July 21, 2014

Matt Levine of Bloomberg has some sensible things to say about institutions victimized by evil derivatives:

This is a general rule to keep in mind when reading about governments and companies that were victimized by swaps that they didn’t understand: Governments and companies don’t understand anything. Governments and companies don’t have brains. Governments and companies do have human agents, and those human agents have brains, and they are capable of understanding many things. Different agents might or might not be capable of understanding the particular formulas at issue here. But most agents are capable of understanding (1) that getting a low low teaser rate now probably means paying a high high rate later, (2) that there are ways of saying that that don’t sound like that, (3) that their interests and the interests of the government or company they work for are not perfectly aligned, and (4) that those interests are likely to drift further apart over time.

A story about an incomprehensible tax dodge is noteworthy for two things:

Executives from Renaissance, founded by billionaire mathematician James Simons, are scheduled to testify about the transactions tomorrow in Washington, as are representatives of Barclays and Deutsche Bank.

Renaissance, based in East Setauket, New York, compiled one of the best records in investing history by using advanced mathematics and computer algorithms to identify mispriced securities. Its Medallion fund, open almost exclusively to Renaissance employees, returned more than 35 percent annualized over more than two decades.

“billionaire mathematician”. You don’t hear those two words together very often! The other point is that they’ve been able to do so well – outperformance is entirely possible for those who know what they’re doing.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets gaining 5bp and DeemedRetractibles winning 10bp. Volatility was almost non-existent. Volume was extremely low.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 3.09 % 3.07 % 20,709 19.50 1 0.0000 % 2,574.3
FixedFloater 4.17 % 3.40 % 28,801 18.65 1 -0.0876 % 4,163.9
Floater 2.84 % 2.92 % 45,010 19.92 4 -0.2162 % 2,783.5
OpRet 4.02 % -4.07 % 78,744 0.08 1 -0.0783 % 2,721.1
SplitShare 4.26 % 3.95 % 44,048 4.02 6 0.3336 % 3,116.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0783 % 2,488.2
Perpetual-Premium 5.52 % -5.34 % 82,168 0.09 17 0.0300 % 2,430.7
Perpetual-Discount 5.23 % 5.13 % 111,916 15.24 20 0.0703 % 2,582.4
FixedReset 4.38 % 3.54 % 200,305 6.57 77 0.0522 % 2,563.5
Deemed-Retractible 4.97 % 0.36 % 123,261 0.10 43 0.1027 % 2,553.9
FloatingReset 2.65 % 0.72 % 98,280 0.16 6 0.0131 % 2,528.7
Performance Highlights
Issue Index Change Notes
PVS.PR.B SplitShare 1.30 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 4.60 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.K FixedReset 203,248 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.48 %
ENB.PF.E FixedReset 104,420 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 23.10
Evaluated at bid price : 24.95
Bid-YTW : 4.11 %
BMO.PR.S FixedReset 84,556 Nesbitt crossed 25,000 at 25.76; RBC bought 10,000 from Scotia at 25.79.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.73
Bid-YTW : 3.27 %
TD.PF.A FixedReset 74,550 Desjardins crossed 58,600 at 25.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 23.30
Evaluated at bid price : 25.50
Bid-YTW : 3.56 %
CM.PR.K FixedReset 65,000 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.66 %
ENB.PF.C FixedReset 54,685 TD crossed 10,000 at 25.12.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 23.17
Evaluated at bid price : 25.15
Bid-YTW : 4.09 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.C FixedReset Quote: 21.80 – 22.51
Spot Rate : 0.7100
Average : 0.5664

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 21.45
Evaluated at bid price : 21.80
Bid-YTW : 3.35 %

IAG.PR.F Deemed-Retractible Quote: 26.02 – 26.41
Spot Rate : 0.3900
Average : 0.2665

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-03-31
Maturity Price : 25.25
Evaluated at bid price : 26.02
Bid-YTW : 5.07 %

BAM.PR.E Ratchet Quote: 24.30 – 24.60
Spot Rate : 0.3000
Average : 0.2191

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 23.86
Evaluated at bid price : 24.30
Bid-YTW : 3.07 %

PWF.PR.A Floater Quote: 20.00 – 20.30
Spot Rate : 0.3000
Average : 0.2266

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 2.65 %

BAM.PR.M Perpetual-Discount Quote: 21.36 – 21.51
Spot Rate : 0.1500
Average : 0.0903

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 21.36
Evaluated at bid price : 21.36
Bid-YTW : 5.62 %

IAG.PR.A Deemed-Retractible Quote: 23.14 – 23.47
Spot Rate : 0.3300
Average : 0.2736

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.14
Bid-YTW : 5.61 %

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