession since the Great Depression.
…<\/b>
While heavier debt burdens have been supported by a Fed policy that pushed average U.S. corporate-bond yields to a record-low 2.65 percent in May, JPMorgan strategists said they expect issuance to slow as interest rates increase. Speculation is mounting that Chairman Ben S. Bernanke will reduce the central bank\u2019s $85 billion in monthly debt purchases as soon as next month.<\/p>\n

With a greater sense of urgency to tap debt markets before rates climb higher, companies may continue to increase leverage through the end of the year, Bank of America Corp. debt strategist Yuriy Shchuchinov said in an Aug. 26 note.<\/p><\/blockquote>\n

There’s an interesting allegation about CMHC lending<\/a>:<\/p>\n

A friend who is an economist further went on to say that when lending rules were liberalized to take into account two incomes in a household it in effect imprisoned families to needing two incomes to afford a house. This did not help families, but rather increased the price of housing, with the outcome that young families are hard pressed not to farm out their children to daycare or grandparents. Single-income households need a really high single income or they face very limited housing options. As individuals, families and a society we\u2019re not any better off, and the outcome only has been higher prices.<\/p>\n

A recent article by Canso Investment newsletter reported one troubling trend \u2013 \u201cgaming\u201d with CMHC\u2019s online automated appraisal system, EMILI. The system was created in 1996 to allow lenders to quickly check if the house price involved in a mortgage transaction was reasonable. According to Canso, while this streamlined the process of mortgage insurance and origination, it also removed any human check and balance.<\/p>\n

EMILI uses an algorithm which looks at the address, and particularly the postal code, and metrics of the house to be insured. The key variables are \u201cthe square footage of the house and the prior sale prices for the geographic area of the house.\u201d<\/p>\n

According to Canso, \u201cthere has been extensive \u2018gaming\u2019 of this system and excessive prices generated by this system. If a higher price is required for CMHC insurance coverage, the square footage, which is input by the lender and supplied by the mortgage broker, can be increased as required.\u201d<\/p>\n

\u201cGaming\u201d is a polite term. What this really looks like is fraud. Having said that, the impact of this fraud will, for the most part, be limited to excessive lending on a single property, as opposed to the greater problem of excessive money supply for mortgages. This excess money supply has floated the buyers\u2019 market to extraordinary heights with very few real winners. Recent homebuyers may be able to afford their mortgage payments \u2013 providing interest rates remain low during the amortization term. But some amortization terms in the past decade have reached 40 years and it\u2019s unreasonable to expect interest rates to remain low three to four decades down the road.<\/p><\/blockquote>\n

I believe that the CMHC is a major part of the problem: they’re insuring far too many mortgages and Canadian banks now have record amounts of mortgage debts on their books, both in absolute terms and in terms of the proportion of their assets. They can do this because the mortgages are insured – or, at least, they can be counted as insured until they default and CMHC suddenly gets more interested in the house’s square footage!<\/p>\n

Eliminate the insurance and – business risks aside – the risk weight will go up. Risk Weight goes up, Risk Adjustjed Assets go up. Risk Adjusted Assets go up, capital requirement goes up. Capital Requirement goes up, banks’ cost of funds goes up. Cost of funds goes up, mortgage rates go up. Mortgage rates go up, mortgage demand goes down.<\/p>\n

NASDAQ has provided an explanation for last week’s shutdown<\/a>:<\/p>\n

The malfunction began when NYSE Arca sent more than 20 \u201cconnect and disconnect sequences\u201d as well as a stream of quotes for inaccurate stock symbols, according to Nasdaq\u2019s summary. At one point, Nasdaq received over 2 1\/2 times more data per second than the system\u2019s tested capacity.<\/p>\n

After being inundated with orders, the flaw in the SIP software prevented redundancy that is built into the system from \u201cfailing over cleanly\u201d to a backup program, it said.<\/p><\/blockquote>\n

It was another day of modest advance in the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets up 8bp and DeemedRetractibles full steam ahead with a win of 46bp. The Performance Highlights table was heavily weighted towards winners. Volume was high.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n
HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices<\/strong>
Values are provisional and are finalized monthly<\/td>\n<\/tr>\n
Index<\/td>\nMean
Current
Yield
(at bid)<\/td>\n		Median
YTW<\/td>\n		Median
Average
Trading
Value<\/td>\n		Median
Mod Dur
(YTW)<\/td>\n		Issues<\/td>\nDay’s Perf.<\/td>\nIndex Value<\/td>\n<\/tr>\n
Ratchet<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n-0.3423 %<\/td>\n2,610.7<\/td>\n<\/tr>\n
FixedFloater<\/td>\n4.18 %<\/td>\n3.48 %<\/td>\n36,026<\/td>\n18.36<\/td>\n1<\/td>\n1.7905 %<\/td>\n3,974.8<\/td>\n<\/tr>\n
Floater<\/td>\n2.58 %<\/td>\n2.91 %<\/td>\n70,768<\/td>\n19.90<\/td>\n5<\/td>\n-0.3423 %<\/td>\n2,818.9<\/td>\n<\/tr>\n
OpRet<\/td>\n4.64 %<\/td>\n3.20 %<\/td>\n69,719<\/td>\n0.79<\/td>\n3<\/td>\n0.3104 %<\/td>\n2,618.6<\/td>\n<\/tr>\n
SplitShare<\/td>\n4.73 %<\/td>\n4.85 %<\/td>\n55,629<\/td>\n3.85<\/td>\n6<\/td>\n0.1076 %<\/td>\n2,958.8<\/td>\n<\/tr>\n
Interest-Bearing<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n0.3104 %<\/td>\n2,394.4<\/td>\n<\/tr>\n
Perpetual-Premium<\/td>\n5.78 %<\/td>\n5.86 %<\/td>\n115,090<\/td>\n14.03<\/td>\n12<\/td>\n0.0371 %<\/td>\n2,241.7<\/td>\n<\/tr>\n
Perpetual-Discount<\/td>\n5.64 %<\/td>\n5.77 %<\/td>\n152,448<\/td>\n14.19<\/td>\n25<\/td>\n0.0205 %<\/td>\n2,286.3<\/td>\n<\/tr>\n
FixedReset<\/td>\n4.95 %<\/td>\n3.82 %<\/td>\n243,411<\/td>\n3.87<\/td>\n85<\/td>\n0.0830 %<\/td>\n2,448.8<\/td>\n<\/tr>\n
Deemed-Retractible<\/td>\n5.21 %<\/td>\n5.11 %<\/td>\n204,225<\/td>\n6.96<\/td>\n43<\/td>\n0.4614 %<\/td>\n2,333.8<\/td>\n<\/tr>\n<\/table>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Performance Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nChange<\/td>\nNotes<\/td>\n<\/tr>\n
GWO.PR.N<\/td>\nFixedReset<\/td>\n-2.04 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2025-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 21.65
\nBid-YTW : 4.85 %<\/td>\n<\/tr>\n
BAM.PR.N<\/td>\nPerpetual-Discount<\/td>\n-1.41 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 20.21
\nEvaluated at bid price : 20.21
\nBid-YTW : 5.99 %<\/td>\n<\/tr>\n
BNA.PR.C<\/td>\nSplitShare<\/td>\n1.01 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2019-01-10
\nMaturity Price : 25.00
\nEvaluated at bid price : 24.10
\nBid-YTW : 5.13 %<\/td>\n<\/tr>\n
CM.PR.G<\/td>\nPerpetual-Premium<\/td>\n1.02 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 24.52
\nEvaluated at bid price : 24.76
\nBid-YTW : 5.51 %<\/td>\n<\/tr>\n
CM.PR.K<\/td>\nFixedReset<\/td>\n1.06 %<\/td>\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2014-07-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 25.70
\nBid-YTW : 2.75 %<\/td>\n<\/tr>\n
BNS.PR.Y<\/td>\nFixedReset<\/td>\n1.09 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2022-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 23.15
\nBid-YTW : 4.23 %<\/td>\n<\/tr>\n
TD.PR.P<\/td>\nDeemed-Retractible<\/td>\n1.11 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2022-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 25.40
\nBid-YTW : 5.11 %<\/td>\n<\/tr>\n
CU.PR.F<\/td>\nPerpetual-Discount<\/td>\n1.14 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 21.25
\nEvaluated at bid price : 21.25
\nBid-YTW : 5.33 %<\/td>\n<\/tr>\n
BNS.PR.M<\/td>\nDeemed-Retractible<\/td>\n1.15 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2022-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 24.70
\nBid-YTW : 4.75 %<\/td>\n<\/tr>\n
RY.PR.B<\/td>\nDeemed-Retractible<\/td>\n1.26 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2022-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 24.96
\nBid-YTW : 4.76 %<\/td>\n<\/tr>\n
BMO.PR.J<\/td>\nDeemed-Retractible<\/td>\n1.30 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2022-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 24.97
\nBid-YTW : 4.55 %<\/td>\n<\/tr>\n
BAM.PR.X<\/td>\nFixedReset<\/td>\n1.73 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 22.66
\nEvaluated at bid price : 23.56
\nBid-YTW : 4.12 %<\/td>\n<\/tr>\n
BAM.PR.G<\/td>\nFixedFloater<\/td>\n1.79 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 22.96
\nEvaluated at bid price : 22.74
\nBid-YTW : 3.48 %<\/td>\n<\/tr>\n
MFC.PR.B<\/td>\nDeemed-Retractible<\/td>\n1.81 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2025-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 21.33
\nBid-YTW : 6.49 %<\/td>\n<\/tr>\n
BAM.PF.B<\/td>\nFixedReset<\/td>\n1.87 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 22.74
\nEvaluated at bid price : 23.99
\nBid-YTW : 4.61 %<\/td>\n<\/tr>\n
TRP.PR.C<\/td>\nFixedReset<\/td>\n2.27 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 22.51
\nEvaluated at bid price : 23.00
\nBid-YTW : 3.87 %<\/td>\n<\/tr>\n<\/table>\n\n\n\n\n\n\n\n\n\n\n
Volume Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nShares
Traded<\/td>\n		Notes<\/td>\n<\/tr>\n
TD.PR.C<\/td>\nFixedReset<\/td>\n76,355<\/td>\nTD crossed blocks of 30,000 and 40,000, both at 25.33.
\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2014-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 25.36
\nBid-YTW : 3.21 %<\/td>\n<\/tr>\n
PWF.PR.G<\/td>\nPerpetual-Premium<\/td>\n64,702<\/td>\nScotia bought 19,000 from GMP at 24.90, then crossed 40,000 at the same price.
\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 24.57
\nEvaluated at bid price : 24.82
\nBid-YTW : 6.01 %<\/td>\n<\/tr>\n
BNS.PR.T<\/td>\nFixedReset<\/td>\n58,699<\/td>\nTD crossed 50,000 at 25.70.
\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2014-04-25
\nMaturity Price : 25.00
\nEvaluated at bid price : 25.63
\nBid-YTW : 3.06 %<\/td>\n<\/tr>\n
PWF.PR.H<\/td>\nPerpetual-Premium<\/td>\n45,347<\/td>\nScotia crossed 39,700 at 24.50.
\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 24.22
\nEvaluated at bid price : 24.51
\nBid-YTW : 5.93 %<\/td>\n<\/tr>\n
RY.PR.N<\/td>\nFixedReset<\/td>\n44,200<\/td>\nTD crossed 40,000 at 25.40.
\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2014-02-24
\nMaturity Price : 25.00
\nEvaluated at bid price : 25.40
\nBid-YTW : 3.11 %<\/td>\n<\/tr>\n
BNS.PR.K<\/td>\nDeemed-Retractible<\/td>\n43,850<\/td>\nRBC crossed 37,200 at 25.05.
\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2022-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 24.95
\nBid-YTW : 4.91 %<\/td>\n<\/tr>\n
There were 56 other index-included issues trading in excess of 10,000 shares.<\/td>\n<\/tr>\n<\/table>\n\n\n\n\n\n\n\n\n\n
Wide Spread Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nQuote Data and Yield Notes<\/td>\n<\/tr>\n
TRP.PR.B<\/td>\nFixedReset<\/td>\nQuote: 21.43 – 22.22
\nSpot Rate : 0.7900
\nAverage : 0.5303<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 21.43
\nEvaluated at bid price : 21.43
\nBid-YTW : 3.80 %<\/td>\n<\/tr>\n

BAM.PR.J<\/td>\nOpRet<\/td>\nQuote: 26.35 – 26.78
\nSpot Rate : 0.4300
\nAverage : 0.2430<\/p>\n

YTW SCENARIO
\nMaturity Type : Soft Maturity
\nMaturity Date\t: 2018-03-30
\nMaturity Price : 25.00
\nEvaluated at bid price : 26.35
\nBid-YTW : 4.33 %<\/td>\n<\/tr>\n

TCA.PR.Y<\/td>\nPerpetual-Premium<\/td>\nQuote: 49.10 – 49.60
\nSpot Rate : 0.5000
\nAverage : 0.3470<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 48.56
\nEvaluated at bid price : 49.10
\nBid-YTW : 5.76 %<\/td>\n<\/tr>\n

ABK.PR.C<\/td>\nSplitShare<\/td>\nQuote: 31.65 – 32.19
\nSpot Rate : 0.5400
\nAverage : 0.4011<\/p>\n

YTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2014-03-10
\nMaturity Price : 31.64
\nEvaluated at bid price : 31.65
\nBid-YTW : 3.71 %<\/td>\n<\/tr>\n

GWO.PR.N<\/td>\nFixedReset<\/td>\nQuote: 21.65 – 22.19
\nSpot Rate : 0.5400
\nAverage : 0.4081<\/p>\n

YTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2025-01-31
\nMaturity Price : 25.00
\nEvaluated at bid price : 21.65
\nBid-YTW : 4.85 %<\/td>\n<\/tr>\n

PWF.PR.I<\/td>\nPerpetual-Premium<\/td>\nQuote: 25.02 – 25.30
\nSpot Rate : 0.2800
\nAverage : 0.1877<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2043-08-29
\nMaturity Price : 24.80
\nEvaluated at bid price : 25.02
\nBid-YTW : 6.06 %<\/td>\n<\/tr>\n<\/table>\n","protected":false},"excerpt":{"rendered":"

In the latest tapering chatter: Tapering talk has already sent 10-year note yields up 120 basis points. Almost the entire increase has been in the real yield, not in inflation expectations. Long-term interest rates aren’t …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[],"class_list":["post-22906","post","type-post","status-publish","format-standard","hentry","category-market-action"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/22906","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=22906"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/22906\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=22906"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=22906"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=22906"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}