{"id":27570,"date":"2015-01-23T23:55:48","date_gmt":"2015-01-24T04:55:48","guid":{"rendered":"http:\/\/prefblog.com\/?p=27570"},"modified":"2015-01-23T23:55:48","modified_gmt":"2015-01-24T04:55:48","slug":"january-23-2015","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=27570","title":{"rendered":"January 23, 2015"},"content":{"rendered":"

I continue to be fascinated by negative yields<\/a>:<\/p>\n

Want proof we\u2019re still living in abnormal times? The bond market is telling us that many advanced economies won\u2019t see much in the way of nominal growth over the next decade.<\/p>\n

In the wake of the Swiss National Bank\u2019s decision to ditch its currency floor and move deposit rates further into negative territory, investors actually lined up to pay the government for the privilege of holding on to their money for a period of 10 years.<\/p>\n

According to Bank of America Merrill Lynch, there is now $7.3-trillion (U.S.) in debt that has a minus sign in front of the yield, courtesy of the euro zone, Japan and Switzerland.
…<\/b>
While the Swiss move got all the headlines last week, India\u2019s central bank governor Raghuram Rajan also surprised with a rate cut. Although this was cast as a response to sliding inflation in light of the slump in oil prices, the governor\u2019s op-ed published prior to this announcement told a different tale. In fact, his reasons were very similar to those of his counterpart in Switzerland: A desire to prevent a wave of inflows into the nation.<\/p>\n

\u201cIf not properly managed, these flows can precipitate a credit and asset-price boom and drive up exchange rates,\u201d he wrote. \u201cWhen developed-country monetary policies are eventually tightened, some of the capital is likely to depart.\u201d<\/p><\/blockquote>\n

The Economist provides a little colour<\/a>:<\/p>\n

Some banks and institutions are also forced to hold government bonds, regardless of their yield, because of regulations and liquidity requirements.<\/p>\n

The final possibility, and the most obvious explanation in the short term, is that investors have been anticipating the introduction of quantitative easing by the European Central Bank. If experience in America and Britain is any guide, purchases by the ECB will eventually drive prices up and yields down. Why worry about the theoretical loss involved in holding a bond till maturity if the investor knows he can offload the bond to his friendly neighbourhood central bank?<\/p>\n

There are risks involved, of course. If the global economy returns to normal, then losses on government bonds will be substantial. The same would be true if inflation ever reappears. M&G says that if German bond yields merely rose back to the levels that prevailed at their previous trough, in 2012, when it was feared the euro might break up, investors would suffer a capital loss of 7%. Whatever else European government bonds may be, they are not risk-free.<\/p><\/blockquote>\n

Canadian inflation is lower than expectations<\/a>:<\/p>\n

Canadian inflation slowed to 1.5 percent in December as cheaper gasoline countered accelerating prices on most other items, reinforcing Bank of Canada Governor Stephen Poloz\u2019s argument the economy needs lower interest rates.<\/p>\n

The core inflation rate, which excludes eight volatile products such as energy, quickened to 2.2 percent from November\u2019s 2.1 percent pace, Statistics Canada said today from Ottawa. Economists in a Bloomberg News survey forecast the total rate would slow to 1.6 percent from 2.0 percent and core prices would rise 2.3 percent.<\/p><\/blockquote>\n

Valener Inc., proud issuer of VNR.PR.A, was confirmed at Pfd-2(low) by DBRS<\/a>:<\/p>\n

DBRS Limited (DBRS) has today confirmed Valener Inc.\u2019s (Valener or the Company) Cumulative Rate Reset Preferred Shares, Series A rating at Pfd-2 (low) with a Stable trend. The rating is based on the stability of dividends distributed to the Company from its 29% interest in Gaz M\u00e9tro Limited Partnership (GMLP), which guarantees the First Mortgage Bonds and Senior Secured Notes (rated \u201cA\u201d) of Gaz M\u00e9tro inc. (GMi). The rating also reflects Valener\u2019s low non-consolidated leverage. GMi owns the remaining 71% of GMLP.<\/p><\/blockquote>\n

It was another violently mixed day for the Canadian preferred share market, with PerpetualDiscounts up 41bp, FixedResets down 14bp and DeemedRetractibles off 7bp. Yet another lengthy Performance Highlights table was dominated by losing FixedResets and winning Straight Perpetuals. Volume was below average.<\/p>\n

For as long as the FixedReset market is so violently unsettled, I\u2019ll keep publishing updates of the more interesting and meaningful series of FixedResets\u2019 Implied Volatilities. This doesn\u2019t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.<\/p>\n

Remember that all rich \/cheap assessments are:<\/p>\n