{"id":30660,"date":"2015-09-25T05:32:33","date_gmt":"2015-09-25T10:32:33","guid":{"rendered":"http:\/\/prefblog.com\/?p=30660"},"modified":"2015-09-25T05:32:33","modified_gmt":"2015-09-25T10:32:33","slug":"september-24-2015","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=30660","title":{"rendered":"September 24, 2015"},"content":{"rendered":"

Janet Yellen gave a speech today<\/a>:<\/p>\n

Federal Reserve Chair Janet Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic \u201csurprises\u201d could lead them to change that plan.<\/p>\n

\u201cMost FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter,\u201d Yellen said during a speech Thursday in Amherst, Massachusetts. \u201cBut if the economy surprises us, our judgments about appropriate monetary policy will change.\u201d
…<\/b>
While \u201cthere wasn\u2019t anything significant enough that changed in one week for her to give us a different take,\u201d said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York, Yellen \u201cfinally acknowledges that she, specifically, does believe that a rate hike is appropriate this year.\u201d<\/p>\n

Porcelli expects a December increase, but thinks there\u2019s a high hurdle to moving this year.<\/p><\/blockquote>\n

Short-term treasuries were hammered, but the rest of the Treasury market took it in stride<\/a>:<\/p>\n

The U.S. two-year yield climbed four basis points to 0.72 percent as of 6:14 a.m. in London. The price of the 0.625 percent security due September 2017 fell 2\/32, or 63 cents per $1,000 face amount, to 99 26\/32.<\/p>\n

The benchmark 10-year yield rose one basis point to 2.14 percent.<\/p>\n

Traders aren\u2019t convinced a rate increase is a sure thing. There\u2019s a 49 percent probability the Fed will raise rates by its Dec. 15-16 meeting, down from 60 percent odds at the end of August, according to data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff.<\/p>\n

Treasury 30-year bonds, which are more influenced by the outlook for inflation, eked out a gain. The difference between two- and 30-year yields shrank to as little as 2.19 percentage points, the narrowest since Sept. 8.<\/p><\/blockquote>\n

Preferred share investors drove to an appointment with their brokers today:<\/p>\n

\"carBomb\"<\/a>
Click for Big<\/i><\/div>\n

(hat tip: adrian2<\/i> on FWF<\/a>)<\/p>\n

“But my money!” they cried. “What has happened to my money?”<\/p>\n

\"Massive<\/a>
Click for Big<\/i><\/div>\n

It was total carnage for the Canadian preferred share market today, with PerpetualDiscounts down 152bp, FixedResets losing a stunning 338bp and DeemedRetractibles off 92bp. The Performance Highlights table is ridiculous and I’m not even going to try to come to grips with the question of what’s real and what isn’t (except for MFC.PR.N … I couldn’t resist) because the entire market was surreal today. BAM issues were notable losers, but one BAM issue was the sole notable winner! Volume was extremely heavy.<\/p>\n

So what caused the problem? Assigning specific reasons to market movements, even dramatic ones is always a bit of a mug’s game; on a day-to-day basis, the market does what it wants to do because it wants to do it. Today the influence might be this, tomorrow that; it’s only in retrospect that you can draw a correlation between the financial markets and the price of eggs in Spain and say wisely how well the market took this driving influence into account. My contempt for the market’s talking heads is mixed with pity; they have to come up with something to fill up their allotted half hour and that’s the end of it.<\/p>\n

But it’s reasonable to suppose it was the BAM new issue<\/a> that broke the camel’s back. 5.00% is a big fat dividend for an investment grade issue and 417bp is a big fat spread and the minimum rate guarantee is a big fat gift for those who seriously believe that GOC-5 can go significantly lower in the next five years (I don’t! But what do I know?). As recently as September 11, when I prepared the September PrefLetter<\/a>, a spread of 417bp would have implied a yield-to-worst of only 4.49%, although correlations are poor and +417 is the highest extant investment-grade spread by far (so don’t take the decimal places too seriously, is what I’m saying) (the previous high was HSE.PR.E, with an Issue Reset Spread of a mere 357bp). A big fat yield like that could well have caused some repricing of the market as a whole; it is significant that the clobbering of BAM issues today was notable even on a day like today; and the results of that clobbering reverberated throughout the market.<\/p>\n

Conspiracy theorists will soon be filling up my mailbox with queries about my opinion regarding the idea that Brookfield did this deliberately so they could buy up their extant issues cheaply under their NCIB, discussed August 12<\/a>. But really, guys – get serious. The Illuminati would never permit me to give a favourable opinion regarding this thesis.<\/p>\n

It is also possible that the credit rating assigned to Element Financial<\/a> today had an effect; this expands the universe with four FixedResets with very nice yields; it is noteworthy that all four extant EFN issues rose today (on a close\/close basis). Volumes were mostly modest, but the most recent issue, EFN.PR.G, traded a significant 35,025 shares. These issues also have high spreads:<\/p>\n